“A revo­lu­tion of dig­nity had hap­pened in our coun­try, and I was quite pa­tri­otic. … Of course I knew there were prob­lems, but I could not imag­ine what prob­lems I would face. I was quite naive.” Va­le­ria Gontareva, for­mer gov­er­nor of Ukraine’s cen­tral bank

Ukraine’s cen­tral banker won the IMF’s praise for fix­ing the econ­omy — and was run out of her job by death threats

The Washington Post Sunday - - BUSINESS - BY STEVEN MUFSON

Va­le­ria Gontareva, gov­er­nor of the Na­tional Bank of Ukraine, takes out her phone and pulls up a photo of her house in Kiev with the word “killer” and dol­lar signs scrawled across an out­side wall. An­other piece of graf­fiti shows a piggy bank with the words “Rus­sian pig.”

An­other photo shows an open cof­fin in front of the for­mi­da­ble doors of the Ukrainian cen­tral bank. Inside lies an ef­figy of Gontareva, a photo of her face where the head would be, prison garb on the body and black bou­quet at her feet.

Th­ese are hardly the sort of emo­tions the av­er­age cen­tral banker stirs up. Yet over three years as Ukraine’s cen­tral bank chief, Gontareva has made her share of en­e­mies, even as she has won ad­mi­ra­tion from the In­ter­na­tional Mon­e­tary Fund and econ­o­mists for the tough steps she took to sta­bi­lize an econ­omy torn by war, an­nex­a­tion, decades of mis­man­age­ment and in­ter­nal ri­val­ries.

In mid-April, she abruptly quit. A suc­ces­sor will take over midMay.

“For me, it was like three years of sus­tained ha­rass­ment,” Gontareva says. Even in Washington dur­ing the IMF meet­ings in April, a team from a tele­vi­sion sta­tion con­trolled by a Ukrainian oli­garch whose bank she had na­tion­al­ized chased her down in the lobby of the Fair­mont Ho­tel and at the At­lantic Coun­cil to dis­rupt her meet­ings.

Gontareva notes that she wasn’t cut­ting and run­ning. She has seen three fi­nance min­is­ters

come and go, and other govern­ment of­fi­cials, too. “I am like the Fen­i­more Cooper novel, ‘Last of the Mo­hi­cans,’ ” she jokes.

It hasn’t been hard for her to make en­e­mies. She had re­duced the size of the cen­tral bank bu­reau­cracy from 12,000 to 5,000. She has let the coun­try’s cur­rency, the hryv­nia, float, which sta­bi­lized the econ­omy but also shrank peo­ple’s in­comes. And, above all, in an ef­fort to clean up the ail­ing bank­ing sec­tor, she has na­tion­al­ized 87 banks with about 60 per­cent of the sec­tor’s as­sets.

‘Zom­bie banks’

“Th­ese banks were not banks. We call them zom­bie banks with­out any as­sets, with only li­a­bil­i­ties,” she said. “About 20 of them were just money-laun­der­ing ma­chines. They do not do any busi­ness at all. It was only money laun­der­ing.”

Gontareva moved the as­sets to Ukraine’s equiv­a­lent of the Fed­eral De­posit In­sur­ance Corp.

The big­gest of the na­tion­al­ized banks was Pri­vatBank, once con­trolled by lead­ing oli­garchs Igor Kolo­moysky and part­ner Gen­nadiy Bo­golyubov. It was the bank pre­vi­ously thought of as be­ing too big to fail.

Other oli­garchs also took aim at Gontareva. Ukrainian steel busi­ness­man and in­de­pen­dent par­lia­men­tar­ian Ser­hiy Taruta dis­trib­uted a pam­phlet ti­tled “Gontareva: A Threat to the Eco­nomic Se­cu­rity of Ukraine.”

From the out­side, though, her ac­tions were viewed as pos­i­tive — even heroic.

“Gov­er­nor Gontareva has done a fan­tas­tic job in an in­cred­i­bly dif­fi­cult situation, de­spite huge re­sis­tance from some peo­ple and po­lit­i­cal fac­tions,” IMF deputy man­ag­ing di­rec­tor David Lip­ton said in an email.

“When she came in, the coun­try was on the edge of in­sta­bil­ity: It had an ex­change rate sys­tem that had con­trib­uted to par­a­lyz­ing ex­ports and growth,” he added. “More­over, Ukraine had many banks that were ei­ther or both mis­man­aged and fail­ing. She has dealt with those prob­lems and de­serves a medal for it, as far as I am con­cerned.”

A long­time banker who headed the Ukrainian divi­sion of the French bank So­ciété Gén­er­alé, Gontareva gladly took the job as cen­tral bank gov­er­nor in midJune 2014 after the Maidan revo­lu­tion had ousted the govern­ment of President Vik­tor Yanukovych. Born in the in­dus­trial city of Dnipropetro­vsk, she had com­pleted en­gi­neer­ing and eco­nomics de­grees in Ukraine. And she had been at a Kiev in­vest­ment bank, In­vest­ment Cap­i­tal Ukraine, where the coun­try’s now-president, Petro Poroshenko, did busi­ness.

“A revo­lu­tion of dig­nity had hap­pened in our coun­try, and I was quite pa­tri­otic,” she said. “I was a sea­soned banker. And I thought I knew ex­actly what was go­ing on. It was rosy glasses at that time. Of course I knew there were prob­lems, but I could not imag­ine what prob­lems I would face. I was quite naive.”

Though she was named to a seven-year term, she thought she could fin­ish re­forms in a year.

