Volodymyr Lavrenchuk: “If prop­erty rights re­form is suc­cess­ful, it will pave the way to lend­ing”

“If prop­erty rights re­form is suc­cess­ful, it will pave the way to lend­ing”

The Ukrainian Week - - CONTENTS - In­ter­viewed by Lyubomyr Shava­lyuk

Board Chair­men for Raif­feisen Bank Aval on re­forms and ex­pec­ta­tions in the banking busi­ness

In pub­lic dis­course over bank re­forms, what of­ten gets left out is the voice of bankers them­selves, al­though they are the ones who can of­fer the most pro­fes­sional as­sess­ment of the changes be­ing car­ried out. One of them is Chair­man of the Board of Raif­feisen Bank Aval (RBA) Volodymyr Lavrenchuk. The Ukrainian Week talked to him about what’s been done and what Ukrainian banks can ex­pect in the fu­ture.

What are your thoughts about the re­forms of the banking sys­tem that have been go­ing on the last three years?

My opin­ion is prob­a­bly not unique among those of us work­ing in the banking sec­tor. Most of us agree that re­forms have been large-scale and ef­fec­tive. Some even re­fer to it as a clean­ing up of the sec­tor: more than 80 banks were shut down and each one of them was a sep­a­rate story. The ex­perts I’ve been talk­ing to say that this has been one of the most dif­fi­cult tasks fac­ing or po­ten­tially fac­ing the coun­try in the last 25 years. It was han­dled pro­fes­sion­ally, and thanks to that, the banking sec­tor has be­come more re­li­able and has bet­ter prospects for fi­nanc­ing the coun­try, pre­serv­ing peo­ple’s de­posits, and so on. This last year has seen a tec­tonic shift in a much bet­ter di­rec­tion.

In fact, there were many sub­stan­tive changes that most peo­ple who don’t deal with banks reg­u­larly would barely no­tice. First of all, in­fla­tion was 43% and has fallen to 12%—in just one year. This is a heroic re­sult that’s barely be­liev­able.

Sec­ondly, re­la­tions be­tween the NBU and the coun­try’s banks are no longer based on hand-man­age­ment and pref­er­en­tial treat­ment. The mar­ket has be­gun to self-reg­u­late. We can pre­dict how things will evolve, we can trust fore­casts, and we can pay less at­ten­tion to the in­flu­ence of the NBU Gov­er­nor, the Pres­i­dent or the PM. Be­fore, a call from any of them could have af­fected the ex­change rate or in­ter­est rates to stay put or to move in a par­tic­u­lar di­rec­tion. The mar­ket now de­ter­mines the value of money and that’s an enor­mous shift over the last 12 months. We have be­come stronger in­sti­tu­tion­ally and Ukraine now truly has a mar­ket econ­omy in the fi­nan­cial sec­tor.

So, ev­ery­thing’s hunky-dory? Not at all. What was the price Ukraine paid for this? How many com­pa­nies suf­fered from hav­ing their banks shut down? How many com­pa­nies and banks suf­fered a ma­jor blow be­cause of the de­val­u­a­tion of the hryv­nia? How many Ukraini­ans lost sleep watch­ing their de­posits shrink? How many Ukraini­ans and how much Ukrainian cap­i­tal left the coun­try be­cause of the cat­a­clysms in the fi­nan­cial sec­tor? Clearly, the price was ex­tremely high. But we don’t see an al­ter­na­tive and don’t be­lieve that the fi­nan­cial sec­tor could grow in any other way. The move was jus­ti­fied and un­avoid­able, so we have noth­ing but sup­port for this re­form pol­icy and have been of­fer­ing prac­ti­cal as­sis­tance in car­ry­ing it out, wher­ever nec­es­sary.

So, al­though the way the banking sec­tor was re­formed was very painful, but the path was the right one and the re­sults speak for them­selves.

How does the scale of re­forms in the Ukrainian banking sec­tor com­pare with sim­i­lar re­forms in other coun­tries where Raif­feisen op­er­ates?

