December 23, 2016, Vol. 3, Issue 4

Banking: Part 2 Banking Crisis: What Rock-Bottom Will Feel Like Where to get the Post?

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Opinions: Banking sector still not out of woods 4 Anders Aslund: Credit expansion still weak after fi nancial crisis This the 12th edition of the Kyiv Post's Legal Quarterly, meaning this “new” product is com- ing to the end of its third year. It was born on March 28, 2014, only a month after President 6 Brian Bonner: Why many don’t fl ed the Revolution. want to talk about asset recovery We are grateful that it has found a place in the market. We are still experimenting with the format, but have evolved to one in which each issue takes an in-depth look at a single topic Articles and its legal ramifi cations, such as banking, customs, taxes, budget, courts, prosecutors and so on. We also are listening to those of you who want more profi les of people in ’s 8 State buys PrivatBank; taxpayer legal community. We agree. Expect these changes and more in 2017. losses will be at least $5.6 billion

This is the fi rst edition in which we’ve repeated a topic: Banking. Our fi rst banking issue 15 Directory of Legal Services came out on July 1. But so much keeps happening. The biggest bombshell is the national- ization of PrivatBank, which accounts for 20 percent of the sector’s $53 billion in assets. It 20 Deposit Guarantee Fund admits has been a train wreck that will cost taxpayers at least $5.6 billion (Hr 148 billion) to bail out. poor results in recovering money How much of the losses were due to fraud, insider lending or embezzlement? We’ll prob- ably never know, given how poorly Ukraine’s politicized regulators and law enforcers work. 24 Chaotic sale of loan portfolios But Governor Valeria Gontareva, at a Dec. 19 press conference an- opens opportunities for fraud nouncing the nationalization, estimated related-party lending at a whopping 93 percent of PrivatBank’s loan portfolio and said the bank had not kept required reserves for nearly a 26 Top 25 banks in Ukraine by assets year. The only real questions are why authorities didn’t act earlier and what penalty will for- mer owner, billionaire oligarch Ihor Kolomoisky, suffer. The chances of Kolomoisky facing any 28 Ukraine slowly warms to cashless criminal or civil penalties are non-existent, in our opinion. There's simply no history of pros- economy ecuting powerful people in this country, no matter what they do. 30 Central bank pressures small Meanwile, taxpayer losses keep mounting in Ukraine’s free-for-all banking sector. After banks, but optimism persists PrivatBank, the costs are likely to top $20 billion from the orgy of insider lending and unpaid loans. The banking sector may yet revive, but it’s way too early to say it has recovered. 32 Risks remain high for lenders in Ukraine’s agricultural sector

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Спеціалізоване видання «Kyiv Post Legal Quarterly» видається ТОВ «Паблік-Медіа». Наклад — 7 000 прим. Розповсюджується безкоштовно. Money – what else is Матерiали, надрукованi у виданні «Kyiv Post Legal there when December 23, 2016, Vol. 3, Issue 4 Quarterly» є власнiстю видавництва, захищенi мiжнародним та українським законодавством i writing © Kyiv Post, 2016 не можуть бути вiдтворенi у будь-якiй формi без about bank- The material published in the Kyiv Post Legal Quarterly may not письмового дозволу Видавця. Думки, висловленi ing? (Top be reproduced without the written consent of the publisher. у дописах можуть не завжди співпадати з поглядами видавця, який не бере на себе left) Today’s All material in the Kyiv Post Legal Quarterly is protected by вiдповiдальнiсть за наслiдки публiкацiй. cover: The Ukrainian and international laws. Засновник — ТОВ «Паблік-Медіа» National The views expressed in the Kyiv Post Legal Quarterly are not Головний редактор — Брайан Боннер Bank of necessarily the views of the publisher nor does the publisher Відповідальний за випуск — Люк Шеньє Ukraine carry any responsibility for those views. Адреса видавця та засновника співпадають: shows the Україна, м. Київ, 01004, вул. Пушкінська, 31А, Publisher: Mohammad Zahoor 6й пов. new Hr 500 Chief Executive Offi cer: Luc Chénier Реєстрацiйне свiдоцтво — note. (Bot- Chief Editor: Brian Bonner Кв № 20588-10388Р від 18.03.2014 tom left) Commercial Director: Alyona Nevmerzhytska Надруковано — ТОВ «Новий друк», Part 1 of Editors: Euan MacDonald, Olga Rudenko 02660, Київ, вулиця Магнітогорська, 1, our bank- тел.: +38 044 537 24 00 Sales Managers: Yulia Kovalenko, Yulia Krus, Vita Shvets, ing edition Elena Symonenko Замовлення № 16-2821 came out Designers: Vladyslav Zakharenko, Anton Ekle З приводу розміщення реклами звертайтесь: in July, but Project Team: Isobel Koshiw, Josh Kovensky, Denys Krasnikov, +380 44 591-77-88 losses have Yuliana Romanyshyn, Natalie Vikhrov Відповідальність за зміст реклами несе рекламодавець. grown con- Photo Editor: Pavlo Podufalov siderably Photographers: Kostyantyn Chernichkin, Volodymyr Petrov, since then. Anastasia Vlasova (UNIAN)

[KYIV POST LEGAL QUARTERLY] #04/2016 3 Ukraine's banking sector resembles a piggy bank that was emptied out due to bank fraud, embezzlement and unpaid loans to insiders. The staggering costs since 2014 are expected to exceed $20 billion before recovery. (Courtesy) Credit expansion still weak after fi nancial crisis

Usually commercial banking expands sharply after a major fi nancial crisis. But that is not happening in Ukraine for many reasons, including the fact that borrowers have a bad habit of not repaying their loans.

he more one delves into banking in To begin with the legal base needs to be im- Ukraine, the more diffi culties emerge. proved. Creditors’ rights need to be reinforced TAs soon as one problem has been re- so that bankers can claim collaterals of debt- solved, a new one appears. The problems are ors and sell it off in case they do not pay. Half many but they can be resolved. a dozen laws need to be promulgated. The fi rst big headache is to get paid. The next problem is the judicial system, Especially big Ukrainian businessmen have a about which nothing positive can be said. By Anders Aslund habit of not paying anybody, which is a conve- The Prosecutor General’s Offi ce is famous for nient way of enrichment for many in the elite. not going after important people, while it is

4 #04/2016 [KYIV POST LEGAL QUARTERLY] Advertisement seemingly quite successful at extortion. A new real offi ce of prose- BUSINESS ADVISER cution needs to be built up with new staff. The court system seems to get worse the higher up a matter Brief review of Ukrainian gets. Therefore, serious cases are likely to lose. If contrary to ex- Anna Sisetska banking system in pectation a sensible verdict is passed, the collection services of the Counsel, 2016: is there any hope Vasil Kisil & Partners Ministry of Justice have a rather poor reputation of not collecting. to restore? Private collection services have too restricted rights, which should %"" ,+,*6+!1%" +(&+$0601"*,#(/&+"&+устч ,+1&+2"1, "Ȅ" 1"! be broadened. by the problems of 2014-2015. Hryvnia devaluation, aggression of the Russian "!"/1&,+&+(/&+"Ѹ&+02Ȅ& &"+1 ,/-,/1"$,3"/++ "+!1%"02 0".2"+1),00 In addition, Ukrainian banks have three big problems, their big- ,# ,+ޖ!"+ ")"!1,!"1"/&,/1&,+,#1%" +(0҃),+-,/1#,)&,ѷ))1%" ,3"Ҍ gest customers, their managers and their owners. Many members of *"+1&,+"!%3" 20"!+,21ޗ,4,#!"-,0&10Ѹ#/""7&+$,/02 01+1&))&*&11&,+ the Ukrainian elite enjoy parliamentary immunity, which they also ,#)"+!&+$Ѹ+! 2//"+ 6ޗ2 121&,+0Ѹ4%& %%0+"$1&3")6Ȅ" 1"!1%"ޖ++ &) standing of many Ukrainian banks. Due to rising negative debts, banks had to apply toward banks. Senior members of important committees feel /"1"0&$+&ޖ +1/"0"/3"0#,/ 1&3",-"/1&,+0Ѹ4%& %&+"3&1 )6%!+"$1&3" particularly immune, especially if their committee deals with eco- &*- 1,+1%")"3"),# -&1)&71&,+,# +(0ѷ +устхҌустч1%"+2* "/,# +(0 nomic matters, as most do. Quietly, a number of major Ukrainian !" /"0"!0&$+&ޖ +1)6ѷ +"/)6" "* "/устч,+)6ъш +(001&))%! +(&+$ license as compared to 180 banks in early 2014 according to the NBU. banks not managed by their owners have seen a complete change of )1%,2$%1%"0&121&,+&0+,10,%/!0&140&+устх+! "/1&+-,0&1&3"06*-- management. The rumor has it that a habit of kickbacks of 10 per- toms become apparent, it is still too soon to speak of abatement of the banking cri- cent of unjustifi ed loans developed under the years of President sis. The Ukrainian banking system is currently in the middle of a reformation stage. +" "* "/устчѸ1%""51"+!"! 2//"+ 6/"01/& 1&,+01%1%3" ""+"Ȅ" - Viktor Yanukovych, who fl ed the EuroMaidan Revolution on Feb. 1&3"#,/*,/"1%+14,6"/0ѷ)1%,2$%1%"6%3"1"*-,//6+12/"Ѹ1%"&/3)&!&16 22, 2014. -"/&,!%0+,1 ""+!"ޖ+"!1%&01&*"ѷ"ޖ+&1")6Ѹ02 %/"01/& 1&,+00%,2)!+"&1%"/ The worst problem of Ukrainian banks, however, tends to be /"-) "1%"/"#,/*Ѹ+,1 "1%"/"#,/*&10")#ѷ 1&0,+)604&ȇ 1&,+0,#(/&+&+ state authorities and regulators based on a comprehensive strategy that can bring their owners. The owner of a bank has usually a capital of about 1%"4"("+"! +(&+$0" 1,/,#(/&+"  (1,%")1%ѷ# ,2/0"Ѹ1%"+! 1/10 of the bank’s assets, that is, its loans. Under Yanukovych, 1%"$,3"/+*"+1%3"02 ""!"!&+01 &)&7&+$1%"0&121&,++!"3"+ /,2$%11, many bank owners developed a habit of giving 80 percent of )&#" "/1&+%&$%)6+1& &-1"!)& "/)&71&,+0ѷ%"6&+ )2!"1%")& "/)&71&,+&+1%" */("1,#&*-,/1&+$0"/3& "04%& %&*-)&"01%" + ")1&,+,#-/& ""5*&+1&,+ the loans to themselves. As they wasted their funds, their banks "/1&ޖ 1"0 6"/7%7,3+&0%&+#,/*+!1%"(/&+&+1/+0)1&,+,#1%"02-- went bankrupt and their poor depositors lost their money. This -,/1&+$-/&*/6!, 2*"+10Ѹ04"))0/"*,3&+$ //&"/01,"5-,/1,#0"/3& "0 6 has been the main reason for the National Bank of Ukraine clos- 1%"41%1 " *""Ȅ" 1&3",+" "* "/фѸустч*(&+$&1)"$))6-,00& )"1, "5" 21"$/""*"+10 6*"+0,# ,//"0-,+!"+ ""5 %+$"+!&002",#&+3,& "0ѷ ing down almost half of the country’s 180 banks in the last three ,4"3"/Ѹ1%"&+!"-"+!"+1)6 ,+1&+2"0*,+&1,/&+$1%" 2//"+ 6 1/+0 - years. tions and may block any transaction the NBU believes to be risky, non-compliant The NBU needs to do more. It needs to complete the closure of 4&1%1%")4,/-,0&+$/"),/-,1"+1&)1%/"11,)"$)&71&,+,#-/, ""!0#/,* /&*"ѷ002 %Ѹ1%"/"&001&))*2 %4,/(1, "!,+"&+,/!"/1,-21&+-) "*,!- substandard banks. Statements are often made that the end goal is "/++!0,2+! +(&+$0601"*4%& %&0!".21")602-"/3&0"!ѷ +-/1& 2)/Ѹ&1&0 50-60 banks. The NBU has suffi cient capacity and routine to head highly important to complete the internal reform of the NBU to change their func- for that target right now, so that people know that the bank cleans- 1&,+)&16+!"01 )&0%4&1%&+1%"*"+1&,+"!-/, "00 +(+!+"5-,/1 /"!&1 $"+ 6#,/02--,/1&+$0*)) 20&+"00"0ѷ)0,Ѹ&1&01%"*11"/,#-/&,/&161,1(" ing is completed. The big remaining question is what will happen *"02/"0)),4&+$1, + ") 2//"+ 6/"01/& 1&,+01%1#,/"&$+&+3"01,/0 +*" with PrivatBank, and it alone accounts for one-fi fth of the banking *,+$1%"/"0,+0(""-&+$1%"*#/,*"+1"/&+$1%"(/&+&+*/("1ѷ))1%"0" assets in the country. /"01/& 1&,+0/"#"/Ѹ*,+$,1%"/1%&+$0Ѹ1,1%"ҙҚ"01 )&0%"!*5&*2*)),4 )" тусҌ!6-"/&,!#,/0"11)"*"+102+!"/"5-,/1+!&*-,/11/+0 1&,+0Ѹҙ Қ"Ȅ" - How can banking be pursued under these conditions? tive prohibition of early repayment of foreign currency loans to non-residents, al- Admittedly most have failed, but most hazards can be handled. 1%,2$%!" 1Ҍ&+1,Ҍ0%/"%,)!"/".2&16 ,+3"/0&,+&0)),4"!Ѹҙ Қ*+!1,/60)" To begin with, a bank needs to secure suffi cient collateral and make of 65% of foreign currency earnings, (d) prohibition on dividends distribution for "%1#,ہ*,2+10"5 ""!&+$т*)+,/тсустхҌустц,/&+$+&!" "/-!,&/"-"1% sure that it can be seized and sold. As a rule, banks should avoid big total amount of payable dividends during one calendar month, (e) prohibition on clients enjoying legal or actual immunity, while a signifi cant bank purchase and transfer of foreign currency for the purposes of returning abroad the can make life suffi ciently hard for a small or medium-sized debtor. funds received from sale of corporate rights in Ukrainian entities, corporate rights &+(/&+&+"+1&1&"0Ѹ+!#2+!0/" "&3"!#/,*(/&+&+"+1&1&"0҃ -&1)/"!2 1&,+ Management needs to be checked with rigorous corporate gover- ,/0/"02)1,#4&1%!/4)#/,*-/1& &-1&,+&+1%"0*"Ѹҙ#Қ-/,%& &1&,+,+-2/- nance and good audits. chase of foreign currency at the instruction of a resident company that has foreign Finally, bank credits need to be affordable. At present, the NBU 2//"+ 6#2+!0%")!&+ 2//"+1+!!"-,0&1 ,2+10&++*,2+1"5 ""!&+$ уцѸсссѷсс,/+".2&3)"+11%"/",#&++6,1%"/ 2//"+ 6Ѹ4&1%#"4"5 "-1&,+0ѷ policy rate has stabilized at 14 percent a year, and the consumer %" ,+ "-1,#+"4 2//"+ 6 ,+1/,)/"$2)1&,+#,/устш--/,3"! 61%" price index at 12 percent a year. Corporate loan rates have declined -/,3&!"0 #,/ ")&*&+1&,+ ,# 1%,0" /"01/& 1&,+0 &+ 1%" ,+1"51 ,#  &+1"$/1&,+ but stay high at 17 percent. Most borrowers have to pay far higher &*"!1&+ /"0&+$1%""5-,/1-,1"+1&),#,2/ ,2+1/6ѷ 1/"*&+01,%,-"1%1 1%"*"+1&,+"!4&)) "&*-)"*"+1"!&+!!&1&,+1,*(&+$01/2 12/) %+$"0&+ interest rates. Scarily, the NBU estimates non-performing loans at 1%" +(&+$0601"*,#(/&+"ѷ)),#1%&0&0&*-,/1+1+,1,+)6#,//"01,/&+$ ,+- the high level of 30 percent of all loans. ޖ!"+ "&+1%" +(&+$0601"*+!&1011/ 1&3"+"001,#,/"&$+&+3"01,/0)),4&+$ Usually, commercial banking expands sharply after a major fi - 1,0,)& &1 ,2+10Ѹ 21)0,1,"+02/".2)&16&*-/,3"*"+1+!/&0(*&1&$1&,+ #,/ +(&+$0"/3& "0Ѹ%&$%)"3"),#-/,1" 1&,+#,/ ,+02*"/0+!ޖ++ &)&+- nancial crisis. Logically, it should start now, but so far credit expan- termediaries and to increase the role of the banking system in the sustainable sion has barely begun. " ,+,*& $/,41%,#(/&+"ѷ

