Financial Sector Transformation Project Quarterly Progress Performance Report Financial Sector Transformation Project FY 2019 Q3 PROGRESS REPORT (01 April – 30 June 2019) Award No: EEM-E-00-00002-00/AID-121-BC-17-00001 Prepared for USAID/Ukraine C/O American Embassy 4 Igor Sikorsky St, Kyiv, Ukraine 04112 Prepared by: DAI Global LLC Financial Sector Transformation Project 7600 Wisconsin Avenue, Suite 200 33-B Taras Shevchenko Blvd., Europe Bethesda, MD 20814 Plaza Business Center, 6th floor, Kyiv, 01032, Ukraine facebook.com/FSTProject http://www.fst-ua.info Table of Contents I. ACRONYMS AND ABBREVIATIONS 3 II. CONTEXT UPDATE 4 III. EXECUTIVE SUMMARY 6 IV. KEY ACHIEVEMENTS 8 V. PROGRESS AGAINST TARGETS 14 VI. PERFORMANCE MONITORING, EVALUATION AND LEARNING 16 VII. LESSONS LEARNED 16 VIII. ENVIRONMENTAL MONITORING 16 IX. PROGRESS ON LINKS TO OTHER ACTIVITIES 16 X. PROGRESS ON LINKS TO HOST GOVERNMENT 17 XI. PROGRESS ON INCLUSIVE DEVELOPMENT 17 XII. FINANCIAL INFORMATION 18 XIII. SUB-AWARD DETAILS 18 XIV. ACTIVITY ADMINISTRATION 18 XV. ATTACHMENTS 20 ATTACHMENT A: DELIVERABLES TABLE 21 ATTACHMENT B. PROJECT DOCUMENTS AND PUBLICATIONS 25 ATTACHMENT C. PERFORMANCE DATA TABLE 26 ATTACHMENT D. SUB-CONTRACTOR TABLE 34 ATTACHMENT E: GIS AND FUTURE ACTIVITIES TABLE 35 ATTACHMENT F: IMPLEMENTATION PLAN 39 2 I. ACRONYMS AND ABBREVIATIONS DGF Deposit Guarantee Fund EU European Union FSR State Commission for Regulation of Financial Services Markets GfK Growth from Knowledge GOU Government of Ukraine IFRS International Financial Reporting Standards IMF International Monetary Fund IOPS International Organization of Pension Supervisors IOSCO International Organization of Securities Commissions LC Leasing Company MEDT Ministry of Economic Development & Trade MIA Ministry of Internal Affairs MOES Ministry of Education and Science MOF Ministry of Finance MSP Ministry of Social Policy NABU Independent Association of Ukrainian Banks NBU National Bank of Ukraine NBU-BU National Bank of Ukraine’s Banking University NGO Non-Government Organization NPF Non-state Pension Fund OECD Organization for Economic Cooperation and Development PFU Pension Fund of Ukraine SSMNC Securities and Stock Market National Commission US CFTC U.S. Commodity Futures Trading Commission US SEC U.S. Securities and Exchange Commission UUL Ukrainian Union of Lessors UWF Ukrainian Women’s Fund VRU Verkhovna Rada of Ukraine VR-FBC Verkhovna Rada Finance and Banking Committee 3 II. CONTEXT UPDATE Ukraine is rated by USAID as a “non-permissive environment” or NPE country because of the threat of war with Russia, the conflict in the separatist held territories, and endemic corruption that constrains efforts to institutionalize a market economy. This quarter was dominated by the presidential election and the run-up to voting for a new parliament. On March 31, comedian and actor Volodymyr Zelensky finished first in the presidential vote with 30.5%, with incumbent President Petro Poroshenko in second position with just under 16%. In the run-off election on April 21, Zelensky prevailed easily with over 75% of the popular vote. During the campaign Zelensky did not define his priorities or his economic and social policies, leaving the nation uncertain about future policy direction. In May, President Zelensky dissolved the Parliament and called for early elections (scheduled for July 21). The Ukrainian Parliament of The inauguration ceremony of Ukrainian President 450 members is elected half by party list, and half by Volodymyr Zelensky; Kyiv, May 20, 2019 single member constituencies. As of July 19, polls indicate that Zelensky’s political party (Servant of the People) is polling above 45%, followed by the pro-Russian Opposition Platform (10.5%), Golos party founded by rock star Svyatoslav Vakarachuk (6.0%,) Petro Poroshenko’s new European Solidarity (7.7%), and Yulia Tymoshenko’s Batkivchyna Party (7%). All political parties must surpass the minimum vote requirement of 5% for representation in the parliament. Some parties that were important in the last Parliament will likely disappear, including Samopomich and the Narodnyi Front. This reflects the highly personalized and fractionalized nature of Ukrainian political parties. President Zelensky’s Servant of the People party may achieve a majority of parliamentary seats, but this majority could prove to be fragile. Thus, President Zelensky may choose (or have to) negotiate a coalition with one or more of the other parties in the Parliament. Policy uncertainty is likely to continue into the fall. President Zelensky has consistently advanced an anti-corruption theme, and stated his intention to reach agreement with the IMF on a stabilization package of reforms to allow for the repayment of high foreign debt obligations in 