The Raif­feisen Group op­er­ates in 14 coun­tries in Cen­tral and East­ern Europe and the Balkans. In terms of how com­pli­cated such re­forms can be, I doubt that any of these coun­tries will beat Ukraine.

You can say that the Ukrainian econ­omy is very small, very poor rel­a­tive to the size of the coun­try. Po­lit­i­cal in­sta­bil­ity has had a huge im­pact on Ukraine’s growth: The Rev­o­lu­tion of Dig­nity roused con­sid­er­able sym­pa­thy, but in the eyes of in­vestors, its con­se­quences—ag­gres­sion in the coun­try’s east, Crimea and Don­bas—have been un­prece­dented. You won’t find any ter­ri­to­ries like that any­where in Europe to­day. And so there are no in­flows of cap­i­tal. At the same time, do­mes­tic in­vest­ment has been flee­ing be­cause of the harsh so­cio-po­lit­i­cal bat­tle. All told, this makes the re­form process that much more dif­fi­cult.

To­day, Ukraine is an ag­glom­er­a­tion of the most dif­fi­cult ob­jec­tives, al­though we aren’t nec­es­sar­ily very aware of that. I re­mem­ber the first few weeks af­ter the Rev­o­lu­tion ended. Many peo­ple were com­mu­ni­cat­ing open-heart­edly about how to form a new gov­ern­ment. I per­son­ally know all, or nearly all of those who joined the first post-revo­lu­tion­ary Cab­i­net—they were among some of the best pro­fes­sion­als. And now peo­ple say that there aren’t any re­forms? I think our com­plaints are un­fair. If dis­tant and enor­mously pow­er­ful coun­tries are in­ter­ested in us, even though they have

more than enough of their own prob­lems to deal with, this sug­gests that our prob­lems mat­ter. The con­cen­tra­tion, scale and com­plex­ity sim­ply don’t al­low for easy so­lu­tions and short time­frames.

So I per­son­ally am very im­pressed by what’s been done and what’s be­ing done to­day. This is not just about the NBU but in the rest of the coun­try as well. The ex­ist­ing prob­lems re­quire highly qual­i­fied, ex­pe­ri­enced and skilled pro­fes­sion­als with char­ac­ter and en­durance who are able to go the dis­tance. Be­cause the tasks aren’t get­ting any fewer.

So, given the scale of the prob­lems that faced Ukraine, you would say that the pro­fes­sion­als avail­able here to tackle these prob­lems have done their ut­most.

That’s hard to mea­sure. I think that a lot is go­ing on and the peo­ple do­ing it are solid spe­cial­ists. Of course, you can al­ways find some­thing to com­plain about, that ev­ery­thing’s not done or that it’s not be­ing done right. OK, so how should it be done?

Pop­ulism is on the rise again to­day. The me­dia, es­pe­cially tele­vi­sion, keep broad­cast­ing talk­ing heads who make cat­e­gor­i­cal state­ments about how it’s all very sim­ple and what needs to be done, one, two and that’s that. OK, then go ahead and do it your­selves! In re­al­ity, ev­ery­thing isn’t that sim­ple. Com­plain­ing about how pro­fes­sion­als are do­ing their job tend to en­cour­age pop­ulism. Its level in Ukraine and the num­ber of state­ments about what should be done dif­fer­ent and how much sim­pler ev­ery­thing re­ally is, is still at a rel­a­tively safe level. This process is for­tu­nately not dom­i­nat­ing so far and there are plenty of con­struc­tive forces around: teams, as­so­ci­a­tions and clubs, both for­mal and in­for­mal, with or with­out pro­grams, who are de­vel­op­ing their own po­si­tions and pro­mot­ing re­form in the coun­try. I think that the steps taken and the di­rec­tion of the changes are right. Ev­ery­thing is go­ing for­ward as planned. That the price is high and the changes are not easy is a dif­fer­ent is­sue.

What is still lack­ing for banking re­forms to do their job? What still needs to be done?