Anders Åslund is a senior fellow of the Atlantic Council in Vasil Kisil & Partners Washington and a member of the supervisory board of Bank Credit Leonardo Business Center, 17/52A Bohdana Khmelnytskoho Dnepr. St., Kyiv 01030, Ukraine; [email protected], www.vkp.ua

[KYIV POST LEGAL QUARTERLY] #04/2016 5 A woman with a whistle tries to stop a police car carrying a detained protester during a rally of people who lost their money in the failed Bank Mikhailivsky on Street on Nov. 3. (Volodymyr Petrov) Why many at the top don’t want to talk about asset recovery

any in Ukraine and in the world want to talk banks and granted big refi nancing loans without personal about how Ukraine will recover the $40 bil- guarantees or collateral. Mlion in assets stolen since 2010, more than a Today’s regulation remains suspect, despite the inter- quarter of it from the corrupt and dysfunctional bank- national accolades heaped in some quarters on Gontareva, ing sector. who, despite her shortcomings, remains the best and most But the ones who can do the most about solving the transparent person to lead the central bank. problem are also the least eager to talk about the mess: This scandalous pre-revolution environment allowed for By Brian Bonner President , Prosecutor General Yuriy the most massive bank robbery in independent Ukraine’s [email protected] Lutsenko, Deposit Guarantee Fund director Kostyantyn history: At least $14.5 billion in losses through insider Voroshylyn and National Bank of Ukraine Governor Valeria lending and bank fraud. In a lot of cases, “insider lending” Gontareva. Also on the list are many of the nameless, face- was simply the polite term for “embezzlement.” less, corrupt judges among a pool of 7,000 who are hiding More than 80 banks crashed this way – imploded in the behind their robes, their bribes in Ukraine and their 97 per- multibillion-dollar orgy of of bad lending by insiders who, cent disapproval rating from the public. of course, stuck suffering Ukrainian taxpayers with the bill To say this is a national disgrace doesn’t begin to de- that they keep on paying. scribe the sad situation. How many criminal cases have been forwarded by the To recap: Ukraine had no effective banking regulation central bank and Deposit Guarantee Fund for investiga- before 2014 – the central bank didn’t know who owned the tion? At least 3,500.

6 #04/2016 [KYIV POST LEGAL QUARTERLY] Advertisement How many bank owners are charged with fraud or convicted of BUSINESS ADVISER fraud? 0. How many civil lawsuits have been fi led to recover assets from failed banks? Only 7, at least by the Deposit Guarantee Fund, accord- Andriy Olenyuk Export credit agencies and ing to its deputy managing director, Andrii Olenchyk, despite the fact Partner, opportunities for solar energy EVERLEGAL that civil lawsuits offer the best opportunity to recover the money. projects in Ukraine How much of the lost $14.5 billion has been recovered, frozen, %&06"/1%"!"3"),-*"+1,#ҁ$/""+"+"/$6ҁ-,4"/-)+10Ѹ02 %00,)/-)+10Ѹ seized or repaid? %0$&+"!*,*"+12*ѷ%&0&0)/$")6 " 20",#1%"11/ 1&3"#""!Ҍ&+1/&Ȅ0 Estimates vary, since no person or agency coordinates this hunt, but +!1%"$,3"/+*"+1$2/+1""!,ȄҌ1("0,#))-/,!2 "!"+"/$6 61%"011"Ҍ ,4+"!"+1&16ѷ# ,2/0"Ѹ1%"/"/")0,%2/!)"0+!2+ "/1&+1&"01%1-/"3"+1 the answer is far less than 10 percent of the total amount looted. the sector from developing at a higher gear. Possible public pressures on the Those offi cials who are brave enough to show up to conferences, $,3"/+*"+11, 21#""!Ҍ&+1/&Ȅ0Ѹ-/"!& 1 &)&16,#0" 2/&+$#""!Ҍ&+1/&ȄѸ)+! like the Kyiv Post Tiger Conference on Nov. 29 and the International )), 1&,++!$/&! ,++" 1&,+/"*,+$#"4ѷ+,1%"/&*-,/1+1# 1,/&01%" +""!1,&*-,/1)/$"-,/1&,+0,#".2&-*"+1+!*1"/&)0+""!"!#,/0,)/-/,'- Asset Recovery Conference in Kyiv on Dec. 15-16, usually offer up ex- " 10#/,* /,!+!-60&$+&ޖ +1*,2+10&+%/! 2//"+ 6ѷ &3"+1%") (,# cuses to explain the failure to bring justice to and money Ȅ,/! )"ޖ++ &+$#,/!"3"),-&+$+"4-/,'" 10&+(/&+"Ѹ%3&+$+" "00/6 to the treasury. #2+!0%+!6&0+,1"06ѷ, ) +(0!,+,1,Ȅ"/#3,2/ )" ,+!&1&,+0#,/(/&- The Deposit Guarantee Fund, which has paid out $3 billion in losses +&+ 20&+"00"02+!"/"5&01&+$ &/ 2*01+ "0ѷ to insured, and the National Bank of Ukraine, which is owed another ,+0&!"/&+$1%" ,3"Ѹ(/&+&+ 20&+"00"0/"),,(&+$#,/ޖ++ &+$ /,!Ѹ &+ )2!&+$#/,*"5-,/1 /"!&1$"+ &"0ҙҁ0ҁҚ1,0" 2/"0,*2 %+""!"!#2+!- $3 billion, blame prosecutors for not fi ling criminal charges in obvi- &+$ѷ214%10%3",+1%"1 )"#,/02 %-/,'" 10Ѿ ous, clear-cut cases of fraud. 0/"202))6-2 )& ,/.20&Ҍ-2 )& $"+ &"01%1-/,3&!"ޖ++ &+$1,"5- Prosecutors, in the rare moments where they will discuss the is- -,/1"/0,/&*-,/1"/01,# &)&11" /,00Ҍ ,/!"/1/!"ѷ%"ޖ++ &+$&0-/,3&!"! sue, say the central bank and Deposit Guarantee Fund submitted cas- 646,#!&/" 1),+0,/$2/+1""+!&+02/+ " ,3"/0ѷ%",Ȅ& &))&01,#0 es with weak evidence. + "#,2+!,+1%"4" Ҍ-$"ҙ#,/"5*-)"Ѹ&++!Ѹ2)"/ "/*"0 &+ "/*+6Ѹ1/!&20&+"1%"/)+!0Ѹ &+,/"Қѷ3"/))Ѹ1%"ޖ++ &+$-/,- And the uninsured depositors, who are owed more than $5 billion, are 3&!"! 60%0 "/1&+!3+1$"0,3"//"$2)/ ,/-,/1"ޖ++ &+$+!&0 seething with anger at what they view as a rigged, corrupt, insider system commercially attractive both for large companies and small and medium enter- now run by President Petro Poroshenko for his benefi t and the benefi t of -/&0"0 " 20",#),4"/&+1"/"01/1"0Ѹ*&!Ҍ+!),+$Ҍ1"/**12/&16-"/&,!0+! his friends and cronies and other untouchable oligarchs or lawmakers. 1%""5-,/1"/0Ҁ &)&161,/" "&3"#2+!0!&/" 1)6#/,*0+!+,1#/,*&*-,/1"/0ѷ Some of the powerful elite, who think they should be allowed to +1%" 0",#!&/" 1),+Ѹ(/&+&+!"3"),-"/ +/".2"01+1,#2+! -2/ %0",#".2&-*"+1+!*1"/&)0#/,*+"5-,/1"/&+1%" ,2+1/6,#1%" keep what they have stolen, are trying to run out the clock. Ҁ0,/&$&+ѷ".2&/"*"+101,02 %/".2"010+!1,1%"/")"3+10)"+!-2/- There is a fi ve-year statute of limitations for liquidating insolvent %0" ,+1/ 10!"-"+!,+1%"ѷ%"/"#,/"Ѹ&+1"/"01"!&*-,/1"/00%,2)!$"1 banks. There’s a three-year window for fi ling civil lawsuits.  .2&+1"!4&1%02 %/".2&/"*"+10&+!3+ " "#,/"*(&+$+6//+$"*"+10 4&1%"5-,/1"/0ѷȇ"+&+02 % 0"Ѹ+&*-,/1"/0&$+0ޖ++ &+$$/""*"+14&1% All of the bank failures, reducing the size of the sector from 180 1%"Ѹ4%& %Ѹ&+12/+Ѹ-60#,/1%"".2&-*"+12+!"/0)"+!-2/ %0"$/""- banks to only 100 today on the way to 50-60 banks, are turning out to *"+1!&/" 1)61,1%""5-,/1"/ѷ%"&*-,/1"/1%"+*201/"-61%"),+1,1%" be a mere warm-up to the big bombshell that is about to explode. ,+1%"1"/*0,#1%"ޖ++ &+$$/""*"+1 "14""+02 %&*-,/1"/+!1%"ѷ PrivatBank, which controls 20 percent of the nation’s banking as- +,1%"/-/,!2 1-/,3&!"! 60&01%"$2/+1""+!&+02/+ " ,3"/0ѷ2 % sets, is on the verge of collapse due to insider lending on a scale unri- ,3"/0/"202))6-/,3&!"! 601,ޖ++ &)&+01&121&,+0ҙ02 %0 +(0Қ1%1 ޖ++ "1%"-2/ %0",#$,,!0#/,*#,/"&$+0"))"/0ѷ%146Ѹ1%"0 10 valed by any other banks. $2/+1,/0+!1%"ޖ++ &)&+01&121&,+0 10ޖ++ &"/0"51"+!&+$ޖ++ &+$ѷ The bank’s insured deposits are estimated at Hr 100 billion – a sum "$/!)"00 ,# 1%" 01/&+$"+1 -&1) ޗ,4 ,+1/,)0 &+1/,!2 "! &+ (/&+"Ѹ 1%" equal to the entire payouts to date by the Deposit Guarantee Fund. 1&,+)+(,#(/&+""5-/"00)6)),40#,/-,00& &)&16,#ޖ++ &+$#,/ One could assume that the uninsured deposits are at least as much, (/&+&+ ,//,4"/0 4&1%,21 #2+!0 %&11&+$ +(  ,2+10 &+ (/&+"ѷ +!"/ another Hr 100 billion – for $7.5 billion in taxpayer losses altogether. 1%"--)&  )"/"$2)1&,+0Ѹ(/&+&+ ,//,4"/0,/ +(0 +, 1&++!/"-6 ),+0&+%/! 2//"+ 61,ޖ++ "&*-,/10Ѹ-/,3&!"!1%102 %),+0/"-/,3&!"! Getting wind of what is ahead, people have been lining up to get 4&1%1%"-/1& &-1&,+,##,/"&$+Ѹ4%& % ,2+1/6,#/"$&01/1&,+%0+,Ȅ&- their money out even as PrivatBank’s owner, Ihor Kolomoisky, says &)/+(&+$,#+,1)"001%+ҁҁ0 ,+ޖ/*"! 6,+",#1%"4,/)!Ҁ0)"!&+$/1&+$ there is no need to panic. $"+ &"0ҙ &1 %1&+$0Ѹ1+!/!р,,/Ҁ0Ѹ,,!6Ҁ0Қѷ"$2)1&,+ ,+1"*-)1"0 1%1 /"!&1 #2+!0 *6 " 1/+0#"//"! 6 1%" ޖ++ &"/ !&/" 1)6 1, 1%" "5-,/1"/ As I understand from insiders, the government was set to announce 2+!"/1%"1"/*0,#1%"0)"+!-2/ %0"$/""*"+14&1%,2102 %#2+!0 "&+$ that it has taken control of the bank and its increasingly worthless as- ޖ/011/+0#"//"!1,1%"&*-,/1"/ҟ ,//,4"/&+(/&+"0&0 201,*/&)6/".2&/"! sets, but the state in ownership of the three largest banks. #,/ /,00Ҍ ,/!"/),+0ѷ%"/"$2)1&,+0)0,0-" &ޖ ))6-/,3&!"1%1(/&+&+ The big question is whether Kolomoisky will pay criminal or civ- ,//,4"/&0"+1&1)"!1,/"-602 %#2+!0 2102 '" 11, "/1&+ ,+!&1&,+0ҙ!, 2- *"+1/6 ,+ޖ/*1&,+1%11%"#2+!0%3" ""+-&!1,1%""5-,/1"/&+1%"ޖ/01 il penalties for the bank’s collapse. But it is not much of a mystery. -) "Қѷ,/",3"/Ѹ1%"/"$2)1&,+0-"/*&11,/"-63/&,20#""000, &1"!4&1% No powerful person has ever been brought to justice in Ukraine – let 1%"Ҁ0-/1& &-1&,+ ,3"1%"&+1"/"01 -&*-,0"! 61%"0*"/"$2)1&,+0ѷ alone one of the fi ve most powerful people the nation. %20Ѹ(/&+&+ 20&+"00"01%14&0%1,!"3"),-0,)/-,4"/-)+10 21 ) ( So, congratulations and my sympathies, suffering Ukrainian taxpay- #2+!01,-2/ %0"".2&-*"+1 /,!%3"$,,!/+$",#-/,!2 10 60 ers: You now own the three largest banks in Ukraine – UkrExImbank, 1%11%"6 +20"ѷ3"/))Ѹ "#,/"12/+&+$1,0#,/),+0,/ ,3"/0Ѹ+6 20&- +"00*201 /"#2))6+)60"1%"Ҁ0/".2&/"*"+10+!!"1"/*&+"4%& %-/,!- the historical piggy bank of the president; Oschadbank, the histor- 2 1&01%" "01ޖ1#,/1%"-/,'" 11%+!ѷ ical piggy bank of the prime minister, and now the hollowed-out PrivatBank, which appears to have been the piggy bank of Kolomoisky. Tel.: +380 44 337 7007 [email protected] Fax: +380 44 337 7008 www.everlegal.ua Let’s all hope that money starts growing on trees.

