Lessons learned:

The ben­e­fits and flaws of Pri­vatBank trans­fer into state hands

The Ukrainian Week - - CONTENTS - Lyubomyr Shava­lyuk

The ben­e­fits and flaws of Pri­vatBank trans­fer into state hands

There had been talk about the pos­si­bil­ity of Pri­vatBank's tran­si­tion into state own­er­ship for a long time. In De­cem­ber the ru­mours have be­come re­al­ity and Pri­vat­was na­tion­alised. This de­ci­sion was un­prece­dented. The mere fact that such a de­ci­sion was taken raised many ques­tions from Ukraini­ans. The na­tion­al­i­sa­tion process fraught with mis­takes and mis­cal­cu­la­tions added more doubts and mis­un­der­stand­ing from the ci­ti­zens. Why was the coun­try’s largest bank taken over by the state, what con­se­quences the move will have and which er­rors ac­com­pa­nied it?

The first ques­tion is "Why did this hap­pen?" The an­swer is quite sim­ple: the bank had a cap­i­tal deficit of UAH 148bn ($5.4bn), which its for­mer share­hold­ers failed to cover. This was the re­sult of Pri­vatBank's flawed busi­ness model: the bank col­lected de­posits from in­di­vid­u­als – it has 20 mil­lion Ukrainian cus­tomers – and is­sued loans to com­pa­nies linked to the for­mer owner IhorKolo­moiskyi and others. Most of those com­pa­nies had a pal­try eq­uity cap­i­tal, were not ac­tively op­er­at­ing and ex­isted only on pa­per as a tool to move the money of Ukrainian clients out of the bank and dis­pose of it wher­ever and in what­ever quan­ti­ties they pleased. The bank it­self got very lit­tle out of this. Ac­cord­ing to the Na­tional Bank of Ukraine (NBU), the pro­por­tion of such loans ac­counted for 97% of the cor­po­rate loan port­fo­lio. Even if this fig­ure is in­flated, that does not change the bot­tom line: the money of Pri­vatBank de­pos­i­tors was si­phoned off while dis­tract­ing clients with talk of ad­vanced IT ser­vices for them.

Ukraine’s top twenty banks in­cluded many of those wherethe NBU found cap­i­tal deficits of vary­ing sizes. For each, a pro­gram was de­signed to re­move this de­fi­ciency. It was not easy to im­ple­ment the plans: there were many de­lays, ma­nip­u­la­tions and bro­ken prom­ises. As of De­cem­ber 2016, the ad­di­tional cap­i­tal­i­sa­tion pro­grammes of the re­quired scope were com­pleted by all but Pri­vatBank (the process is still on­go­ing for fi­nan­cial in­sti­tu­tions out­side the top twenty, as they started later). The state had to act, be­cause de­lays would only lead to an in­crease in cap­i­tal deficit and ex­po­nen­tially ag­gra­vate risks to the bank­ing sys­tem and econ­omy. Con­sid­er­ing the size and range of Pri­vatBank's clien­tele, how­ever, the state could not al­low its bank­ruptcy and opted for na­tion­al­i­sa­tion, although there was no prece­dent, nor peo­ple with ex­pe­ri­ence in deal­ing with such a ma­jor prob­lem. Na­tion­al­i­sa­tion was nec­es­sary, be­cause the for­mer own­ers would not re­turn the de­pos­i­tors’ money. Mean­while, the prob­lem was be­com­ing more and more painfully ob­vi­ous and threat­en­ing to the coun­try and as­sets of Ukraini­ans.

Many an­a­lysts and or­di­nary peo­ple tend to claim that one oli­garch (re­fer­ring to Petro Poroshenko) "grabbed" Pri­vatBank from another oli­garch (Ihor Kolo­moiskyi). But what is the point in tak­ing over an as­set with a huge cap­i­tal hole that needs to be im­me­di­ately tucked up with real money? Pri­vatBank has no eco­nomic value for any­one ex­cept Kolo­moiskyi and Co., who used it for their own ben­e­fit. Even the tech­ni­cal level and po­ten­tial value of the Pri­vat24 sys­tem for on­line money trans­fer­sis not enough to com­pen­sate for the UAH 150bn deficit. The so­cial value of the bank is pri­mar­ily an as­set for the state, which in­ter­vened in the sit­u­a­tion in or­der to pre­serve it.

We of­ten hear that the state will spend an enor­mous amount of tax­pay­ers' money on the na­tion­al­i­sa­tion– over UAH 100bn ($3.6bn). In­deed, this is a con­sid­er­able amount. But what does the state get in re­turn? Firstly, con­tin­ued co­op­er­a­tion with the IMF, which sup­ported the gov­ern­ment's de­ci­sion and will likely soon give Ukraine the next loan tranche (the money, per­haps, is not as im­por­tant as fur­ther im­ple­men­ta­tion of the hun­dreds of projects that Ukraine has be­gun with for­eign part­ners in or­der to re­form the coun­try). Se­condly, the end of the bank­ing sec­tor re­form process is now within reach. When the top twenty banks in the coun­try start op­er­at­ing ac­cord­ing to gen­er­ally ac­cepted in­ter­na­tional stan­dards, it will be much eas­ier to force the rest of the fi­nan­cial in­sti­tu­tions to play by the new, le­git­i­mate and trans­par­ent rules. If it was pos­si­ble to solve the Pri­vatBank prob­lem, it will also be pos­si­ble to over­come smaller dif­fi­cul­ties. The third com­po­nent, which is rarely men­tioned, Ukraine man­aged to avoid neg­a­tive sce­nar­ios, the risks of which were grow­ing by the day. Pri­vatBank is the largest fi­nan­cial in­sti­tu­tion, which has not only twenty mil­lion clients, but also strong links with other Ukrainian banks. If it col­lapsed in an un­con­trolled way un­der the pres­sure of its ac­cu­mu­lated prob­lems, the con­se­quences would be mas­sive and neg­a­tive for the bank­ing sys­tem, the econ­omy and all Ukraini­ans. It is good that we did not have to bear wit­ness

