Ukraine's banking system in crisis (09/27/98)

Ukraine's banking system in crisis

by Roman Woronowycz
Kyiv Press Bureau

KYIV - The current major financial threat to Ukraine is not an economic and financial meltdown, but the destruction of its banking infrastructure, according to Ukrainian financial experts.

"There has been a substantial outflow of deposits from Ukraine's banking system over the last month, losses suffered by banks as a result of exchange operations," said the president of the Association of Ukrainian Banks (AUB), Oleksander Suhoniako, on September 23.

Mr. Suhoniako, who spoke after an emergency session of the AUB, put the losses at $800 million, which he said are a direct result of the financial and business crisis in Russia.

Ukraine's bankers called the meeting after the government announced two emergency steps to keep hard currency in the country and after it became apparent that Ukraine's largest bank, Bank Ukraina, was on very shaky financial ground.

In the first of two announcements made the week of September 14, the first of which was rescinded, the government said that domestic banks would have to convert 75 percent of their hard currency holdings into hryvnia. It also announced that it would ask foreign banks to take merely 20 percent of profits on matured short-term Government Domestic Loan Bonds (GDLBs) and convert the rest into long-term treasury notes (CGDLBs).

After a loud protest from Ukraine's banks, the amount of conversion of bank holdings into hryvnia demanded by the government was reduced from 75 percent to 50 percent. Meanwhile, some 75 percent of foreign banks have agreed to the government's second announcement, the conversion plan for their GDLBs, Ukraine's President Leonid Kuchma announced the same day.

Mr. Suhoniako added that more action is needed. First, the government, as it has done for foreign investors, must allow domestic banks also to take some profits from their GDLB investments and give them the ability to convert to CGDLBs. The head of the AUB said it is also necessary for the government to continue its domestic borrowing, make radical budget cuts and proceed with its privatization program, much of which has been suspended because of severe price instability.

Mr. Suhoniako said the government's GDLB repayment crisis could be averted if the National Bank of Ukraine were allowed to extend credits to Ukraine's Ministry of Finance from money it has received from the International Monetary Fund.

"It would be expedient to address an appeal now to the international financial organizations, requesting them to change the terms for granting loans and thus give the national bank a free hand in adopting adequate financial solutions," said Mr. Suhoniako.

He said that it is obvious that IMF stipulations and conditions had done little to prevent the financial meltdown in Russia.

However, President Kuchma, speaking on September 22 at a gathering of regional press where he noted the success of the GDLB conversion program for foreign investors, gave no indication that he is ready to use IMF monies to replenish domestic bank coffers.

While calling the near-term economic outlook for Ukraine "extremely complicated, alarming and dangerous," the president said the IMF credits would be used according to the original agreement with the international lender.

That same day National Bank of Ukraine Chairman Viktor Yuschenko, attempting to reassure the population that the banking system is not near collapse, told reporters that Ukraine's banking system "remains liquid and solvent as a whole."

"However, certain banks have their problems," said Mr. Yuschenko. Interfax-Ukraine reported that the national bank director said that while domestic banks have accumulated a debt service of 16 million hrv, the daily volume of payments exceeds 1.2 billion hrv.

At a Cabinet of Ministers meeting the previous day, Mr. Yuschenko said the hryvnia would no longer be supported with hard currency outlays from the NBU. "Support for the hryvnia is being provided by limiting hard currency operations on the market and closing the interbank market," said Mr. Yuschenko on Ukrainian Television.

Although financial experts generally believe that the Ukrainian financial upheaval was spurred by the crisis in Russia, there is also an awareness that Ukraine has only itself to blame.

Ihor Yukhnovsky, a member of President Kuchma's Supreme Economic Council, said Ukraine had forced itself into a corner by issuing too many government bonds to cover budget deficits, which it cannot currently repay. He said that, even without the Russian financial collapse, Ukraine's own financial house was in sufficient disarray to produce the situation in Ukraine today.

"This is the principal reason for the financial problems in Ukraine today, although, of course, the Russian crisis only fueled our problems," said Mr. Yukhnovsky.

Since 1995 Ukraine has issued 10.8 billion hrv (about $5.5 billion U.S. before the hryvnia began to fall late last month) in government domestic loan bonds, a majority of which have been purchased by domestic investors.

Mr. Yukhnovsky explained that only 16 percent of the treasury notes issued by the Ministry of Finance were bought up by "non-resident" investors, while 63 percent were purchased by the National Bank of Ukraine and the remaining 21 percent by domestic commercial banks

"The financial problem in Ukraine is the 1.7 billion hrv that the Ministry of Finance currently owes the commercial banks of Ukraine," he added.

Mr. Yukhnovsky said the perceived low level of liquidity of the commercial banks by Ukraine's citizens could provoke a catastrophe. "Right now the real crisis is a psychological one," he said, explaining that if people began demanding their savings, creating a run on banks, then Ukraine's banking system could collapse.

"If Ukraine can shore up its commercial banks and repay what it owes, then it will halt the financial crisis," said Mr. Yukhnovsky.

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