[KYIV POST LEGAL QUARTERLY] #04/2016 7 People line up at an ATM of a PrivatBank branch on Saksahanskoho Street on Dec. 19. (Kostyantyn Chernichkin) State buys PrivatBank; taxpayer losses will be at least $5.6 billion

By Josh Kovensky kraine's government is nationaliz- also lent credence to what critics have alleged [email protected] ing the country’s largest commer- for even longer: that PrivatBank operated Ucial bank, PrivatBank, after it failed more like an embezzlement scheme for own- to fi ll an Hr 89 billion hole ($3.4 billion) in its er-oligarchs Ihor Kolomoisky and Gennadiy books. Bogolyubov than a properly functioning bank. National Bank of Ukraine Governor Valeria The question now is whether they will re- Gontareva and Finance Minister Oleksandr pay these bad loans and face any legal conse- Danylyuk announced the decision on Dec. 19, quences, or simply stick Ukrainian taxpayers pledging to protect depositors' money, say- with a bill that could exceed $5.6 billion (Hr ing that the bank's credit portfolio is infected 148 billion). with insider loans -- many of them unpaid -- Gontareva hinted at the nationalization amounting to 97 percent of the loan portfolio. of PrivatBank a week earlier while announc- Gontareva's statement revealed what had ing the institution’s fi nancial stability report been known to the NBU for at least a year. It on Dec. 13. “The key risk to fi nancial stability

8 #04/2016 [KYIV POST LEGAL QUARTERLY] ADVERTISEMENT Do you or your bank own the money on your current account?

bookkeeper, banks are not allowed to them on a current account opened operate with your money until you de- with a bank. One cannot find any title cide to enter into a deposit or trust transfer wording, or even transfer in account agreement with the bank. A cur- trust provisions or orders while com- rent account shouldn’t be confused with municating with the bank regarding a deposit account – where one concludes servicing your current bank account — another agreement on a bank depos- unless you explicitly order the trans- it, under which funds are borrowed by fer of your money from your account Maxim Oleksiyuk the bank and title to the funds is trans- to an account belonging to the bank. Partner, Attorney at Law ferred to the bank’s ownership. In fact, Even the wording ‘transfer from ac- accounting your money on your account count to account’ is not logically cor- ver the last several years, more itself does not provide your bank with rect, because the title is transferred Othan 80 banks in Ukraine have any rights to your money. Let’s compare from person to person, with due re- been declared insolvent. Business a current account with accounts in secu- flection in the accounts. Changes in entities and private citizens have lost rities (shares, bonds, etc.) — the latter accounts are just the registration of a billions of hryvnias that was on their is also opened by banks serving as de- transaction for the transfer of a virtu- current accounts. We’ve got used to positaries of securities. If the insolven- al financial instrument. the news of another bank turning into cy of a bank were to lead to the loss of an empty can, from which all funds title to shares by shareholders of a joint- There is no formal or common sense have been washed out, leaving zero stock company, who would keep shares reason to stick to archaic image of the chances for restitution. It looks like in such an account opened with a bank? bank as the custodian of your mon- there can be no happy end for stories Another example: could you imagine ey. This paradigm has sunk into obliv- like these. Here I’d like to shift your that the hypothetical insolvency of the ion, together with real money made of attention to a little detail which the state registrar service or the state land gold and silver — for better or worse. banks avoid disputing, and which cadaster would lead to losing your title Today’s currency is a virtual thing — changes the whole scene dramatically: to your house or land plot? even that of paper. There’s no doubt it is whether your bank owns the funds that this ambiguous and non-trans- in your current account? parent situation — is artificially sup- ported by the banks in order to get Let’s take a look from different angles: "If you want to steal profit from operating with your money, some money, while not entitled to do so. The insol- the comparative and common sense don't rob a bank — vency of a bank should not have any approach: Today, hryvnia is issued by adverse effect on current accounts — the National Bank of Ukraine and are open one." which are simply a register kept by a declared to be the only legal payment bank, acting as the NBU’s agent. Such instrument in the country. But the law a register is subject to transfer to an- Bertolt Brecht limits the ability of legal entities and other agent as it is. But such approach natural persons to make settlements could hardly be supported by the NBU, in cash, thus forcing us to use cashless formal/legal approach: there is no which cares for the banks and their payment systems. The NBU empowers provision either in the law or in the business first. its agents — the banks — to register and usual agreements on servicing cur- account all transactions with these fi- rent bank account stipulating the nancial instruments — cash — on bank alienation of your funds in favor of accounts. Being just a registrar and a the bank by means of accounting

[KYIV POST LEGAL QUARTERLY] #04/2016 9 PrivatBank owner in the short run is possible non-compliance by a few large billion in payments to foreign creditors due next year, Ihor Kolomoisky in December 2010. banks with recapitalization programs, which were based on NBU offi cials may need IMF lending to make it through Kolomoisky surren- diagnostic studies,” said Gontareva. 2017. IMF lending has stalled at $7.7 billion out of a possi- dered control of the These reports prompted withdrawals from PrivatBank. ble $17.5 billion because of Ukraine's failures on the reform bank to the state on Dec. 18. (Ukrafoto) On Dec. 16, there were reports that PrivatBank had limited front, including in the banking sector. daily withdrawals from ATM machines. Bu now, PrivatBank has effectively become a second Privat party Oschadbank - a mammoth business run by the state. Ukraine’s banking sector is characterized by poor reg- The amount that could have been siphoned out of the ulation, insider lending, and fraud. Some thought that bank through insider loans may be as high as Hr 163 billion PrivatBank's size alone would protect it, but since its 1992 ($6.3 billion), according to NBU data. That is more than founding, it appears that its owners also fl eeced deposits Ukraine’s defense budget and at least 5 percent of the na- off its customers through insider loans. tion's economic output this year. PrivatBank has 20.5 million depositors holding $11 bil- Even after nationalization, Kolomoisky will retain con- lion in assets, out of 45 million Ukrainians with a banking trol of the bank’s payment systems, which appear to be system worth $52.8 billion. That accounts for 21 percent of owned via separate legal structures, giving him continued the sector's assets. leverage. The bank, however, minimized the problem and through Political analyst Vitaly Bala said that the threat to de- last week said it was meeting central bank refi nancing re- stroy the bank has been a main source of power for quirements and operating normally. It also said that only Kolomoisky. “He’s a very creative businessman,” said Bala, 17.7 percent of its credit portfolio is related-party loans -- laughing. “But the problem has become too big for the gov- a far cry from 93 percent that the NBU calculated. Before ernment to ignore.” nationalization, Dragon Capital placed the amount at be- The International Monetary Fund has made resolving tween 40 and 80 percent. the PrivatBank problem one of the conditions for Ukraine According to the NBU fi gure, the insider lending would to receive the next loan installment. With upwards of $3.5 amount to $6.3 billion (Hr 163 billion) out of a total loan

10 #04/2016 [KYIV POST LEGAL QUARTERLY] Advertisement portfolio of $6.8 billion (Hr 180 billion.) BUSINESS ADVISER Besides a source of cash, PrivatBank was a lever of infl uence for 4+"/0 ,# 20&+"00Ѹ 4%&)" *(&+$ Kolomoisky. It was feared that he could destroy the bank in retalia- decision on raising credit funds for its tion for legal moves that interfere with his vast business interests in Artem Stoyanov development, depend on stability of the " ,+,*& +!ޖ++ &)0601"*Ѹ 21+,1 airlines, oil and media. Senior partner, )4601%"6 +-/"!& 1))/&0(01%1 + LCF Law Group Another path to destruction involves PrivatBank’s online bank- &+ޗ2"+ "1%"-,00& &)&16,#/"#2+!&+1%" #212/"Ѹ#,/"5*-)"4,/)! /&0&0&+уссщѷ ing service Privat24. The division provides internet banking, a pay- ,/",3"/Ѹ&1&0&*-,00& )"#,/ 20&+"001,-/"!& 1"51/,/!&+/6, 0&,+0Ѹ02 %0 ment system that processes 40 percent of transactions in Ukraine, *&)&1/6 1&,+0&+1%"01"/+(/&+",/++"51&,+,#/&*" 6200&+ "!"/1&,+ѷ 1*201 "!*&11"!1%1&+ 0",#-/, )"*04&1%),+0"/3& &+$Ѹ ,//,4"/0,ȇ"+ according to Samopomich Party lawmaker and member of the 1/61,3,&!#2)ޖ))*"+1,#1%"&/),+)& &)&1&"0Ѹ03"1%"&/00"10+!1, ,+1&+2" Parliamentary Committee on Banking Oleh Lavryk. running their business. Usually, this is accomplished by commencement of the in- solvency procedure. “The bank is used as a machine for receiving money,” said +02 % 0"Ѹ,+)61%",+"Ѹ4%, 12))6 ,+1/,)01%"&+0,)3"+ 6-/, "!2/"Ѹ%0 Oleksandr Savchenko, director of the Kyiv International Institute of chance to achieve positive result from it. ,+1/,),#1%"&+0,)3"+ 6-/, "!2/"&0-,00& &)&161,&+ޗ2"+ "1%"!" &0&,+,# /"!&- Business and a former NBU offi cial, of Kolomoisky’s intentions. “It's 1,/0҃*""1&+$,+#,/*1&,+,#1%" /"!&1,/0҃ ,**&11""Ѹ+!Ѹ#2/1%"/Ѹ1%"!" &0&,+,# a good mechanism, it can perform good operations, or it can kill.” /"!&1,/0҃ ,**&11"",+--,&+1*"+1,#&+0,)3"+ 6,Ȅ& "/Ҏ00"1*+$"/,/)&.2&- !1,/Ѹ+!,+-/, ""!&+$1,1%"+"5101$",#1%"&+0,)3"+ 6ҙޖ++ &)/"% &)&11&,+Ѹ )&.2&!1&,+Қ+!!"1"/*&+1&,+,#-/,-"/16!&0-,0)-/, "!2/"ѷ Flunking the test &1%02 %-2/-,0"Ѹ,4+"/0,# 20&+"00 +#,/* "/1&+*,2+1,# ,2+10-6-  )"&+)"$)"+1&1&"01%1/"))&"!,/Ȅ&)&1"!4&1% ,//,4"/Ѹ4%& %*6$&3"1%"* PrivatBank’s related parties - Kolomoisky and Bogolyubov - have -,00& &)&16,#&+!&/" 1&+ޗ2"+ ",+ ,**"+ "*"+1,#02 %-/, "!2/"0ѷ largely failed to repay their loans to the bank, resulting in a non- +02 % 0"0Ѹ) (,# 1&3"-"/#,/*+ "#/,*1%")"+!&+$ +(Ѹ&+1"+!"!1, protection of its interests, is a guarantee that insolvency initiators or more active performing loan rate of up to 70 percent, the central bank said. /"!&1,/04,2)!$&+ ,+1/,),3"/1%"&+0,)3"+ 6-/, "!2/"Ѹ&+ )2!&+$1%"-/,-- The NBU has known this since at least November 2015, according erty disposal procedure. Lending bank can ensure control of the insolvency procedure by forming of liabili- to Oleksandr Zavadetsky, a former head of the NBU’s related party 1&"0-,,)Ѹ1%"3,)2*",#4%& %4,2)! "*,/""51"+0&3"1%+&10,--,+"+10%3"ѷ loans monitoring department, one of the fi rst government offi cials 11%"0*"1&*"Ѹ 6ޖ)&+$1%" /"!&1,/҃0 )&*0Ѹ +(0%,2)!2+!"/01+!1%1 2/- /"+1)"$&0)1&,+!&3&!"0 /"!&1,/0,+0 %"!2)"! /"!&1,/0+!0" 2/"! /"!&1,/0ҙ4%,0" to analyze the bank’s loan portfolio for insider lending. )&*0/"0" 2/"! 61%" ,//,4"/҃0-)"!$",#-/,-"/16Қѷ “The insider loans diagnostic on PrivatBank showed results that +)60 %"!2)"! /"!&1,/0%3"1%"/&$%11,-/1& &-1"&+ /"!&1,/0҃*""1&+$4&1% /&$%11,3,1"+!&+ޗ2"+ "1%"&+0,)3"+ 6-/, "!2/" 6")" 1&,+,# /"!&1,/0҃ ,*- nobody expected to see,” Zavadetsky, who left the central bank in mittee. Claims of secured creditors are registered in the list of creditors separately October, told the Kyiv Post. “It caused real anxiety among everyone.” +!/"+,11("+&+1, ,2+1&+1%"-/, "00,#!"1"/*&+1&,+,#1%" /"!&1,/0҃3,1"0ѷ ,+0".2"+1)6Ѹ&1&0 )"/1%1+( +"+02/"!"1"/*&+&+$&+ޗ2"+ ",+1%"!" &0&,+ In June, the NBU struck a deal with Kolomoisky that would see ,#1%" /"!&1,/0҃ ,**&11"" 60,)3&+$14,-/, )"*0ѷ &/01)6Ѹ1,ޖ)"*5&*2**,2+1 him attempt to recapitalize the bank while reducing related party of its scheduled claims, and secondly, to take measures for decrease of scheduled claims of the other creditors. lending. If Kolomoisky met the requirements, he would be allowed &1%1%&0-2/-,0"Ѹ+(Ѹ "#,/"ޖ)&+$Ѹ0%,2)!+)67"1%"*,2+1,#&10 )&*0 to retain control of his bank. +!!" 1,/҃000"101%10" 2/"02 % )&*0Ѹ-/1& 2)/)6Ѹ3)2"+!/")"3+ " of such assets. Coordinated with the IMF, the plan gave PrivatBank’s owners ,/ "5*-)"Ѹ 1, 0" 2/" -"/#,/*+ " ,# , )&$1&,+0 2+!"/ 1%" /"!&1 $/""*"+1Ѹ Banks can take in pledge goods for sale, namely, property that is used by the bor- /,4"/&+,-"/1&+$ 1&3&1&"0,/ ,//,4"/҃0/&$%11, )&*$&+01&10 ,2+1"/-/1&"0,+ supply agreements, services agreements, etc. NATIONALIZING PRIVATBANK WON'T +1%"*',/&16,# 0"0Ѹ0,#1%"!1",# ,//,4"/҃0&+0,)3"+ 6 ,**"+ "- MEAN NATIONALIZING PRIVAT24 *"+1Ѹ02 %02 '" 10,#-)"!$"*6+,1 " 12))63&) )"ѷ,Ѹ+(4,2)! not have a possibility to uphold its claims at the cost of such pledge. This demon- 01/1"01%1&+ )2!&+$,#02 %02 '" 10,#-)"!$"1,1%")&01,#0" 2/"! )&*04,2)! be not recommended. 2//"+14,+&+0,)3"+ 6-/,3&!"0 /"!&1,/04&1%1%"/&$%11, +!,+02 %-)"!$"Ѹ 0,1%1 +(҃0 )&*04,2)! "&+ )2!"!1,0 %"!2)"!+!4,2)!-/,3&!" +(4&1% online payment *,/" %+ "01,/"#2+!1%/,2$% ,+1/,),# ,//,4"/҃0&+0,)3"+ 6-/, "!2/"ѷ banking Privat24 !!&1&,+))6Ѹ +(0%,2)!+)67" )&*0,#,1%"/ /"!&1,/0Ѹ+!0-" &)11"+1&,+ system 0%,2)! "$&3"+1, )&*0Ѹ4%& %4,2)!)),402 % /"!&1,/01,&+ޗ2"+ "!" &0&,+,# /"!&1,/0҃*""1&+$,+#,/*1&,+,#1%" /"!&1,/0҃ ,**&11""Ѹ+!,+!" &0&,+0,#1%" /"!&1,/0҃ ,**&11""ѷ + 0",#1%"0)&$%1"01!,2 1+!02Ȅ& &"+ 6,#02 % )&*0Ѹ&14,2)! "/"0,+ )" 1,, '" 1$&+011%"*+!-/,3"1%"&/$/,2+!)"00+"00ѷ 4,+&+0,)3"+ 6)0,-/,3&!"00 %"!2)"! /"!&1,/4&1%1%"/&$%11,0"&7"1%" ,2/1 4&1% )&*,+&+3)&!&16,/!"+&),#!" 1,/҃0)"$)1/+0 1&,+0,/-/,-"/16 1&,+0 PrivatBank Privat Group 1%14"/"*!"!2/&+$,+"6"/Ѹ-/" "!&+$1%"&+&1&1&,+,#+&+0,)3"+ 6 0"ѷ In addition to being Ukraine’s The payment system is not With the help of such instrument bank has a possibility to appeal against formation largest physical bank by assets, owned through PrivatBank, ,#)& &)&1&"0&+)"$)"+1&1&"0ѸȄ&)&1"!4&1% ,//,4"/Ѹ+!&+ /"0",#&10&+ޗ2"+ ",+ 1%"!" &0&,+0Ѹ4%& %4,2)! "*!"4&1%&+1%"&+0,)3"+ 6-/, "!2/"ѷ PrivatBank runs the country’s giving the owners control of /"#2)11"+1&,+1,1%" +!&!12/",#00"1*+$"/&0)0,&*-,/1+1ѷ +1%" 0" most popular online banking the system even in the event of any reasonable suspicions of interest of the abovementioned person to debtor or service, Privat24. of nationalization of the bank. one of the creditors, bank should apply the procedures to discharge the appointed asset manager and complain against his actions to the regulatory. The percentage of transactions ,)),4&+$ ,+ )20&,+ #,/* 1%" -/ 1& " ,# &+0,)3"+ 6 0" -/, ""!&+$0 + " *!"ѹ,+)6 1&3"-"/#,/*+ "+!%&$%.2)&ޖ 1&,+,# +(҃0)"$)!3&0"/04,2)! that the Privat24 payment system )),4-/,1" 1&+$&+1"/"010+!/&$%10,#)"+!&+$ +(&+ 0",#&+0,)3"+ 6,#1%" ,/- 40% processes in Ukraine. /,4"/4&1%*5&*2*"Ȅ& &"+ 6+!-,0&1&3"/"02)1ѷ *according to Oleh Lavryk, lawmaker and member of the Parliamentary Committee on Banking Privat24, one of the most advanced payment systems in Ukraine, LCF Law Group, still belongs to billionaire oligarch Ihor Kolomoisky, despite the 47, Volodymyrska St., office 3, Kyiv, 01001, Ukraine Dec. 19 privatization of PrivatBank. [email protected] www.lcf.ua