Pri­vatBank col­lected de­posits from in­di­vid­u­als – it has 20 mil­lion Ukrainian cus­tomers – and is­sued loans to com­pa­nies linked to the for­mer owner Ihor Kolo­moiskyi and others

to such a devel­op­ment, de­spite all the risks that ex­isted un­til re­cently. Fourthly, Kolo­moiskyi did not change the prin­ci­ples of the bank's op­er­a­tion. So the more they de­layed, the larger the cap­i­tal deficit would be. There­fore, the state has spent a large sum for good rea­son. Fig­u­ra­tively speak­ing, it has bought sta­bil­ity, a new bank­ing sys­tem, the abil­ity to con­tinue re­forms and min­imise its own losses.

It should be un­der­stood that ob­jec­tively there is no pos­si­bil­ity of pun­ish­ing Kolo­moiskyi for mov­ing money out of the bank. This would re­quire a com­pletely dif­fer­ent law en­force­ment sys­tem, and in the long run a com­pletely dif­fer­ent coun­try. So for now we will have to make come to terms with his im­punity and wait for bet­ter times, though the is­sue of Pri­vatBank will even­tu­ally dis­ap­pear from the agenda. One can hope that the for­mer share­hold­ers will re­turn the miss­ing funds, as they al­legedly promised when hand­ing Pri­vatBank over to the gov­ern­ment, but this should not be ex­pected. In this light, the money that the state will in­vest in Pri­vatBank is the price for 25 years of our eco­nomic sys­tem al­low­ing op­er­a­tions of this kind to go un­pun­ished, while the peo­ple we elected to gov­ern it did ev­ery­thing to keep it the same way.

Un­doubt­edly, the state and gov­ern­ment should be praised: they were able to over­come a mas­sive prob­lem with­out pro­vok­ing a dis­as­ter, as has of­ten hap­pened be­fore. And this is oh-so dif­fi­cult and re­quired tough ne­go­ti­a­tions with Kolo­moiskyi and ex­ter­nal part­ners. How­ever, it was not with­out er­rors. First of all, the news was leaked again. The na­tion­al­i­sa­tion hap­pened on Sun­day night, and the me­dia was al­ready filled with de­tails about it on Fri­day. As a re­sult, peo­ple re­alised that some­thing was go­ing on and, with­out ad­e­quate in­for­ma­tion, be­gan to pre­pare for the worst. On Satur­day and Sun­day, queues could be seen at Pri­vatBank ATMs, which gave the im­pres­sion of panic. And all be­cause some­one can­not keep their mouth shut and the state is un­able to pre­vent leaks.

Se­condly, the state seems un­able to learn how to com­mu­ni­cate with its own ci­ti­zens. Mass re­as­sur­ances from politi­cians could be heard again. Ukraini­ans, how­ever, have learned the hard way and cus­tom­ar­ily do not be­lieve a sin­gle word, show­ing a di­a­met­ri­cally op­po­site re­ac­tion: they went to ATMs to take out their money. On Mon­day, there were queues at cash ma­chines again and a part of the with­drawn cash went onto the for­eign ex­change mar­ket, pro­vok­ing a rise of sev­eral dozen kopiykas in the price of the dol­lar. The gov­ern­ment should un­der­stand that di­rect calls for calm do not have the de­sired ef­fect and that it is nec­es­sary to clearly and con­fi­dently ar­tic­u­late the tools that will make it pos­si­ble to bring the sit­u­a­tion un­der con­trol. In de­vel­oped coun­tries, peo­ple lis­ten to the au­thor­i­ties in such cases and be­lieve them, be­cause they make it clear how sig­nif­i­cant their ar­se­nal of in­stru­ments to counter any ex­cesses is. In Ukraine, the state does not usu­ally talk about this, and if it does, the ma­jor­ity of the pop­u­la­tion does not have suf­fi­cient eco­nomic knowl­edge to un­der­stand. This is where all the prob­lems come from: peo­ple fear what they do not know. This is a strate­gic prob­lem for Ukraine, and sys­tem­atic work will be re­quired in or­der to over­come it.

Strate­gic is­sues are another im­por­tant topic. Will the new lead­er­ship keep up the pace of the bank's tech­no­log­i­cal in­no­va­tion? Does it have enough re­sources for this? Will Kolo­moiskyi en­tice cur­rent Pri­vatBank cus­tomers and lead­ing ex­perts into a new fi­nan­cial in­sti­tu­tion that he might­build from scratch? Will the bank re­main


com­pet­i­tive or steadily be­gin to lose mar­ket share due to the in­ef­fec­tive­ness of new man­agers? The gov­ern­ment, as the new ma­jor­ity share­holder, will still have to find an­swers to all these ques­tions. Un­til now, it has never been an ef­fec­tive owner. There­fore, it is the mo­ment of truth: ei­ther the state shows that it is truly chang­ing and im­prov­ing, or ev­ery­thing will be as it al­ways has. Only this will come later. In the mean­time, there is one big prob­lem less in Ukraine.

Man­age­ment qual­ity test. The way Pri­vatBank is run af­ter na­tion­al­i­sa­tion will show how ca­pa­ble the state is to solve mas­sive prob­lems with­out cre­at­ing more havoc

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