2019-2020. Policy details, however, are scarce and the informed public is carefully watching his political appointments to government ministries. Thus far, the President has only announced appointments to a few key positions (former Economics Minister Abromavicius to the Board of the defense industry monopoly UkrOboronProm, ex-Finance Minister Daniliyuk to the National Defense Security Council). One early appointment to head the Presidential Administration, Andriy Bohdan, proved controversial because of his status as an attorney for the oligarch and former owner of Privat bank, Ihor Kolomoisky. During the quarter, the exchange rate moved in a narrow range between 26 – 27 UAH: $1, and was at 26.15/$1 on June 30. In mid-June, Ukraine borrowed $1 billion on the Eurobond market (7 year term, 6.75%), which was a significant drop from the 9.5% it paid in December 2018. This reflects the fall in interest rates globally rather than a significant improvement in Ukraine’s debt position. The country’s credit rating by Moody’s was unchanged at B-. Foreign currency reserves are $20 billion, inflation is about 8- 9%, and economic growth is forecast at 3%. The interest rate on 3-month hryvnia-denominated government bonds was 17.24% at end June, and the NBU discount rate was 17.5%. 4 Last quarter FST introduced a new elements framework to describe more accurately the purpose, objectives and range of its activities. This diagram is presented below. The main components are: Enabling Environment: Financial markets depend on trust. Trust is the result of knowledge, because you are more likely to have confidence in and use a product or service you understand. Trust is reinforced by the existence of a legal and regulatory regime, including enforcement, that protects you against manipulation, abuse, or fraud. Access to Finance. Entrepreneurship requires funding. This refers to the ability of individuals/enterprises to obtain financing or financial services, including loans, leases, investment products, insurance, and risk management services. It also includes credit history and reporting, and insolvency procedures. Financial Disclosure/Transparency. Information moves markets. Disclosure is important to price discovery, to fair competition, to investment and to combating fraud and corruption. This element includes information disclosure systems, tax and accounting, transparency, anti-money laundering, advertising, and corporate governance management practices. Financial Infrastructure. Markets require business support services. This includes the institutions and practices that are critical to the functioning of markets: clearing and settlement, payment systems, messaging, IT, exchanges and brokers, SROs, capital pools (insurance companies, pension funds, private equity, etc.), and digital finance tools. FST ELEMENTS FRAMEWORK ENABLING ENVIRONMENT PUBLIC REGULATION CONFIDENCE SUPERVISION FINANCIAL INFRASTRUCTURE SME GROWTH ACCESS TO FINANCE FINANCIAL CAPITAL CAPACITY INCLUSION LEASING DIGITAL MARKETS BUILDING FINANCE INVESTMENT (IT, TRAINING) COMMODITY MARKETS (ENERGY, AGRICULTURE) FINANCIAL DISCLOSURE / TRANSPARENCY FINANCIAL AML, BEPS REPORTING ANTI-CORRUPTION INITIATIVES 5 III. EXECUTIVE SUMMARY A. Key Achievements DO1. CORRUPTION REDUCED IN TARGET SECTORS FST continued its efforts to develop a more transparent reporting system for financial entities, working with the Ministry of Finance (MOF) and the three financial sector regulators. On June 20, FST's sub- contractor Vizor Ltd. installed the software for the Financial Reporting System (FRS) in IFRS/XBRL on the system of the “hub” manager, the NSSMC. The system is now “live" (meaning it is now fully operational) and .receives reports from the market. Financial entities will continue to report in a "test mode" until the end of 2019. Annual reports for 2019 are due in the first quarter of 2020, when an estimated 4000 financial company reports are expected. This will improve financial information disclosure according to international standards and provide important information to investors. FST has thus fulfilled its responsibility regarding software development and installation under the MOU with the Securities Commission and the European Union. FST will continue to provide technology and promotional support for implementing the FRS. FST held several meetings with interested parties (commercial banks, the NBU, Fintech companies, media companies) to refine the concept of a digital comparison tool (DCT) for bank consumer lending products. FST evaluated procurement options, and prepared a justification memo for holding a limited competition among five organizations. FST completed an RFP to develop, operate and promote a sustainable DCT, and bids were received in late June. During the next quarter,