[KYIV POST LEGAL QUARTERLY] #04/2016 11 the recapitalization of a problem systemic bank.” Moreover, the fund allotted Hr 166 billion ($6.3 billion) in bond issu- ances for “bank recapitalization.” Subtracting the Hr 14.3 billion ($542 million) set for state-owned Oshchadbank and Ukreksimbank, that comes to Hr 135.7 billion ($5.1 billion) to cover issues relating to “systemic banks.” At the time the report was released, the NBU ran a stress test on the top 20 banks. PrivatBank fl unked.

On the offensive The NBU determined that PrivatBank’s shareholders either could not, or did not want to, repay the loans to recapitalize the bank. Bank CEO Oleksandr Dubilet flew to Washington, D.C., in early October to lobby against the bank’s nationalization. At the same time, lawmaker and metallurgy mogul was at an IMF meeting in Washington distributing a pamphlet Ukrainian Finance three years to gradually fi ll the hole. But all banks had to alleging corruption in the NBU. Minister Olek- attain a capital adequacy ratio of 5 percent by the end of In Kyiv, protests started to appear with more frequen- sandr Danylyuk and National Bank of September, meaning that Kolomoisky had to inject money cy around the NBU. One protest in November, over the col- Ukraine Governor into PrivatBank worth 5 percent of its credit portfolio. lapsed Bank Mikhailivsky, saw thousands of pensioners Valeria Gontar- “The IMF is funding the country, so they see that there close down the street on which the NBU is located. eva announce the nationalization of is potentially a hole in the fi nancial system that can be cre- Volodymyr Fesenko, director of the Penta political stud- PrivatBank on Dec. ated in an aggravated situation by PrivatBank,” said Ihor ies center, said that while PrivatBank was likely behind 19. Losses to taxpay- Olekhov, head of law fi rm Baker & McKenzie’s fi nancial in- some of the Kyiv disturbances, “the interests of many dif- ers could exceed $5.6 billion. State stitutions practice in Kyiv. ferent factions came together. Batkivshchyna, (business- offi cials promised to PrivatBank’s press service only admitted to a capitaliza- man Serhiy) Taruta - a political crisis and snap elections protect depositors. tion requirement of Hr 10 billion ($379 million). would all be to their benefi t,” Fesenko said. (Julia Berezovska/ Press offi ce NBU) A December report from the NBU says that the coun- try’s top 20 banks had an average non-performing loan rate What does nationalization really mean? of 53 percent; even at that level, Kolomoisky would have to Gontareva said on Dec. 8 that she intended to resolve the supply at least Hr 89 billion ($3.4 billion) of his own money issue of PrivatBank by the end of 2016. to make the bank safe. In its second-ever fi nancial stability report on Dec. 13, The IMF-approved repayment plan had already run into the NBU published fi gures showing that PrivatBank was problems by the September deadline. It turned out that col- Hr 89 billion ($3.4 billion) short of fi lling its capital needs. lateral for many of the bank’s loans came nowhere near “Resolving this risk demands quick, tough, and coordinated matching the value of the loans themselves - out of a cred- actions by the NBU and the government,” reads the report. it portfolio of Hr 180.4 billion ($6.8 billion), PrivatBank was In the week leading up to nationalization, the Ukrainian able to verify collateral for Hr 31 billion ($1.1 billion), leav- press was full of rumors. PrivatBank's press service released ing an Hr 148 billion ($5.6 billion) gap. a statement the day after the NBU report on Dec. 14, call- ing nationalization reports part of a "coordinated informa- tion attack." Some fear that PrivatBank owner Ihor But by Dec. 18, a joint NBU and Deposit Guarantee Fund Kolomoisky has siphoned money out of the team was in to begin the takeover. bank, leaving Ukraine's taxpayers on the That evening, the Cabinet of Ministers issued a decision under Article 41.1 of the law on guaranteeing deposits, say- hook for up to $6 billion in losses under state ing that they had agreed to a request from the NBU to na- ownership; PrivatBank says all is well. tionalize the bank. PrivatBank simultaneously entered into temporary administration as the government bought 100 percent of the shares from Kolomoisky for Hr 1. Danylyuk cited that Hr 148 billion fi gure during the post- The bank now belongs to the Ministry of Finance, allow- nationalization press conference of the maximum amount ing the government to inject up to 150 billion in capital to of money that Ukrainian taxpayer would have to pay. stabilize the institution. The IMF duly noted this failure in its September mem- To fund the capital injection, the government will issue orandum, referring to “a decision for state participation in Ukrainian treasury bonds to fund the bailout.

12 #04/2016 [KYIV POST LEGAL QUARTERLY] Advertisement $6 billion bailout? BUSINESS ADVISER But won’t fi lling the hole in PrivatBank’s spreadsheet will mean that the Ukrainian government is paying for Kolomoisky’s insider lending? “Unfortunately, yes,” said Savchenko, the business school director Oleksander Plotnikov Partner, Arzinger and former NBU offi cial. Kolomoisky has likely used the past few months to “siphon the Positive developments in debt restructuring tastiest bits out of the bank,” said Fesenko, the political analyst, " "+1 6"/0 *6 " %/ 1"/&7"! 0 1%" "/ ,# &$ !" 1 /"01/2 12/&+$ meaning that Ukraine will likely inherit an empty bank. -/,'" 10&+(/&+"ѷ+)&("&+ ,2+1/&"04&1%!"3"),-"!" ,+,*&"0Ѹ)"$&0)Ҍ Given that the NBU says PrivatBank has a total loan portfolio of 1&,+&+(/&+"&0+,1!3+ "!"+,2$%1,# &)&11""Ȅ& &"+1+!04&ȇ!" 1 Hr 180.4 billion ($6.8 billion), the bank’s nationalization could mean /"01/2 12/&+$ѷ,*")"$)+!ޖ++ &)&+01/2*"+101%1/" 201,*/6#,/ such matters in developed countries are still not available in Ukraine. Ukraine will pay up to 20 percent of its annual national budget over 11%"0*"1&*"4"%3"1,!*&11%10&121&,+&0 %+$&+$+!4"0"" time to cover the losses. 0&$+&ޖ +1-,0&1&3"!"3"),-*"+10&+ ,//,4"/0҃+! /"!&1,/0҃--/, % The risks inherent to nationalizing PrivatBank led to dithering 1,/"01/2 12/&+$ѷ,*"&002"04%& %0"3"/)6"/0$, ,2)! "!") /"(Ҍ from the Presidential Administration on what decision to take, said "/0Ѹ*6 ""0&)6/"0,)3"!+,4+!!,+,1-/"3"+1-/1&"0#/,*!&Ҍ Bala, the political analyst. ),$ѷ 4,2)!061%1 &)&161,-216,2/0")#&+0%,"0,#1%",1%"/-/16+! /"!&+"00#,/ ,*-/,*&0"0/""00"+1&)#,/02 "00#2)/"01/2 12/&+$ѷ+! Zavadetsky, the former NBU related party lending monitor, said "&+$"+$$"!&++2* "/,#/"01/2 12/&+$-/,'" 104%& %&+3,)3" ,1% that the NBU should have nationalized PrivatBank in December ), )+!#,/"&$+ /"!&1,/04"0""1%13"/6,ȇ"+-/1&"0/"/"!6+,41, 2015 after it realized the depth of the related-party lending problem. go against their short-term interests in order to close the deal and obtain “What should have happened, didn’t happen,” Zavadetsky said. "+"ޖ10&+1%"#212/"ѷ +!!&1&,+1,$"+"/)"3,)3&+$,# /"!&1,/0҃+!!" 1,/0҃--/, %1,1%" !" 1/"01/2 12/&+$Ѹ  +)0,*"+1&,+0,*"-,0&1&3"&*-/,3"*"+10,#), ) Insured losses )"$&0)1&,+4%& %*("3,)2+1/6!" 1/"01/2 12/&+$*,/"11/ 1&3"#,/)) involved parties. This is the amount the taxpayer-financed Deposit *"+1%"4,#(/&+"҄+ &++ &)"01/2 12/&+$҅ҙ1%"҄"01/2 12/Ҍ Hr Guarantee Fund has paid out to individuals who lost &+$4҅Қ4%& % " *""Ȅ" 1&3",+тъ 1, "/устч+! %+$"0&*-)"Ҍ 80 billion their money in liquidated banks since 2014. The ($3 billion) maximum individual payout is Hr 200,000 or $8,000. *"+1"!1,1%"5,!",#(/&+"&+ ,++" 1&,+4&1%1%&0)4ѷ %,2$%1+,1-"/#" 1Ѹ1%""01/2 12/&+$4 /"1"0)"$&0)1&3" 0" #,/ Uninsured losses 3,)2+1/6!" 1/"01/2 12/&+$&+(/&+"ѷ 1&0#&/1,061%14&1%,211%&0 )41%"/"4"/"02 "00#2)/"01/2 12/&+$0&+(/&+"+!*,01,#1%"*/Ҍ The number from the Deposit Guarantee Fund comes from an accepted creditors claim registry, ("1 ,2)! )&3" 4&1%,21 1%&0 )4ѷ ,4"3"/Ѹ ,+" ,# 1%" *&+ -,0&1&3" +,3")Ҍ filed by uninsured depositors (over Hr 200,000 in 1&"0&+1/,!2 "0 61%&0)4&0&*-)"*"+11&,+,#0,*"2+&ޖ"!/2)"0#,/)) -/1& &-+10,#/"01/2 12/&+$-/,'" 14%& %#2/1%"/*6 "&*-/,3"!0 Hr losses), corporate entitites, etc. These non-insured deposits will be paid out from proceeds received 1%"-/ 1& "!"3"),-0ѷ,/",3"/Ѹ1%""01/2 12/&+$4&04") ,*"! 61%" 229 billion from the sales of assets of failed banks. Payouts are 011"Ҍ,4+"! +(04%& %4"/")&*&1"!&+1%"&/ &)&161,-/1& &-1"&+/"Ҍ ($8.8 billion) made according to priorities set out by law. As of 01/2 12/&+$-/,'" 10!2"1,1%"&/01120+!/&0(0 ,++" 1"!4&1%&1ѷ Dec. 1, there is an approved registry for 79 liquidated ,4Ѹ&1&0 )"/)6011"!1%1011"Ҍ,4+"! +(0+! +(04&1%011"Ҍ banks. ,4+"!0%/"&+1%" -&1)*6-/1& &-1"&+/"01/2 12/&+$-/,'" 10 ,+ $/""! ,+!&1&,+0Ѹ4%& %*6&+ )2!"&ѷѷѸ020-"+0&,+,# /2),#&+1"/"01 Unrepaid refinancing loans +!-/1&)!" 14/&1&+$,Ȅѷ2"1,1%&04""5-" 11%1011"Ҍ,4+"! +(0 This is the amount of money that bankers or former Hr 4&)) "1%"*,01 1&3" /"!&1,/0&+-/ 1& )21&)&71&,+,#1%"+"4)4ѷ bankers owe the National Bank of Ukraine for +!!&1&,+1,1" %+& )&002"04%& %&*"!1*(&+$1%"/"01/2 12/&+$ refinancing loans from the central bank, dating back 72 billion -/, "00*,/",/$+&7"!+!01/&$%1#,/4/!Ѹ15-/"#"/"+ "0$&3"+1,-/Ҍ at least to 2008, when Viktor Yushchenko was ($2.7 billion) 1& &-+10,#!" 1/"01/2 12/&+$2+!"/1%"+"4)4/"11/ 1&3""+,2$%1, president. 01&*2)1" ,1%!" 1,/0+! /"!&1,/01,//+$"!" 1/"01/2 12/&+$-/,'" 10 2+!"/1%""01/2 12/&+$4ѷ%"*,01&*-,/1+1-/"#"/"+ "0/" ,++" 1Ҍ Total losses "!4&1%Ҍ"5"*-1&,+,#0,*",-"/1&,+04&1%00"1004"))0"5"*-1&,+ The losses are likely to grow as more banks are #/,* ,/-,/1"-/,ޖ115,#1%"-/,ޖ1, 1&+"! 6 ,//,4"/0/"02)1,# liquidated and more claims for financial losses are !" 14/&1&+$,Ȅѷ Hr filed. The bank losses amount to 15 percent of %,2$%1%""01/2 12/&+$4%0 " ,*""Ȅ" 1&3"0"3"/)*,+1%0$,Ѹ 381 billion Ukraine’s expected gross domestic product in 2016. &*-)"*"+11&,+,#&10/2)"0&001&))02 '" 11, /"1&,+,#0-" &) ,!&"0ҙ0" Ҍ ($14.5 billion) The actual dollar vallue of the losses is higher, since /"1/&1+!/ &1/1&,+ ,2/1Қ4%& %/"/".2&/"! 61%")4ѷ 1&0"5-" 1"! some of the unpaid loans were takenout when the 1%1)) ,!"04&)) " /"1"! 6 " /2/6устш+!1%"+ޖ/01/"01/2 12/&+$ exchange rate was Hr 5/$1. Now the rate is Hr 26/$1. -/,'" 102+!"/1%"+"4)44&)) " ,**"+ "!ѷ ,#/!" 1,/0+! /"!&1,/0%3"0,*"!!&1&,+)1&*"1,$/"",+1%" By Ira Movchan | Kyiv Post 1"/*0,#/"01/2 12/&+$0,1%1&+1%"-/, "00,#/"01/2 12/&+$1%"64&)) " )" Sources: National Bank of Ukraine, Deposit Guarantee Fund of Ukraine 1,ޖ51%"&///+$"*"+10&+1%"/"01/2 12/&+$-)+4&1%,212++" "00/6),+$Ҍ )01&+$+"$,1&1&,+0+!4&))04&ȇ)6-001,1%"01$",#&*-)"*"+11&,+ѷ Ukraine's banking sector losses have grown to at least $14.5 bil- lion, not counting another $6 billion in probable losses from the Arzinger newly nationalized PrivatBank. The losses are broken into three 75, Zhylyanska St., 5th Floor; 01032, Kyiv, Ukraine categories: state payments to insured depositors, uninsured [email protected] www.arzinger.ua deposits lost by consumers and unpaid refi nancing loans owed to the National Bank of Ukraine.