Of course, it would be nice to be able to pro­pose some­thing dif­fer­ent that isn’t be­ing done now. I’m fa­mil­iar with the pro­gram for Ukraine de­vel­oped to­gether with the IMF. Given how com­plex the ob­jec­tives in it are, it’s hard to add any­thing. If we carry it out as planned, this will be a huge step for­ward for the en­tire banking sys­tem and for the coun­try.

If the fo­cus is shifted from ba­sic macroe­co­nomic the­o­ries to the day-to-day life of an or­ga­ni­za­tion or in­sti­tu­tion, the key item on the agenda has to be in­tro­duc­ing dig­i­tal tech­nol­ogy. As some­one from the banking sec­tor, I can say that this is on­go­ing, the re­sults will be in soon, and this will have a very big im­pact. I’m not just talk­ing about elec­tronic pay­ments from a smart­phone or tablet, but reg­is­ter­ing con­tracts, re­ceiv­ing doc­u­ments and reg­is­ters, elec­tronic re­ceipts at park­ing lots—in short, the e-so­ci­ety. When we can ac­cess doc­u­ments and data and re­ports, and have the op­tion of sign­ing a con­tract through the right apps on our mo­bile phones. The dig­i­tal world is very timely for us.

I know how it’s hap­pened in other coun­tries, and their e-so­ci­ety sys­tems, and can say that fi­nan­cial in­sti­tu­tions are al­ready es­tab­lish­ing the lion’s share of in­fra­struc­ture needed for this. Right now, banks are con­cen­trat­ing on de­vel­op­ing their pay­ments sys­tems so that cus­tomers can make pay­ments, de­posits and loans as quickly as pos­si­ble. And Raif­feisen is no ex­cep­tion. I think that ev­ery­one will soon be com­pet­ing in this seg­ment. Ev­ery fi­nan­cial in­sti­tu­tion—at least it’s true of Raif­feisen Bank Aval—is al­ready go­ing through the dig­i­tal trans­for­ma­tion. We’ve been work­ing on it for some time, but right now, ex­pec­ta­tions and the need for this trans­for­ma­tion are grow­ing con­sid­er­ably.

It's a lit­tle like switch­ing from a car­riage to a Fer­rari?

That’s a good com­par­i­son. I think that one of the qual­i­ta­tive changes that have taken place lately is that con­spic­u­ous con­sump­tion has be­come un­fash­ion­able and un­pop­u­lar. In­stead, smart spend­ing is a sign of style—cer­tainly in the busi­ness world. The per­son who knows how to spend eco­nom­i­cally is liked by oth­ers, both as an in­di­vid­ual and pro­fes­sion­ally. So our so­ci­ety doesn’t need to get into a Fer­rari but on a qual­ity western car at a rea­son­able price. We need to be­come more ma­ture in our spend­ing habits.

Given their high rate of liq­uid­ity, why is it Ukraine's banks aren't lend­ing but are putting their spare cash into CDs or gov­ern­ment bonds?

That’s a long topic, be­cause there are many rea­sons for this. But I’ll just em­pha­size a few of them, us­ing Raif­feisen Bank Aval as an ex­am­ple. Our bank has a sur­plus of liq­uid­ity that amounts to a few bil­lion hryv­nia. We’re in­ter­ested in plac­ing this cash, to earn on it, to pay out our de­pos­i­tors, and grow the bank. But we’re cur­rently putting most of this sur­plus into gov­ern­ment or NBU bonds. Why not lend it out? First of all, be­cause there’s a short­age of cap­i­tal. Many com­pa­nies lost cap­i­tal sev­er­al­fold as the hryv­nia de­val­ued, as they lost as­sets in Crimea or Don­bas, and as shrink­ing house­hold cash cut into de­mand for goods and ser­vices. Right now, the risks aren’t worth it for busi­ness own­ers.

