KYIV – As the outgoing central bank governor, Valeria Gontareva will be a hard act to follow.
Her resignation on April 10 expectedly came after the International Monetary Fund released an additional $1 billion as part of its $17.5 billion country support program, and after three years as head of the National Bank of Ukraine (NBU).
Under her watch, 87 out of some 180 banks lost their licenses because they couldn’t meet the stricter regulations she put in place in one of Europe’s most corrupt and shaky banking systems. As a result, total banking sector assets shrank to $53.8 billion by year-end 2016 from more than $120 billion three years earlier.
Put another way, if the ratio of corporate loans to gross domestic product was around 50 percent before Ms. Gontareva’s tenure, and the household loans to GDP ratio was 13 percent, then today they are 35 and 7 percent, respectively.
“I came here to implement reforms. My mission is fulfilled – the reforms are implemented,” Ms. Gontareva told journalists on the day of her resignation. “I know that if all government institutions conducted their reforms in the same way as the NBU, our country would be at a very different qualitative level in its development today.”
Her efforts to clean up the banking system weighed down by massive related-party lending and non-performing loans, and what she called in an April 5 Wall Street Journal column, “zombie banks,” were praised by the IMF and broader financial community.
When President Poroshenko asked the former investment banker to chair the NBU in June 2014, most owners of financial institutions were using them for their own personal benefit, rather than as vehicles to stimulate economic growth and keep the economy turning.
The Dnipro (formerly Dnipropetrovsk) native and former head of Investment Capital Ukraine, which counted Mr. Poroshenko as a client, identified three categories of toxic banks that eventually failed.
Twenty of these banks were pure “money-laundering machines” with “no assets or liabilities” that were used entirely to stash ill-gotten gains, usually abroad. A second group was “zombie banks” that had “only liabilities and no assets,” she told the Financial Times on March 26.
A third group comprised the “oligarch banks” that “collected money from all possible sources – mostly from private individual deposits – and invested all this money into their own businesses,” Ms. Gontareva said.
Stress tests conducted by the NBU found “fake correspondent accounts, accounts opened with fictitious passports, huge discrepancies on balance sheets, sham collateral, banks that conducted more money laundering than banking – we saw it all… Many banks themselves had nontransparent ownership structures, compounding the problem,” she said in the WSJ column.
The nation’s largest private commercial bank, PrivatBank, co-owned by Igor Kolomoisky and Hennadiy Boholyubov, fell into the “oligarch bank” category.
It failed to meet a three-year recapitalization plan and was taken over by the state late last year. Regulators found a $5.5 billion hole in its balance sheet as of early December 2016 and $592 million in fraudulent transactions were allegedly conducted the day before the lender’s nationalization, Ms. Gontareva said in her resignation speech.
She added that the failed lender’s entire corporate portfolio was in the hands of related parties.
Other oligarchs owe the NBU money as well, according to Ms. Gontareva.
Dmytro Firtash’s Nadra Bank owes $363 million; Oleh Bakhmatiuk’s Financial Initiatives and VAB banks owe $370 million; Mykola Lahun’s Delta Bank owes $296 million; and Kostyantyn Zhevago’s Finance and Credit bank owes $233 million.
“I stress: a bank’s bankruptcy doesn’t mean that these sorry excuses for owners are absolved from their banks’ debt,” she said on April 10. “State funds must be returned – period!”
Not surprisingly, Ms. Gontareva has endured death threats, slander and smear campaigns from vested interests. A coffin was even placed at the doorstep of her residence, she told the Reuters news agency.
Calling the various attacks “sustained harassment,” she said “there was absolutely tons of fake information, manipulation… absolutely evil slander about me personally, about the national bank team,” the Financial Times report said.
Without naming him, she said “one big oligarch personally threatened me – physically threatened me – even in this office [the NBU].”
Thus, roughly half of the banking system’s assets now belong to the state in one form or another. Along the way, Ms. Gontareva also slashed the NBU’s staff by more than half: from 12,000 to 5,000. She raised foreign currency reserves to more than $15 billion, helped stabilize the hryvnia currency with tight capital controls. Inflation has been brought down from 61 percent in April 2015 to 12.4 percent by the end of last year. And the economy is forecast to grow 2 percent this year despite the Russian-instigated war in the Donbas, now entering its fourth year, in which more than 10,000 people have been killed.
Still, her successor will have to contend with $12.7 billion of external debt that needs to be serviced by year-end 2019, the same year of parliamentary and presidential elections, Hlib Vyshlynsky, executive director of the Center for Economic Strategy, told The Ukrainian Weekly by phone.
“If Gontareva leaves and her post is taken by someone weaker and more controlled by different interest groups, this will mean that the ability to finance these payments without default and without threats to financial stability will decrease,” he said.
Furthermore, about 31 percent of loans in the banking system are still classified as “non-performing,” according to the German Advisory Group Ukraine. An additional 15 percent are in the “substandard” category.
So, it is imperative Ms. Gontareva’s replacement be a “true professional, a banker and a technocrat, not a politician,” she said in a separate statement published by the central bank’s media office.
Restart of lending is the key task for this year, according to an IMF country report published earlier this month.
This hinges upon “corporate solvency” recovering and on “progress with enhancing the protection of creditors’ rights,” the report stated.
Otherwise, “further delays with making necessary legal amendments and judicial reform would cause material losses for the economy through underinvestment, underutilized output capacities, and under-received personal incomes and budget revenues.”
Or, as Ms. Gontareva concluded in her WSJ column: “In short, this is only the beginning of our journey. But our banking reforms have now guaranteed a stable foundation for growth and investment, which will help our economy recover and allow us to build a better future for Ukraine and its people.”