[KYIV POST LEGAL QUARTERLY] #04/2016 13 Poroshenko’s 'moment of truth' NBU offi cials insist that they will attempt to force Kolomoisky to repay the loans. If not, they say, they will at- tempt to seize as much of his collateral as they can. But political analysts doubt that the Dnipro billionaire will repay his debts. “Kolomoisky has been more inclined to negotiate in recent months,” said Fesenko. "This situation with PrivatBank was critical, and forced him and the govern- ment into a deal. But it's unlikely that he will pay back ev- erything immediately." Fesenko added that the 1+1 TV channel, which los- es money but provides political infl uence, could have fi g- ured into the deal to nationalize PrivatBank. As long as Kolomoisky retains 1+1, he will be able to spread his own version of the story. Some outgoing PrivatBank offi cials are doing so. Both Dmytro Dubilet, the bank's information technology direc- tor, and Oleg Gorokhovsky, a bank executive, claimed that the bank was forced into nationalization by an informa- tion attack. Aleksandr Dubinsky, a journalist on 1+1, sug- People walk away from a PrivatBank branch on Oct. 24 in Kyiv. (Kostyantyn Chernichkin) gested that the government does not know how to operate PrivatBank's technological systems, setting up a nar- rative in which Kolomoisky pulling the plug on Privat24 looks to be the result of govern- ment incompetence. Kolomoisky will also be able to It’s empty, fi ght nationalization through the but pretty courts/ Ukrainian law has no spe- cifi c concept for bank “nation- alization,” complicating the government’s position. “The issue is not clearly ad- dressed in current law,” said Oleksandr Kurdydyk, an attorney at DLA Piper’s Kyiv offi ce. One scenario that worries is that Kolomoisky could win a court case after the government has pumped billions of dollars to fi - nancially stabilize the bank. Whether Kolomoisky is held to account for the bank's failure, and how much of the burden average Ukrainians must shoulder, is now in the government's hands. “It’s a moment of truth” for the president, Savchenko said.

NEWS ITEM: Some fear that PrivatBank's own- er Ihor Kolomoisky has siphoned the bank's money abroad prior to the Dec. 18 national- ization and handed over an empty bank.

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[KYIV POST LEGAL QUARTERLY] #04/2016 19 This fi le photo shows about 50 people who came to the Deposit Guarantee Fund offi ce in Kyiv on the morning of June 21 to demand the return of the money they Deposit Guarantee had deposited with Mykhailivsky Bank, which went bankrupt and closed on May 23. (Anastasia Vlasova) Fund admits poor results in recovering failed banks’ assets

he government has paid out more more than 3,000 criminal reports to law en- By Natalie Vikhrov [email protected] than Hr 80 billion ($3 billion) to forcement agencies- 376 of them linked TUkrainian customers with insured de- to owners and top managers of insolvent posits in the nation's 80 collapsed banks banks. However, this approach has yielded since 2014. poor results. To date, there have been mere- But little of that money, and as well anoth- ly two convictions of bank owners or top er $5 billion in losses from uninsured depos- management. its, has come from bank owners, managers and In comparison to the thousands of criminal shareholders, who pocketed billions of dollars reports, the fund has fi led a total of seven civ- of Ukrainian deposits through insider loans il lawsuits throughout 2014 and 2015 against and other embezzlement schemes. the bank owners and shareholders of Tavryka, The Deposit Guarantee Fund has fi led ERDE, Forum, and Mercury banks, amounting

20 #04/2016 [KYIV POST LEGAL QUARTERLY] BUSINESS ADVISER Advertisement

Artem Stanislav Taranowski Kuniansky advocate, partner advocate, Golovan & Partners Golovan & Partners

An Ultimate Obstacle for the Execution of the European Court’s Judgments Against Ukraine ,),3+ +! /1+"/0 4 &/* -/,3&!"0 )"$) 02--,/1 1, 1%" --)& +1 &+ 1%" $/,2-,# 0"0-"+!&+$ "#,/"1%" /+!%* "/,#1%"2/,-"+,2/1,# 2- man Rights mentioned as an indication of failure in solving the problem of non- "+#,/ "*"+1,/!")6"!"+#,/ "*"+1,#(/&+&+ ,2/10҃'2!& &)!" &0&,+0ѷ 1&0, 3&,201%11%" ,2/1/2)&+$&+,+"0#3,2/4,/1%+,1%&+$4&1%,21&1҃0 "- +&0+,&0& "!1/2, #,ہ/фс+ "Ѹ!2/&+$уссчҌустт,+)6+",/&+01 ѷ!" /,#+"$+& (/&+"4"/""+#,/ "!ѷ A woman with Delta Bank cards hanging on her neck attends a +уссш,+",#(/&+&+ ,**"/ &) ,2/10#,2+!&+#3,2/,#,2/ )&"+1+!,/- rally of depositors of collapsed banks in front of parliament on Nov. 15. (Volodymyr Petrov) !"/"!1,/" ,3"/00"10#/,*1%"011"Ҍ,4+"!"+1"/-/&0"ѷȇ"/+2*"/,20)"$)  1&,+0Ѹ*!"&+,/!"/1,"+#,/ "1%&0 ,2/1!" &0&,+Ѹ4"&+&1&1"!+&+0,)3"+ 6 to claims of Hr 13.4 billion ($510 million). -/, ""!&+$0$&+011%"011"Ҍ,4+"!"+1"/-/&0" 0"!,+1%"!"*+!02+!"/1%" Despite losing all seven lawsuits, the fund has come under fi re court order. for failing to further pursue the civil route against bank leader- /,*уссш1&))-/"0"+11&*"1%" ,2/1!" &0&,+&+#3,2/,#,2/ )&"+1/"*&+02+- ship, which has proven effective in many other countries, includ- "+#,/ "!ѷ+!&10""*01%1)))"$) 1&,+0*!" 6,2/ )&"+1+! 6200&10 ing Russia. )"$)!3&0,/0&+-01ъ6"/0Ѹ)) /+!+"4+!/"#,/*&01)"$&0)12/"&+ +(- /2-1 60-%"/"Ѹ))"Ȅ,/101,&*-)"*"+12/,-"+,2/1҃0-/ 1&0"&+(/&+&+)4 Andriy Olenchyk, the Deposit Guarantee Fund deputy manag- system — looks like desperate and chaotic moves in an ocean of irresponsibility. ing director, admitted that the organization struggled in its pursuit of civil claims. ,/+,44" +06#,/02/"Ѹ1%11%"/"&0+,!&Ȅ"/"+ "#,/(/&+&+,Ȅ& &)0,+ %,41,"+#,/ ")4ѹ 6!&/" 1Ѹ ,**,+0"+0"+!$,,!#&1%Ҍ--)6&+$,#-,0&- Both banking sector experts and anti-corruption authorities have 1&3")4+!$"+"/))6 (+,4)"!$"!)4-/&+ &-)"0Ѹ,/ 6),+$+!"5%201&+$ criticized the organisation for repeatedly forwarding criminal cas- 01/2$$)"&+ ,2/1/,,*0+!"3"+),+$"/"Ȅ,/101,"5" 21"'2!$*"+1ѷ es to the Prosecutor General’s offi ce, where the investigations typ- +301+2* "/,# 0"01%"/"/"+,+6+"$1&3")"$) ,+0".2"+ "0#,/,#- ically stall. ޖ &)0Ѹ/"0-,+0& )"#,/3&,)1&,+0,#%2*+/&$%10Ѹ"3"+&#1%" ,2/10!&/" 1)6-,&+10 Even in the cases of Mikhailovsky and Delta banks, where top 102 %3&,)1&,+0+!1/"0-,+0& )",Ȅ& &)0ѷ offi cials called for the arrest of the their owners, neither Viktor +#,/12+1")6Ѹ!"0-&1"1%" &+!&+$-,0&1&,+,#1%"2/,-"+,2/11%1+,1'201 Polishchuk nor Mykola Lagun have been arrested to this day. (/&+"҃0 )"$&0)1&,+ 21 !*&+&01/1&3" -/ 1& " 1,, 0%,2)! " /"#,/*"!Ѹ 4" According DLA Piper partner Oleksandr Kurdydyk, on average 4,2)!1("1%")& "/16,#/$2&+$1%11%"/"&0+,/"#,/*,#!*&+&01/1&3"-/ 1& " civil claims took 30 to 40 percent less time to reach a resolution taking place here. compared to criminal. +!"/1%")4+!02--,/1&+$/"$2)1&,+01%"&+&01/6,# 201& ",#(/&+"&01, Furthermore, Igor Budnik, head of the risk management de- bring to light those liable for the violations of the Convention, and initiate legal partment of the National Bank of Ukraine, at Kyiv Post's 5th Tiger  1&,+0$&+011%"*Ѻ1%"&+&01/6,# 201& ",#(/&+")0,*201 ,+0,)&!1"&+- Conference on Nov. 29, said the evidence bar for civil lawsuits is formation on measures taken to recover the state budget losses from violations ,#1%",+3"+1&,+ѷ ,/!&+$1,&+#,/*1&,+-/,3&!"! 61%"&+&01/6,# 201& " lower -- requiring only to prove guilt in civil cases by a preponder- ,#(/&+"2-,+,2//".2"010"3"/)6"/0$,Ѹ!2/&+$уссчҌусту1%"/"4"/"  ance of evidence rather than beyond a reasonable doubt, the crimi- чхѸщщхѸщщцѷущ,#),0"04/!"!ѷ nal standard. ),+$0&!"4&1%1%1Ѹ ,/!&+$1,&+#,/*1&,+-/,3&!"! 61%"&+&01/6,# 201& " Olenchyk said the fund was currently renewing its efforts to pur- ,#(/&+"Ѹ1%"4%,)"*,2+1,#*,+"6/" ,3"/"!40 фсѸхсхѷъф&+уссщѸ sue civil lawsuits with the help of international agencies, but leg- +! шчѸцчхѷсш&+уссъѷ islative amendments in this area were also key if the fund was to +" 46 ,/ +,1%"/Ѹ 1%" "5&01&+$ !*&+&01/1&3" -/ 1& " 0""*0 1, ,+1/& 21" have any chance of success. +,1%&+$1,/"0,)3&+$1%"-/, )"*,#3&,)1&,+0,#1%",+3"+1&,+,+1%"4%,)" He said in one case against Forum Bank, co-owned by former +!1%"-/, )"*,#+,+Ҍ"+#,/ "*"+1,/!")6"!"+#,/ "*"+1,#!,*"01& '2!&- members of parliament Vadim Novinsky, the court &)!" &0&,+0&+-/1& 2)/Ѹ&#+,14,/0"+1%"-/, )"*01))ѷ decided that the real sum of the losses could not be determined un- 10""*01%1(/&+&+011" ,!&"0'201!,+,1%&+$1,-2+&0%&1҃0,4+,Ȅ& &)0 til all the assets were sold. /"0-,+0& )"#,/3&,)1&,+0,#(/&+&+)4ѷ 1҃0*20%"0&"/#,/011"1,-6'20101- “(We would have to) fi nish the liquidation, and then after a few &0# 1&,+2+!"/!" &0&,+,#1%"2/,-"+,2/1#/,*1&*"1,1&*"Ѹ1%+")&*&+1" years we’d be able to understand the difference between creditor’s the true root of this problem — personal irresponsibility of bureaucrats. demands and assets...this is all without long-term prospects.” “Other lawsuits were based on lack of evidence and often the em- Golovan & Partners Law Firm 33B Bulvarno-Kudriavska (Vorovskoho) St., Kyiv 01054, phasis was on the fact that guilt wasn’t proven.” Ukraine; [email protected], www.golovan.ua Olenchyk said by the time a bank is declared insolvent and the

[KYIV POST LEGAL QUARTERLY] #04/2016 21 Financial entanglements of 11 members of the Ukrainian Parliament’s banking committee

NameFinancial interests Name Financial interests

The central bank demanded Serhiy Pavlo Riznanenko marked $725,000 in his Ribalka’s removal as banking committee official declaration. He also appears in U.S. chair, saying he was incapable of doing his government documents as working with job - an accusation Ribalka called "worth- Washington lobbyists for oligarch Victor less." Ribalka owns the snack-producing SI Pinchuk. Group, which had a conflict with supermar- Serhiy Rybalka ket chain ATB over an alleged Hr 110 million Pavlo Rizanenko (Radical Party) ($4.1 million) debt. (Petro Poroshenko’s Bloc) The central bank has accused Maksym The former Ukrsotsbank and Prominvest- Polyakov, former head of national financial bank employee declared $750,000 and services commission, of being in the 18,700 euros in Ukrsotsbank. Viktor Ukrainian insurance industry's pocket. Romanyuk also owes around Hr 1 million Polyakov, who declared $250,000 in an ($38,000) to his brother, Eduard. unnamed bank account as well as Tiffany Maksym Polyakov jewelry, denies the allegation. Viktor Romanyuk (Narodniy Front) (Narodniy Front)