How can we in­cen­tivize own­ers to in­vest cap­i­tal? This is both a macroe­co­nomic is­sue and a po­lit­i­cal one. And it’s af­fected by the in­vest­ment cli­mate. For in­vestors to want to sell a build­ing in Greece or Spain and put that money into their noo­dle fac­tory, they need to have some guar­an­tee that po­lit­i­cal sta­bil­ity rules the day where that fac­tory is lo­cated. That no one will be pros­e­cuted or any­thing.

Are we see­ing any cap­i­tal in­flows? Yes, es­pe­cially in the farm sec­tor. We’re lend­ing a lot there. And be­cause cap­i­tal­iza­tion is grow­ing, in­vest­ments are com­ing in: di­rect, via off­shore zones and from within Ukraine. In­vestors bring in cap­i­tal and then we of­fer them loans, not the other way around. A cap­i­tal short-

age can’t be sub­sti­tuted with loans. So the Gov­ern­ment needs to think about how they might im­prove the in­vest­ment cli­mate, be­cause that’s closely linked to lend­ing.

Sec­ondly, mort­gages have been un­re­li­able. The cri­sis of 2008-2009 showed the ex­tent to which doc­u­ments were de­fi­cient. When banks started go­ing to court—our bank had 12,000 court cases in­volv­ing col­lat­eral at the peak of the cri­sis—they saw enor­mous re­sis­tance and their own vul­ner­a­bil­ity. Doc­u­ments were bad, reg­is­ters were copied, and all kinds of phony and even crim­i­nal steps were taken that caused the mort­gages to be­come worth­less.

If prop­erty rights re­forms are suc­cess­ful—e-reg­is­ters are in­tro­duced and so on—, this pave the way to lend­ing. Right now, they are only un­der­way. We have to be con­vinced that a se­cu­rity on land, an of­fice or some­thing else is pro­tected.

Thirdly, banks need to know their clients. Fi­nan­cial mon­i­tor­ing of the sources of money, not even in the case of bor­row­ers but of any cus­tomer, is the high­est it’s ever been, not only in Ukraine, but all over the world. Ac­cord­ing to these re­quire­ments, if the source of the money is not ex­plained, no loan will be is­sued. Oth­er­wise, the bank has to have 100% of the loan avail­able in its re­serves from Day One, which au­to­mat­i­cally cuts into its prof­its. Un­der­stand­ably, no fi­nan­cial in­sti­tu­tion can af­ford to do that. The path to lend­ing lies through do­ing busi­ness openly and trans­par­ently.

I’m con­fi­dent that ori­ent­ing to­wards a trans­par­ent econ­omy, se­cured doc­u­ments and an open busi­ness will bring us prof­its a lot sooner than stay­ing the way things are now. And if our agenda is a lit­tle more com­pli­cated here than in other coun­tries, that’s just the his­tor­i­cal place we’re at to­day. Maybe one day we’ll be able to tell our grand­kids what he­roes we were in our time...

Hav­ing na­tion­al­ized Pri­vatBank, the gov­ern­ment is now the owner of nearly half the coun­try's com­mer­cial banking sys­tem. How good is this for pri­vate banks?

Most ex­perts will prob­a­bly say that state man­age­ment is a bad thing, and pri­vate is good, so ex­tend­ing the state seg­ment is bad for the coun­try. I don’t share that opin­ion. Af­ter all, all the banks that were closed down were pri­vately owned and many of them were dirty.

At the same time, if the state’s in­flu­ence is unchecked, then state-owned banks could pose a threat for the so­ci­ety and the fi­nan­cial sys­tem. From what I know about the re­or­ga­ni­za­tion of Oschadny Bank, UkrExImBank and now Pri­vatBank, new su­per­vi­sory coun­cils have been formed that are dom­i­nated by ex­pe­ri­enced, well-re­puted in­di­vid­u­als with in­ter­na­tional ex­pe­ri­ence from solid in­sti­tu­tions. I’m con­fi­dent that this is the bar­rier that will make it pos­si­ble to re­duce the im­pact of di­rect in­ter­ven­tions by Gov­ern­ment of­fi­cials in the day-to-day op­er­a­tions of those banks. And I think we’ll see that very soon, in about 18 months. So, the fu­ture com­pe­ti­tion should be in­ter­est­ing.