But she had walked into a po­lit­i­cal cri­sis, as well as a se­vere eco­nomic one. When she took of­fice, Rus­sia had al­ready seized and an­nexed Crimea, and Ukraine had lost 3.6 per­cent of its gross do­mes­tic prod­uct. Two months after she took of­fice, Rus­sia’s sup­port for sep­a­ratists in eastern Ukraine cre­ated more dis­rup­tion. This time Ukraine lost 15 per­cent of its GDP, in­clud­ing 30 per­cent of its ex­ports.

“I promised to write a spe­cial chap­ter for the IMF about what to do when your coun­try is in a real war,” she said. “You can­not pre­tend any­more that there is a nor­mal busi­ness model. There is an ab­so­lutely dif­fer­ent mood.”

The cur­rent ac­count deficit was more than 10 per­cent, mean­ing that the coun­try was bleed­ing fi­nan­cial re­sources. The lo­cal cur­rency was pegged to the U.S. dol­lar, but the pre­vi­ous cen­tral bank gov­er­nor had spent more than $23 bil­lion of for­eign cur­rency re­serves to prop up the lo­cal cur­rency.

Mean­while, the cen­tral bank, she said, was “a me­dieval mon­ster,” and she even­tu­ally hired 500 new ex­perts even as she laid off older em­ploy­ees.

Gontareva took the bold step of let­ting the cur­rency float and find its own true value. The dol­lar peg to the cur­rency, the hryv­nia, was a “sa­cred cow.” Elim­i­nat­ing the link trans­lated into much more ex­pen­sive im­ports and high in­fla­tion. It also ef­fec­tively slashed the stan­dard of liv­ing of peo­ple liv­ing in Ukraine.

“We were crit­i­cized by house­holds. We were crit­i­cized by busi­ness,” she said. “But it was the only way we could sta­bi­lize the macro situation.”

She couldn’t do it alone. The fi­nance min­istry re­strained spend­ing to help with fis­cal bal­ances. The IMF pro­vided $17 bil­lion for re­struc­tur­ing the econ­omy. Other coun­tries helped, too.

The mon­e­tary medicine has had its ef­fects, though the econ­omy is still strug­gling. In­fla­tion has dropped from 43 per­cent in 2015 to 12 per­cent last year. This year’s tar­get is 9 per­cent, and next year’s tar­get is 6 per­cent.

Her tough­est fights may have come from reg­u­lat­ing the coun­try’s pri­vate banks, many of which were con­trolled by the na­tion’s lead­ing oli­garchs. Of­ten there was no al­ter­na­tive to na­tion­al­iz­ing the banks, wip­ing out the oli­garchs’ own­er­ship.

“I was called a killer of oli­garchs,” she said.

The big­gest was Pri­vatBank, which held a third of all in­di­vid­ual de­posits. Much of the in­ter­na­tional aid to the cen­tral bank flowed through to banks like Pri­vatBank to make pay­ments to re­tirees and civil ser­vants. But the bank also had a cap­i­tal short­fall of $5.6 bil­lion, Gontareva said.

There was es­sen­tially no cor­po­rate loan port­fo­lio, she said, and where the bank was do­ing busi­ness, 97 per­cent of the time it was with re­lated par­ties.

“Na­tion­al­iza­tion of this bank was not our pri­mary idea,” Gontareva said. But, she said, talks dragged on for two years. Kolo­moysky pledged to cover the $5.6 bil­lion short­fall and “signed his per­sonal guar­an­tee,” she said, adding, “He failed to de­liver.”

Kolo­moysky, who had been gov­er­nor of one of Ukraine’s prov­inces and who had raised a mili­tia to re­sist Rus­sian ag­gres­sion in 2014, has told other news out­lets that his busi­ness was un­fairly tar­geted by reg­u­la­tors.

The next chap­ter

Gontareva is not sure what she will do next.

“After all of the hard work she has done, one can un­der­stand her mov­ing on,” the IMF’s Lip­ton said. “Run­ning the Na­tional Bank of Ukraine has never been and is not an easy job. But there is no doubt that Ukraine can and will find some­one to carry for­ward the good hard work that she has done.”

Gontareva said that de­spite the death threats, a new cen­tral banker would carry on her work and help in­te­grate Ukraine with the rest of Europe.

“We do not need spe­cial treat­ment,” she said. “We are a big coun­try in the cen­ter of Europe with ed­u­cated peo­ple. We do not need to rein­vent the Ukrainian bi­cy­cle.”

PHOTOS BY VIN­CENT MUNDY/BLOOMBERG NEWS

Un­cut sheets of one-hryv­nia bank notes de­pict­ing Volodymyr the Great sit on dis­play at the head­quar­ters of the Na­tional Bank of Ukraine in Kiev. Gontareva let the value of the hryv­nia float, which af­fected peo­ple’s in­comes.

PHOTOS COUR­TESY OF VA­LE­RIA GONTAREVA

Among the in­sults aimed at Va­le­ria Gontareva: graf­fiti on the wall of her home in Kiev and an open cof­fin hold­ing an ef­figy of Gontareva at the doors of the Ukrainian cen­tral bank, where she was gov­er­nor.

VIN­CENT MUNDY/BLOOMBERG NEWS

Peo­ple pass a for­eign cur­rency rate sign out­side an ex­change bureau in Kiev, Ukraine, in Fe­bru­ary. By float­ing the na­tion’s cur­rency, Gontareva sta­bi­lized the econ­omy. But not be­fore mak­ing a whole lot of peo­ple an­gry.

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