In August 2015, Ruslan Demchak bought the insolvent Omega Bank to create RVC Oleksandr Zholobetsky seems more bank, taking Omega's Hr 229.1 million in bank-shy than his fellow deputies - in his assets to make the bank. The transaction declaration, he noted $180,000 in cash, a cost Demchak Hr 32 million. Cartier watch and his wife's Lexus. No other deposits were noted. Ruslan Demchak Oleksandr (Petro Poroshenko’s Zholobetsky Bloc) (Petro Poroshenko’s Mykhaylo Dovbenko was receiving Bloc) Leonid Klimov is the former owner of dividends from the collapsed Bank Imeksbank, which was taken over by the Khreshchatyk, which closed in April. government in January 2015. The central Novoye Vremya reported that Dovbenko bank gave Imeksbank Hr 310 million ($11.8 was able to take much of his money out of million) in refinancing in November 2014, a Khreshchatyk before the bank collapsed. sum Klimov has refused to repay. The Mykhaylo Depositi Guarantee Fund is paying Hr 4.3 Dovbenko billion ($163 million) to insured depositors. (Petro Poroshenko’s Leonid Klimov Klimov refuses comment. Bloc) (Vidrodzhennya) Oleh Lavryk keeps his Hr 482,000 ($18,300) Denys Dzenzersky owes millions of dollars deposits in the -based VS Bank. He also to VTB Bank over the failure of his Westa received an Hr 62.3 million ($2.3 million) car battery plant in Dnipro. loan from the bank in 2007 using the company Prombudprylad as collateral, in which Lavryk has a stake. Prombudprylad Denys Dzenzersky also owns Samopomich's headquarters in (Batkyvshchyna) Lviv, and has another company as a Oleh Lavryk shareholder controlled for eight years by Deputy Ivan Fursyn himself owns two small (Samopomich) party chief Andriy Sadovyi. banks - Misto, and Clearing House. Fursyn, head of the banking subcommittee, co-owns Clearing House with Viktor Yanukovych-era kingmaker Serhiy Lyovoch- kin through his wife, Yulia. By Ira Movchan | Kyiv Post Ivan Fursyn Source: National Agency for the Prevention of Corruption (Volya Narodu)

Source: National Agency for the Prevention of Corruption

22 #04/2016 [KYIV POST LEGAL QUARTERLY] Ukrainian banking crisis by the numbers BUSINESS ADVISER Advertisement Estimated assets of insolvent banks, $ billion Special Control Area Number of insolvent banks %"ޖ$%1$&+01 -&1),21ޗ,40&0+ Natalya Ulyanova &+"3&1 )" -/, "00 4&1% *,/" +! *,/" Managing partner, ,2+1/&"0Ѹ 4%,0" $,3"/+*"+10 /" $,- 17.5 ICF Legal Service &+$ ),+$ 1%" /,! ,# !"Ҍ,Ȅ0%,/&01&,+ of their domestic economies, getting in- 15 3,)3"!ѷ%"0, ))"!0"/,0&,++!/,ޖ1%&ȇ&+$ 1&,+)+ҙҚ&+&1&1"! 6 1%"/$+&01&,+#,/ ,+,*& ,Ҍ,-"/1&,++!"3"),-*"+1ҙҚ+!&*"!1 9.4 02--/"00&+$151&,+ 0""/,0&,++!-/,ޖ10%&ȇ&+$&0,+",#02 %1,,)0ѷ 10 86 2//"+1)6Ѹ1%"/"/")/"!6,3"/ус ,2+1/&"0Ѹ4&1%1%",3"/4%")*&+$*',/&16,# 7 1%"* "&+$*"* "/0,#1%"2/,-"++&,+Ѹ4%& %%3"*"+!"!1%"&/+1&,+) 67 )"$&0)1&,+1,!,-11%" 1&,+)+ѷ"0&!"0Ѹ ,21фс ,2+1/&"0%3"0&$+"! 5 *2)1&)1"/)1/"1&"01,"5 %+$"15+!ޖ++ &)&+#,/*1&,+ѷ 33 (/&+"4&)) "$&+&*-)"*"+1&+$1%"-/,3&0&,+0,#1%" 1&,+)+&+устш 0 04"))ѷ%1&0*"+1%"/"&01%"ޖ$%1$&+01 20&3"151&,+-/ 1& "0Ѹ4%& %&+- 3,)3"0--)& 1&,+,#0-" &)15/"$2)1&,+0+!15 ,+3"+1&,+0Ѹ1%"!&0 ),02/",# 2014 2015 2016 0 %"*"04%& % 20&+"00"020"1,"0"1%"15 2/!"+Ѹ04"))01%""Ȅ& &"+1--)& - 1&,+,#!,2 )"151/"1&"0ѷ%,2$%1%"0"/",+)61%" 0& /".2&/"*"+10Ѹ1%"# 1,# The number of insolvent banks has risen to 86 in the last three ',&+&+$1%" 1&,+)+02$$"010 6&10")#1%11%"4,/)!151/"+!0/""+1"/&+$ years, leaving Ukraine with less than 100 banks. (Sources: Na- Ukrainian legislation. tional Bank of Ukraine, Deposit Guarantee Fund) &))&1Ȅ" 1(/&+&+ 20&+"00"0Ѿ# ,2/0"Ѹ&14&))ѷ+!),+$4&1%1%"/"3&"4,# the approaches to structuring their operations and choosing partners, companies 4&))%3"1,/" 2&)!1%"&/&+1"/ 1&,+04&1% +(0ѷ211%"/"0,+&0+,1,+)61%11%" fund steps in as a temporary administrator, the evidence is typical- /")& &)&16,#1%"(/&+&+ +(&+$0601"*%0 ""+&+1%"/&0(7,+"#,/0"3"/)/" "+1 ly gone. 6"/0+!,+"0%,2)!--)60-" &) /"1, %,,0"ޖ++ &)&+01&121&,+0ѷ +1%"&/12/+Ѹ +(0/"01/"+$1%"+&+$*,+&1,/&+$,# 201,*"/0҃ 1&3&1&"0ѷ 1&0+,1 Following pressure from the International Monetary Fund, )"01 " 20"0&+ " 2)6тѸустхѸ +(0%3"%!1,*""11%"/".2&/"*"+10,#1%" changes to legislation in 2015 gave the fund more freedom to fi le ,/"&$+ ,2+15,*-)&+ " 1ҙ ҚѸ4%& %40!,-1"!&+1%"ѷ%" civil lawsuits.  1, )&$"0))ޖ++ &)&+01&121&,+01,21,*1& ))6!&0 ),0"&+#,/*1&,+ ,21 - ,2+10,#*"/& +15-6"/0+! ,*-+&"0&+ ,/-,/1"!,210&!"1%"ѷ+!1%" However, Olenchyk said that the amendments were minor and ޖ+"0#,/+,+Ҍ ,*-)&+ "4&1%1%" /".2&/"*"+10/"--)&"!$&+01 +(0/"- did not address key problems, such as alleviating the fund’s respon- $/!)"00,#1%"&/'2/&0!& 1&,+ѷ sibility to prove the bank shareholders’ guilt. ,/",3"/Ѹ&1&00&+ "устф1%11%",**,+"-,/1&+$1+!/!ҙҚ!"3"),-"! 01%"&+&1&1&3"%0 ""+&*-)"*"+1"!Ѹ4%& %02$$"010++2)21,*1& "5- Furthermore, from September 2015, new fees were introduced %+$",#&+#,/*1&,+ "14""+$,3"/+*"+10ѷ+(0/"-,/1&+$ ,1%&+!&3&!2)0҃+! that would see the fund charged up to 1.5 percent of the claimed ,*-+&"0҃ ,2+10/")0, ,3"/"! 61%&0"5 %+$"ѷ amount for every civil lawsuit it fi led. 0/"02)1Ѹ(/&+&+ ,*-+&"0# "-/, )"*04&1%1%"&/ /,00Ҍ ,/!"/1/+0 - 1&,+0Ѹ0 +(00""1%"*0%3&+$0&$+0,#҄020-& &,201/+0 1&,+0҅Ѹ ), (1%"* A fund spokesperson told the Kyiv Post the money for the court -"+!&+$ )/&ޖ 1&,+Ѹ+!!"*+!"51"+!"!!, 2*"+1/6'201&ޖ 1&,+0ѷ 1&0"0-"- charges would be taken from the liquidated bank assets, which is cially related to payments in dollars. used to satisfy claims of creditors of the banks. +,1%"/)/*&+$1/"+!&01&$%1"+&+$ ,+!&1&,+0,##,/"&$+ 2//"+ 6-6*"+10&+ 2/,-"+ +(04%& %Ѹ2+1&).2&1"/" "+1)6Ѹ21%,/&0"!1/+0 1&,+04&1%,21+6*&0- Olenchyk said the fund tried to address the issue with the $&3&+$0Ѹ0,*"1&*"0"3"++,1/".2"01&+$#2))- ($",#1/+0 1&,+)!, 2*"+10ѷ Ministry of Finance but it fell on deaf ears. Currently, correspondent banks refuse to sort out numerous suspicious transac- He said the fund was however open to assistance and advice on 1&,+0,#1%"&/ 201,*"/0+! " ,*"02 '" 10,#1%"/"$2)1,/҃0ޖ+"0ѷ%"/"#,/"Ѹ)) -6*"+10Ѹ ,1%&+ ,*&+$+!,21$,&+$Ѹ/" %" ("! 6 +(0҃&+1"/+)*,+&1,/&+$ fi ling civil lawsuits. #2+ 1&,+0ѷ 1 +,ȇ"+/"02)1&+#/""7&+$,/"3"+ ),0&+$+ ,2+1ѷ Furthermore, he said the fund was going to be working with in- ,/",3"/Ѹ4%"+4,/(&+$4&1% +(0Ѹ+,1"3"/61%&+$*6!"-"+!,+ 201,*"/,+)6ѷ ternational companies to assist them with insolvent bank projects. ,/"5*-)"Ѹ1%"/"/" "/1&++2+ "04%"+4"0-"(,#1/+0 1&,+ "14""+(/&- nian and a foreign bank. The National Bank of Ukraine issued the list of foreign banks Daria Kaleniuk, executive director at the Anti-Corruption Action ҙ&+ )2!&+$2/,-"+,+"0ҚѸ҄4%,0",-"/1&,+0*6 "00, &1"!4&1% ,+!2 1&+$/&0(6 Centre, said civil claims were the only feasible solution for Ukraine ,-"/1&,+0҅ѷ21ȇ"//" "&3&+$1%&0)&01Ѹ),1,#(/&+&+ +(0-"/ "&3"!&10$2&!"1, considering there is no will to pursue criminal cases.  1&,++!01/1"! ), (&+$1/+0 1&,+0Ѹ4&1%,21"3"+) ,2/&+$1%"&/-,&+10ѷ %"/"#,/"Ѹ 20&+"00"0 %3" 1, 1(" 1%"&/ ,4+ ,+1/,) ,3"/ 1%" 0&121&,+ѷ &/01Ѹ 1%"6 “I think civil cases, especially targeting benefi cial owners inter- 0%,2)!1%&+(,3"/1%"-/,-"/ 0%ޗ,40 %"*"ѷ +,/!"/1,!,1%&0Ѹ6,20%,2)! "4/" nationally and their assets internationally, this is the way moving ,#-" 2)&/&1&"0,#1/+0 1&,+04&1%6,2/ 2//"+1 +(+!1%" +(4%"/"6,2/-/1+"/҃0 forward. Even if we hire private fi rms and they can work for a possi-  ,2+1&0,-"+"!ѷ" ,+!Ѹ6,20%,2)!-/"-/"))!, 2*"+10 "#,/"1%"1/+0 1&,+Ѻ ,1%"/4&0"&14&))1("),1,#1&*"1, ,))" 1!, 2*"+101, ,+ޖ/*1%"1/+0 1&,+Ѹ+! ble percentage of recovery... if we identify 100 percent but recover 1%" ,2+14&)) " ), ("!!2/&+$))1%&01&*"ѷ%&/!Ѹ&1&03"/6&*-,/1+11,"01 )&0% 40 or 60, it’s already more than zero,” she said. ,**2+& 1&,+4&1%1%" +(ѷ ,2/1%Ѹ6,20%,2)!-/,  )6 ,+0&!"//&0(%"!$"ѷ0 She said it was also important to address the issues in the law, *11"/,## 1Ѹ&1&0)460,-1&*)#,/ 201,*"/1,$,1,1%" +(4&1%1%"02--,/1,# .2)&ޖ"!-/1+"/4%,4&))+,1,+)6%")-1, %,,0"ޖ++ &)&+01&121&,+Ѹ 214&)))0, which were hindering the Deposit Guarantee Fund from pursuing ,+!2 102 "00#2)+"$,1&1&,+04&1%1%" +(1))01$"0Ѹ-/"-/"))1%"!, 2*"+10 further civil claims. +!-/,3&!"*&+&*&01&,+,#/&0(0!2/&+$1%"1/+0 1&,+)-/, "00ѷȇ"/))Ѹ +(04,2)! “There should be no fees in the percentage of the possible claim /1%"/  +!,+  201,*"/ +! 1%"&/ -/,ޖ1Ѹ 0 1/+0-/"+ 6 -)60  $/"1 /,)" 1%"/"ѷ %"/"#,/"Ѹ1%"(+,4)"!$",#%&!!"+$"+!0+!1%" &)&161,"3!"1%"*/"1%"$2/- ...for the Deposit Guarantee Fund to start the civil claim,” she said. +1""01%16,2/ 20&+"004&)) "02 "00#2)ѷ “The law also says that fi rst you have to calculate the amount of debt and amount of remaining assets to be sold, but fi rst we have to ICF Legal Service 10 Muzeyniy lane, 1 st floor, office 101-103 Kyiv 01001, Ukraine; wait for the assets to be sold, which could be years. It postpones the icf.ua, [email protected] moment when the action could be started signifi cantly.”