We’re see­ing cus­tomer mi­gra­tions be­fore our very eyes. In my opin­ion, the na­tion­al­iza­tion of Pri­vatBank took place un­der the best pos­si­ble sce­nario and they were able to avoid any kind of cat­a­clysm. Right now, Pri­vatBank en­joys state guar­an­tees, but it’s not clear how long that will con­tinue.

I be­lieve that com­pe­ti­tion will very soon af­fect banking ser­vices and the re­sult of that will de­pend on how much the cus­tomer is at the heart of op­er­a­tions, how re­li­able the bank is, and how eas­ily its prospects can be pre­dicted from the tech­no­log­i­cal, fi­nan­cial and pric­ing points-of-view.

How do you see 2017 go­ing for the banking sec­tor?

First of all, the num­ber of banks will be al­most sta­ble by the end of the year and that’s what we will live with for some time to come. Whether they are 40, 60 or 70 will de­pend more on the be­hav­ior of their in­vestors. All the own­ers who are will­ing to take money out of their own pock­ets and rein­vest will hang on to their banks. But it’s not likely that all will. At the end of the year, we will be in a po­si­tion to turn that page and say, “Mis­sion ac­com­plished.”

Sec­ondly, the cur­rent mon­e­tary pol­icy has al­ready sig­nif­i­cantly re­duced the cost of bor­row­ing. We will even­tu­ally get to the point where the cost of hryv­ni­abased loans will be in­ter­est­ing to most coun­ter­par­ties. We pre­dict that it will be 13-15% in hryv­nias by the end of the year. This opens the gates to long-term fi­nanc­ing and even to re­new­ing mort­gages.

Thirdly, the dig­i­tal trans­for­ma­tion is com­ing. It will be not only tied to pay­ments but to documentation as well. I’m re­ally count­ing on this be­ing har­mo­nized by the end of the year and chang­ing our day-to­day op­er­a­tions dra­mat­i­cally.

In­ter­est­ingly, you haven’t asked about the ex­change rate. Well, we’ve changed our ap­proach to us­ing fi­nan­cial ser­vices con­sid­er­ably. This is not the first in­ter­view I’ve given this year and not one in­ter­viewer has asked about what’s go­ing to hap­pen to the ex­change rate. This sug­gests that the hryv­nia’s de­pen­dence on the dol­lar has gone down be­cause when peo­ple de­pend on the ex­change rate, then they only talk about that. Now that’s not the case. Why? Be­cause NBU fore­casts for the end of 2016 proved cor­rect. It promised to re­duce in­fla­tion, and did. It promised the hryv­nia would fluc­tu­ate be­tween 10 and 15%, and that’s what hap­pened. This is a ma­jor qual­i­ta­tive change! We can now af­ford to make other fore­casts as well.

If we look at the cur­rent sit­u­a­tion from this an­gle, then we are overly crit­i­cal of our­selves. Look at our farm­ers; 18 months ago, the main ex­port mar­ket was Rus­sia. Then the em­bargo was in­tro­duced and ev­ery­thing was shut down. De­val­u­a­tion ate up 40% of their cap­i­tal and many com­pa­nies went into the red. Yet to­day, these same com­pa­nies are mak­ing nice prof­its—in many cases, over 30%, which is ter­rific. Rus­sia has been re­placed by North Africa, Arab coun­tries, and Latin Amer­ica. Part even went to Europe, where the quo­tas may be small but they are com­pletely filled. They’re open­ing plants abroad. And all this in only 18 months!

ONE OF THE QUAL­I­TA­TIVE CHANGES THAT HAVE TAKEN PLACE LATELY IS THAT CON­SPIC­U­OUS CON­SUMP­TION HAS BE­COME UN­FASH­ION­ABLE AND UN­POP­U­LAR. IN­STEAD, SMART SPEND­ING IS A SIGN OF STYLE—CER­TAINLY IN THE BUSI­NESS WORLD

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