[KYIV POST LEGAL QUARTERLY] #04/2016 23 Ex-Bank Mikhaili- vsky clients protest in Kyiv on Nov. 3. Chaotic sales of collapsed (Volodymyr Petrov) bank loan portfolios opens many opportunities for fraud

By Natalie Vikhrov and Josh Kovensky krainians have lost billions of hryvnias in unin- assets. Some of the best assets are sold at cut-rate prices to natalie.vikhrov@gmail. sured bank deposits over the past two years as the the former owners of the banks, managers of the exchang- com and kovensky@kyivpost. Ugovernment has taken over and liquidated doz- es, and assistants of members of parliament. com ens of banks whose main business model was embezzle- One investigation by Radio Liberty’s Schemes program ment and fraud. demonstrated how former Delta Bank owner Mykola Lagun But for some, the resulting chaos is a lucrative was able to buy back chunks of Delta’s loan portfolio at a opportunity. fraction of their value. Ukraine’s Deposit Guarantee Fund is tasked with sell- Practitioners in Ukrainian banking law agree that these ing the assets of liquidated banks back into the market. The assets are often sold back to the same bankers whose in- juiciest assets are the bank’s loan portfolios, which can in- sider lending destroyed the fi nancial institution in the fi rst clude collateral for businesses around the world. place. Not only is the DGF overwhelmed with its caseload of Ihor Olekhov, head of Baker McKenzie’s Kyiv banking hundreds of millions of dollars worth of assets to sell, but practice, said that this will likely continue to happen as it lacks control over the exchanges it uses to sell them. long as law enforcement does not bring cases against the This opens up an opportunity for fraud in the buying of the owners of collapsed banks.

24 #04/2016 [KYIV POST LEGAL QUARTERLY] “Effectively you cannot limit who is going to buy the loan portfolio, because if you start imposing those limits, you effectively restrict the market,” Olekhov said.

Confl icts of interest The Deposit Guarantee Fund started to disclose the details of the sales - including selling price and buyer - on its website in June, revealing trans- actions in which the fund has sold off loan portfolios to companies with unknown benefi cial ownership for less than 7 percent of their value. According to the Anti-Corruption Centre, many of the purchasing companies were only registered in 2015 and have no clear ownership structure. The exchanges that sell the loans themselves may also be caught up in the problem. “There are so-called pocket exchanges - exchanges which were appar- ently created only for certain low aims,” said Antonina Volkotrub, fi nan- cial manager at the Anti-Corruption Action Center. “They have nominal directors, and don’t always meet all the requirements.” All of this lack of transparency allows for striking confl icts of inter- Head of the Deposit Guarantee Fund’s asset management and sales est to occur. For example, a fi rm called Morgan Capital won a number of department Yuliya Bereshchenko talks to the Kyiv Post in Kyiv on auctions to cheaply buy up portfolios in July and August. Dec. 15. (Anastasia Vlasova) One sale in July saw Morgan Capital buy a loan originally valued at Hr Bereshchenko said the fund typically starts with the highest price, 7 million ($270,000) for Hr 550,000 ($20,800). which is reduced by 10 percent every two weeks until the asset is sold. The sale occurred on an exchange called “Electronic Trades of Alexander Paraschiy, Concorde Capital’s head of research, said that Ukraine.” because there is no unifi ed valuation approach, the price of loan port- But both Morgan Capital and the exchange appear to be controlled by folio may vary, which means “there is big room for pricing and for the same person: a man named Ruslan Kharchenko. corruption.” Looking further through the roster of purchasers reveals a number of politically exposed people. In one case, a loan valued initially at Hr 106 million ($4 million) was bought for Hr 6.5 million ($246,000) by a com- pany apparently controlled by a nominee director linked to allegedly “It’s complicated. Th at’s why we’re rigged tenders run by one-time Odesa Governor Vladimir Nemirovsky. bringing in BDO.” Other transactions, of which there are hundreds, appear to be linked to former Party of Regions deputies. BDO Legal Services

What is your value? Industry experts agree that a lack of a unifi ed approach to asset valua- tion only adds diffi culty to effectively auctioning off assets such as loan portfolios. With a lack of valuation guidelines set out by the industry regu- lator - the State Property Fund - the Deposit Guarantee Fund, with assistance from the U.S. Treasury, established and approved its own val- uation method in 2015, specifi cally to assist with pricing non-perform- ing loans. “It is very easy to value a piece of banking equipment, a banking out- let, a piece of real estate, because there are plenty of market bench- marks,” Yuliya Bereshchenko, head of the Deposit Guarantee Fund's asset management and sales department, said. “But to value a loan, there needs to be a more detailed valuation Audit | Tax | Legal | Advisory methodology, which takes into account the quality of the collateral, www.bdo.ua whether the borrower is solvent or insolvent, the guarantors, the stage of the litigation process.” Using an independent appraisal valuation as a benchmark, the fund BDO is the brand name for the BDO network and for each of the BDO Member Firms. © engages third party licensed fi rms to perform independent appraisals. It 2016 BDO. All rights reserved. also has an independent appraisal unit, separate from the asset sales of- fi ce, which performs its own calculations using the same data.

[KYIV POST LEGAL QUARTERLY] #04/2016 25 Top 25 banks by assets. Ukrainian banks ranked by assets (as of Dec. 1) Total assets of Ukraine’s banking sector are estimated by the National Bank of Ukraine at $52.8 billion. The top 20 banks account for 88 percent of the sector’s assets.

Overall Ultimate Overall Ultimate Bank assets benefi cia- Bank assets benefi cia- (billions, $) ries (billions, $) ries

Ihor Kolo- OTP Bank (1998). Until moisky and OTP Bank 1 PrivatBank 10.3 13 2006, known as 0.9 Gennadiy Plc, Hungary Bogolyubov Raiffeisen Bank Ukraine.

Bank VTB State VTB Bank Oschadbank Russia (Rus- 2 7.2 (Cabinet of (1992). Previously (1991) 14 0.8 sian Fed- Ministers) Bank Mriya until eral Property 2007. Agency) State Ukreximbank 3 5.8 (Cabinet of Yuriy Rodin (1992) Bank Pivdennyi Ministers) 15 0.7 and Mark (1993, Odesa) Bekker Ukrgazbank (1993) Previously State Citibank Citigroup Khadzhybeybank 16 0.7 4 2.2 (Ministry of (1998) Inc., USA (1993-1995) and Finance) Intergazbank ING Bank ING Bank Ukraine (1995-1996) 17 0.6 N.V., Nether- (1997) Raiffeisen Bank lands Raiffeisen Aval (1992). Until ProCredit Bank Bank Inter- ProCredit 5 2006, it was Posh- 1.9 (2000). Previously national AG 18 0.4 Holding, tovo-pensiyniy Microfi nansoviy (Austria) Germany bank Aval. Bank (2000-2003) Unicredit Kredobank Bank Austria Ukrsotsbank (Lviv, 1992). 6 1.9 AG, Austria Previously (1991) PKO Bank and Alfa Zakhidno-Ukrain- 19 0.4 Polskі SA, Group skiy Komertsiyniy Poland Bank (until 2001) Sberbank Sberbank and Credit Bank (2001). Previously Russia (Cen- (2001-2006) 7 Bank NRB-Ukraine 1.8 tral Bank of (2001-2005) and the Russian Megabank Viktor NRB (2005-2008) Federation) 20 0.3 (1991, ) Subotin UkrSibbank BNP Paribas 8 1.6 Bank Credit Viktor (1991) S.A. France 21 0.3 Dnipro Pinchuk Rinat Akh- 9 PUMB 1.5 Platinum Bank metov (2005). Previously Grygoriy 22 International 0.2 Alfa Bank Gurtoviy Mortgage Bank (1993), ear- Alfa Group (2005-2009) lier Bank Vito consortium, 10 1.5 (until 1997) and Mikhail Frid- Igor Kerez, Diamantbank Kyivinvestbank man 23 0.2 David Zh- (1993) (1997-2001) vaniya

Vneshkom- Bank Vostok Prominvestbank bank Russia (Dnirpropetrovsk, Volodymyr 11 1.3 (1992) (Russian 2002). Previously Kostelman, government) 24 Agrobank (2002- 0.2 Volodymyr 2007), Khoum Morokhovs- Credit Agricole Credit Bank (2007- kiy Credit (1993). Previously 2011) 12 1.1 Agricole S.A., Index-bank until France 2011. Tascombank Serhiy 25 0.2 (2008) Tihipko

Source: National Bank of Ukraine

26 #04/2016 [KYIV POST LEGAL QUARTERLY] Bereshchenko said the fund does not have the power to restrict the circle of buyers,” Bereshchenko said. restructure loans, which includes deep haircuts, but bor- “By law we are obliged to sell at the maximum price in rowers have pursued other routes to buy back their loans the shortest period of time, which means to anyone. The on the cheap - including dragging it through the courts. only restriction is embedded into our regulation number Moreover, according to allegations received by the fund, two - that a loan may be sold only to a (certifi ed) fi nancial auctions hosted by independent online platforms can be institution.” manipulated to act in the interests of one particular buy- er, or prevent other bidders from participating in or win- ning the auction. ‘By law we are obliged to sell at the maximum The fund recently started to move its auctions to price in the shortest period of time, which ProZorro, the public e-procurement system, a move that means to anyone.’ Bereshchenko believes will eliminate such allegations. – Yulia Bereshchenko, head of the Deposit Guarantee Asset sales through ProZorro have generated Hr 30 mil- Fund's asset management and sales department. lion ($1.2 million) for the fund, with around 1,000 individ- ual assets listed on the system. Bereshchenko said the fund was preparing for the deci- Bereshchenko says that given Ukraine’s macroeconomic sion to move all asset sales to ProZoro, which is managed status, handing the loan back its original borrower who de- by Transparency International. faulted on the loan may not be altogether negative. But she admitted that even a shift to ProZorro will not “If strategically, the government decides that selling give the fund control over whose hands the assets fall into loans back to bad borrowers... is the wrong thing to do, in the end. then they should impose pre-qualifi cation criteria. But the Furthermore, there is currently no legal obligation to competition will probably be lower, and we do not know prevent the asset from being sold back to the original whether the prices will be lower, because the borrowers are borrower. not allowed to participate in the auction.” “I know that buyers may not be the ultimate buyers but, “If we are selling to the highest bidder, no one should in the Ukrainian environment, by law we are not allowed to care if that bidder is (actually) the borrower.”

[KYIV POST LEGAL QUARTERLY] #04/2016 27 Ukraine slowly warms to cashless economy

By Denys Krasnikov any Ukrainians think it is much saf- made in total 1,272 million cashless payments [email protected] er to keep their money under the worth Hr 398 billion – more than for the whole Mmattress than in the bank. year of 2015, according to the National Bank. This point is proven by Ukraine’s richest: Today, 35.8 percent of all the payments in The country’s top offi cials and lawmakers, Ukraine are cashless, up from just 8 percent many of them millionaires, tend to keep their in 2011. vast savings in cash, according to their recent- Based on the data for July – September ly fi led electronic declarations of assets. 2016, the most popular way to pay cashless is But even with distrust in the banking sector through a shop's point of sale terminal – that’s lingering, the number of cashless operations is how 35.9 percent of the cashless payments slowly increasing in Ukraine. were conducted, while 33.1 percent were card- to-card payments, and 27.8 percent were in- Slow growth ternet transactions. The remaining 3.2 percent In the fi rst nine months of 2016 Ukrainians have were made through self-service devices.

28 #04/2016 [KYIV POST LEGAL QUARTERLY] The top fi ve banks behind the most internet transactions Iryna Kholod, the CEO of consultancy fi rm E-Commerce in 2015 were PrivatBank, Raiffeisen Bank Aval, Alfa Bank Expert says the development of a so-called cashless soci- Ukraine, Oschadbank and First Ukrainian International ety in Ukraine will indicate the stability of the country’s de- Bank (PUMB). velopment and will send a positive signal to the European But while the number of cashless payments is slow- Union, which Ukraine longs to join. ly increasing, this slow growth shouldn’t mislead one into She thinks that currently not all of Ukraine’s transac- thinking that Ukraine is moving to cashless economy at tions are clear, agreeing with VISA’s Krepak that cashless any great pace. payments will help the market become “well-organized and The numbers are still very small compared to devel- transparent.” oped European countries and the , where citi- “Cashless payments will get most of the transactions out zens have almost forgotten about the times when they had of the shadows, and will show their real volume,” Kholod to pay cash in public transport or in a store. Compared to said. them, Ukrainians are only beginning their move towards a cashless economy. Terminals needed According to the Swedish National Bank, Riksbank, in Although more than 50 percent of Ukrainians’ salaries are 2014, Ukraine was among those countries in the world with paid in a cashless form, 80 percent of all spending are done the greatest fondness for cash: The amount of cash circu- with cash. lating in the economy equaled 18.1 percent of the country's Another reason for people to withdraw money they re- gross domestic product. In comparison, in Poland the same ceive on their bank card is the scarceityof point-of-sale ter- indicator was 7.5 percent, in Canada – 3.8 percent, and in minals in the country. There are 200,000 retail terminals in Sweden – 2.2 percent. Ukraine, while VISA’s Krepak thinks that the country needs “It's been a long time since I last used cash in Sweden 1 million at least. – cards work everywhere,” says Gustav Henman, a Swede, After retail, the focus is on making payments for pub- and the cofounder of Beetroot, an IT company that oper- lic transport and utilities cashless – these are the two most ates in Ukraine. frequent cash transactions in Ukraine. “In Ukraine, using cash is obviously inevitable in some “Cashless is convenient,” says Yaroslava Boyko, a coor- cases.” dinator at Kyiv Smart City, a group of volunteers that are Henman even says he enjoys using cash for a change – as implementing technology and cashless solutions in Kyiv’s long as it’s not coins. public transport and other municipal systems. “Everything “Feels a bit nostalgic and exotic in some way,” Henman can be done with three clicks, which saves up to 30 minutes told the Kyiv Post. “But surely it’s convenient not to han- of one’s time.” dle cash. You more or less forget about the whole con- The NBU also promises to push for utility companies to cept of (paper money) after a couple of years of only card issue electronic bills. There already are intermediary ser- payments.” vices that collect utility bills in an electronic form for a cus- tomer to pay online. A man makes a How to go cashless, and why? “Migration to cashless is a global trend, and Ukraine is cashless payment to The country’s high cash circulation is fueling the na- not an exception here,” says Krepak of VISA. “Consumers enter the Kyiv metro network at Ploshcha tion’s corruption problem, says VISA country manager for get more digital, they expect a ‘fast-lane’ consumer expe- Lva Tolstoho station Ukraine, Georgia and Armenia Dmytro Krepak. rience and this is what electronic payments offer – they in the city center. “Cashless means transparency. Cash, on the other hand, make overall consumer experience better.” (Volodymyr Petrov) is a key element of the shadow economy and corruption in any society,” Krepak told the Kyiv Post. Currently, there are over 31.1 million active payment cards in Ukraine, but that’s owing to the fact that an av- erage Ukrainian has more than two cards. And the coun- try’s potential is huge, for Krepak says only one-fi fth of Ukrainians trust banks and online transactions, and hence there’s still a lot of customers waiting to discover cashless services. The National Bank of Ukraine plans to bring the amount of circulating cash from 18.1 to just 9.5 percent of GDP by 2020, as part of their Cashless Economy project. Reducing the amount of paper money will increase the database of taxpayers, reduce expenditures on supporting A woman buys an electronic ticket for a Ukrainian train. Payments for public transport and utilities are still monetary circulation and printing bills, and allow cashless the two most frequent cash transactions in Ukraine. money to be used for economic purposes. (Volodymyr Petrov)

[KYIV POST LEGAL QUARTERLY] #04/2016 29 Despite a massive wave of bank failures, the sector could right itself in 2017, resum- ing commercial lending that is vital to the national economy. (PHL) NBU puts small banks under pressure, yet experts stay positive

ust three years ago there were 178 banks capitalization and the quality of loan portfoli- By Maria Romanenko [email protected] in Ukraine, with assets ranging from Hr os at the remaining banks, he said. J203 billion ($8.12 billion) to Hr 120 mil- The NBU currently sets the minimum share lion ($4.8 million). capital for a bank at Hr 120 million ($4.8 mil- Then came revolution, war, economic cri- lion), but from July it will increase this to Hr sis… and banking collapse. 200 million ($8 million). As the regulator grad- Today, only 103 banks remain, a 42 per- ually raised its share capital requirements, cent reduction, with six of those under tem- banks have been closing, or have merged with, porary administration or receivership. As the or been bought out by the stronger banks. article was being prepared, another small “Strategically, by the end of 2017, we bank, Investbank, was placed under tempo- may only have around 50-60 banks left,” rary administration by the National Bank of Nevmerzhitskiy told the Kyiv Post. Ukraine. And with a new resolution from the central After such bloodletting, which the central bank (No. 351, setting stricter requirements on bank refers to as “cleansing” of the market, reserves to cover loan portfolios) coming into the problem of low liquidity in the bank sec- force on Jan. 1, Ukrainian banks, especially the tor is less urgent than it was even six months smaller ones, will have to fi nd additional capi- ago, according to fi nancial expert Vasyl talization, making conditions for their surviv- Nevmerzhitskiy. al even tougher. The issues for today are, instead, Small banks "need to create a strategy of

30 #04/2016 [KYIV POST LEGAL QUARTERLY] survival, to decide how they will compete with systemic like loan giving, loan buying, factoring and guarantee pro- banks,” Nevmerzhitskiy said. vision,” Nevmerzhitskiy said. However, the new rules are not designed to sweep all According to him, many of the new fi nancial companies small banks from the market, said Ihor Olekhov, the head could be offshoots from banks that have closed, with for- of Baker & McKenzie's regulatory and fi nancial institu- mer bank workers setting up shop to provide niche fi nan- tions groups in Kyiv. Small but strong banks should be able cial services by themselves. to keep going. “If (former) managers of systemic banks carried out fac- “Ukraine is in the process of an asset quality review, and toring in their banks, they might think ‘We’ve already there is an intention to set up clear rules in general, under written the procedures, we know the methodology and un- which only banks with suffi cient capitalization and high derstand the risks. We can take our old clients, fi nd some level of reliability can operate,” Olekhov said. money, and set up a fi nancial company to carry out factor- “If banks can satisfy these requirements, nobody will ing operations.'" stand in their way,” he added. But with the Ukrainian banking system undergoing pos- sibly the greatest changes in the history of the country, Ukraine may have only 60 banks by the end what is the outlook for the sector? And more specifi cally, is there a future for the 60 smallest banks, which make up of 2017, two-thirds fewer than in 2014. But less than 5 percent of the whole banking system in terms there may still be room in the market for the of assets? smaller ones despite the consolidation.

Changing conditions According to Olekhov, the banking regulatory system has Ways to survive become a lot stricter over the last fi ve years. Olekhov thinks the smaller banks can survive, but to do so “If a bank’s capital isn’t suffi cient, then the NBU imple- they need to take advantage of their strong points. ments a three-year plan, according to which a bank is giv- “They can make decisions quickly and effectively, un- en the choice to either increase its capital, or decrease the like big banks, where non-standard decisions may take 3-6 amount of risky assets it has,” Olekhov said. months, and sometimes even up to a year,” he said. There is also the question of the legitimacy of the bank’s “Thanks to their quickness and agility, small banks can assets. offer new and non-standard services.” “Tax declarations, sources of money, transactions carried And there is a lot of potential in the Ukrainian market for out, money pay-ins and pay-outs (all need to be approved) such banks, and if they go about this task creatively, they in commercial banks,” Nevmerzhitskiy says. will do well in Ukrainian environment, Olekhov believes. Nevmerzhitskiy also emphasized that the tougher reg- A high quality of customer services is another selling ulatory environment doesn’t necessarily spell the end for point of small banks. the banks at the bottom of the market. “In a small bank nobody will tell you that the cash regis- “It’s likely that we will see changes in the amount ter is closing, or that it’s lunch time, or that a computer has of banks in total. (We previously had) Alfa-Bank buy- broken down. It’s this level of (customer service) that’s very ing Ukrsotsbank, Unicredit closing down, much treasured by clients,” Nevmerzhitskiy said. (the Ukrainian politician and fi nance specialist) buying “A manager and a client almost become friends: you help Universal Bank. So we’re (also) talking about absorption him, he helps you. You just don’t get this in the systemic and gradation,” Nevmerzhitskiy said. banks,” he added. At the same time, new fi nancial companies are being So it is vital for bank managers in the small banks to un- launched, which is changing the whole Ukrainian banking derstand the value of their relationships with clients, that system. According to the registry of the National Financial these clients are important to them, if they hope to survive, Services Committee, the country has over 1,700 fi nancial Nevmerzhitskiy said. companies. More than 210 new licenses for providing fi - Expanding a branch network is not as good a way for the nancial services were issued in 2015, and about 190 were smaller banks to develop as it once was, Nevmerzhitskiy issued in the fi rst three quarters of 2016. said. “You can now see a lot of currency exchange offi ces on Those that do decide to expand their branch networks the streets that belong to fi nancial companies rather than can do so by picking up the best staff from smaller banks banks,” Nevmerzhitskiy said. that have foundered, he said. Comparing the conditions for setting up a bank against “Those banks that are able to (survive) will form a strong those for a fi nancial company, it’s easy to see why. team of top managers from people who are working, or “To set up a new bank today you need Hr 500 million have already quit their jobs at other banks, in order to build ($20 million), while fi nancial companies can open with a the most effective sales team, and create innovative servic- budget of only Hr 7 million ($280,000) and provide services es to develop their business.”

[KYIV POST LEGAL QUARTERLY] #04/2016 31 UkrLandFarming's equipment is seen in Poltava Oblast. The agricultural company is restructuring its large debt among fi nancial problems of its owner Oleg Bakhmatiuk, Risks remain high for who also owned two failed banks and who owes the National Bank of Ukraine 11 billion ($340 million) in unpaid refi nancing loans lenders in Ukraine’s alone. (Ukrafoto) agricultural sector

By Bermet Talant he failures of Mriya, Creative and Mriya default [email protected] UkrLandFarming agroholdings to pay Mriya, the -based agroholding that Ttheir debts have made some lenders controls 180,000 hectares of land in west- wary of the sector. ern Ukraine, highlights the troubles. The com- Ukraine's agricultural sector is one of the pany went public on the Frankfurt Stock big engines driving the economy, but cred- Exchange in 2008. In August 2014, it default- itors contended with all sorts of calamities ed to creditors. The previous owners, the Huta in the last three years – revolution, war, eco- family, are suspected of siphoning the mon- nomic recession, high infl ation and currency ey abroad through a network of offshore fi rms devaluation. - the alleged scheme came to light in the These factors, along with parlaiment's re- Panama Papers scandal in April. The Hutas fusal to lift the moratorium on sales of agricul- fl ed Ukraine, leaving Mriya with $1.3 billion tural land, have clouded fi nancing prospects. in debt. Without land as collateral, the 10 largest Since then, the new management appointed Ukrainian agroholdings, which control 2.1 mil- by Mriya’s creditors and bondholders has been lion hectares of land, have had to turn to other trying to preserve the agroholding, repay the sources of fi nancing. debt and return the assets illegally seized by

32 #04/2016 [KYIV POST LEGAL QUARTERLY] the Huta family. In September, they approved the conditions for restruc- Top 10 payouts from Deposit Guarantee Fund turing its debt of $1.1 billion to $330 million. Date of On Dec. 16, the Ternopil Economic Court satisfi ed a claim by BNY Amount Bank Owner of bank temporary Mellon Corporate Trustee Services Ltd., which represents the interests (million, $) administration of eurobond holders. They sought the recovery of $573 million worth overdue obligations from 68 Mriya group subsidiary companies reg- Mykola March 3, 606 istered in Cyprus that operate in Ukraine and acted as sureties for the Lagun 2015 bonds issued in 2011 and 2013 by Mriya Agroholding Plc. Delta Bank Simon Cherniavsky, CEO of Mriya, told the Kyiv Post that this lawsuit was crucial for Ukraine since it was the fi rst time eurobond holders had Kostyantyn claimed their rights in Ukraine rather than the country where the bonds 394 Sept. 17, 2015 Zhevago were issued. “The Ukrainian judiciary demonstrated its ability to protect Finance and the rights of foreign investors,” Cherniavsky said. Credit Bank According to Volodymyr Igonin, lawyer at Kyiv-based Vasil Kisil and Partners law fi rm, the Mriya case was a de facto precedent and its expe- Oleh 268 Nov. 21, 2014 rience overcoming massive debt would be employed by other creditors Bakhmatyuk in the future. VAB Bank Despite this small victory, Alexander Paraschiy, research director at Concorde Capital, said Mriya’s experience was unlikely to have any Leonid 165 Jan. 27, 2015 positive outcome for its creditors. He noted that Ivan Huta, the previ- Klimov ous owner, recently established a new agricultural company in Ternopil IMEXBANK Oblast called Agrarnaya Horodnitsa. “Most agroholdings are comprised of small collective farms, and by Dmytro 146 Feb. 6, 2015 virtue of Ukrainian laws, they can only hold lease rights on farmland. Firtash With his power in Ternopil, Huta is able to pull those rights from Mriya Nadra Bank in favor of his new agro-company, and Mriya will lose its land bank,” Paraschiy said. Vadim March 26, 110 Novinsky 2014 Creative bankruptcy Forum Bank Amid the Mriya crisis, another shock followed up in 2015. One of the leading agricultural processing holdings in Ukraine, Kirovohrad-based Creative Group, was involved in a well-documented forgery. In July Andriy 105 April 5, 2016 Ivanov 2015, Creative Group was acquired by several investors. An audit re- Bank vealed falsifi cations in accounting and collateral documents used for Khreshchatyk borrowing from banks. As one of the owners Rysbek Toktomushev said, this “massive historic fraud” prevented them from restructuring the Serhiy debt. In June, they fi led for bankruptcy. 102 Feb. 28, 2014 Kurchenko “Because of the accounting fraud the actual debt is totally dispropor- Brokbusiness- tionate to the real income and real asset base of the company: the num- bank bers just don’t stack up.” Toktomushev told the Kyiv Post. “The previous owners pictured income and assets for collateral coverage that had nev- Viktor March 19, 83 er existed or been far less.” Bratko 2015 Since the fall of 2015, Creative managed to decrease its debt from Kyivska Rus more than $700 million to $545 million. The major lenders are state- owned Oschadbank ($313 million), UkrEximBank ($109 million), pri- Nurulislam March 26, vate VTB Bank ($18 million) and Greek-based Piraeus Bank ($15 million 75 City Commerce Arkallayev 2015 each). Bank According to Toktomushev, $74 million debt to the syndicate of European banks, led by UniCredit Bank, was bought out by an invest- $2.05 Total of top 10 banks ment group whose identity he didn’t disclose. Kernel Group, another gi- billion ant agrobusiness in Ukraine, acquired an oil-extracting plant Ellada, and Total payouts to all insured depositors who thus bought out Creative’s $95.8 million debt to UkrGazBank. $3.03 lost money in failed banks since 2014 (up to “Our intention now is to claim damages from the previous sharehold- billion ers. Also, as the banks foreclose the production assets, our intention is Hr 200,000 or $8,000 limit.) to buy sound production assets back at auctions,” said Toktomushev. Source: Deposit Guarantee Fund of Ukraine, National Bank of Paraschiy of Concorde Capital said that many Ukrainian Ukraine.

[KYIV POST LEGAL QUARTERLY] #04/2016 33 agrocompanies tended to abuse international accounting standards. $1.7 billion debt. They either overreport expected crop yield and market prices and show Bakhmatiuk is under criminal investigation now. He could not be high operational revenues from unharvested crops. reached for comment. Or they conceal from their fi nancial statements some of their assets Alexander Paraschiy doubted that Mriya’s scenario would work for with large debts, like it was in Mriya; or, as it happened with Creative, UkraLandFarming. they document overestimated or even non-existent assets as collater- “First, Mriya Plc. was offi cially registered in Cyprus, while most of the al for bank loans. assets of UkrLandFarming are registered in Ukraine. This means for- eign creditors will have to litigate in Ukraine. Second, we can witness UkrLandFarming’s uncertain future how diffi cult it is to litigate with Bakhmatiuk – the NBU has won some Lately all eyes have been on UkrLandFarming, the largest agricultural lawsuits against him, but the court decisions aren’t being executed for holding, which controls 670,000 hectares of land. Not so long ago it was some reasons,” he said. expected to go public, but cancellation of tax relief and economic reces- The resolution of these disputes to a large extent depends on debtor sion hurt business. In addition, two banks – VAB and Financial Initiative companies’ ability to negotiate with their creditors as well as relies on – that belonged to its owner Oleg Bakhmatiuk went bankrupt in 2015. compliance with legislation and execution of the judicial orders. The NBU fi led fi ve lawsuits against Bakhmatiuk, who acted as the Volodymyr Igonin of Vasil Kisil & Partners said that Ukrainian leg- guarantor for his banks’ loans, to recover debt worth Hr 10.9 billion islation on debt restructuring is inadequate. Still, the Ukrainian legal ($419 million) and had his property frozen by the court approval. He framework is being changed to comply with a common business prac- also owes Hr 5.3 billion to the state banks. tice of the developed markets. “The NBU will take all measures within Ukrainian law to recov- Comprehensive legal due diligence provides a prospective lender er the debt on refi nancing loans from the insolvent banks at the stage with an understanding of the company's assets and liabilities, as well as of liquidation, as well as from their sureties,” the NBU press service available collateral for loan repayment. The high level of implement- said. The central bank claimed that Bakhmatiuk was using “semi-le- ed corporate governance can be another institutional safeguard from gal methods to evade its liabilities, such as foot-dragging on legal pro- wrongdoings of the management and particular owners. cesses.” Bakhmatiuk, in turn, accused the NBU and its governor, Valeria “Our practice shows that strategic creditors may recommend or Gontareva, of attempting to destroy UkrLandFarming. even insist on implementation of the best practice of corporate gover- In October, Bakhmatiuk told Interfax-Ukraine that he was ready nance (e.g. a powerful supervisory board with independent directors, to sell the company over the confl ict with the NBU. Earlier in April, risk-management procedures, transparent reporting etc.) in a bor- UkrLandFarming reported successful talks with Deutsche Bank, Russian rowing company as a condition to granting it a substantial loan,” said Sberbank and eurobond holders on restructuring more than a half of its Igonin.

NEWS ITEM: Hundreds of people pro- tested near the National Bank of Ukraine headquarters in Kyiv in November. While the protesters supposedly represented uninsured depositors of insolvent banks and demanded state compensation, many of them appeared to have no idea why they What do you Another were protesting, sparking suspicion that want? Compensation ‘Star Wars’ I forgot my protesters were simply movie instructions paid to be there.

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