http://www.centralbanking.com/operational-risk/governance/3238311/ukraines-gontareva-on-one-of- the-toughest-jobs-in-central-banking Ukraine’s Gontareva on one of the toughest jobs in central banking Christopher Jeffery Dan Hardie 12 May 2017 The outgoing National Bank of Ukraine governor speaks about transforming the central bank while engaging in wartime deficit funding and overhauling the banking sector How did you end up as governor of the National Bank of Ukraine (NBU)? This is really a question for the president, Petro Poroshenko. But perhaps it was because I was a seasoned banker with more than 20 years of experience and the president knew me personally. The request came as big surprise and, initially, I refused it. But he convinced me. And it also came just after the ‘Revolution of Dignity’ [the Maidan Revolution in 2014, which overthrew then-president Viktor Yanukovych], at a very patriotic time when everybody wanted to implement real reform. After a few weeks of quite difficult discussions, the president convinced me to accept his proposal, and my nomination was put to Ukraine’s parliament, the Verkhovna Rada, where a majority of the deputies who voted supported the motion. Were there any terms you required from President Poroshenko in terms of support or otherwise before you took on your role? At the time, it was a very difficult macro situation. So we only discussed some general areas for reform – particularly the real need for reform in the banking sector – but nothing on specific details, of what should be done. What was the situation like when you took over as governor? It was the epicentre of a perfect storm. There were real economic problems everywhere, an unbelievably problematic banking system and an out-of-date central bank. This is why we instigated three main reforms in parallel straight away. The first priority was macro-financial stability. The second was a cleaning-up of the Ukrainian banking sector. And the third was the transformation of the central bank itself. At the same time, there was a war going on in the country. Before I joined the central bank, we had already lost Crimea [which was occupied by Russian forces in March 2014], which represented about 3.6% of our GDP and 2 million people from our population. The current account deficit was more than 10% of GDP and our foreign reserves were depleted. We had also faced a bank run, with the banking sector having lost about 35% of private individuals’ deposits. It was just incredible. And on top of that, a real war started in our eastern regions [in August 2014, when Russia began giving major military support to separatist rebels fighting the Ukrainian government]. As a result of that war in the industrial east, we lost another 10% of our territory, 15% of our GDP and 30% of our export revenues. Some of our infrastructure and industrial capacities were physically destroyed. And we lost them all in one day. It’s not like you have a period of time to adjust. Everything happened so quickly. So we experienced all these deficits and lost almost 20% of our GDP in 2014 and 2015. That represented an incredible hit to our banking sector. Valeria Gontareva was appointed governor of the National Bank of Ukraine in June 2014, following the ‘Maidan Revolution’ earlier that year. She holds a degree from the Kyiv Polytechnic Institute and a master’s degree in economics from the Kyiv National Economic University. She worked for several scientific research institutes in Ukraine before beginning a career in commercial banking in 1993. Gontareva worked for ING Bank and Société Générale before becoming chairwoman of the Ukrainian financial services group ICU. Was it difficult to implement reforms at such a time? It was very difficult, but we started immediately. First, we switched to a flexible exchange rate regime. Until then, Ukraine’s exchange rate had been pegged to the US dollar, which is why there were so many imbalances. To have our currency tied to the US dollar was suicidal for the economy. It was clear even towards the end of 2013 that Ukraine stood on the brink of an economic precipice. This emerged after our previous president, Yanukovych, who had consistently said Ukraine would like to join the European Union, decided instead in 2013 to move closer to Russia. He even borrowed €3 billion ($3.3 billion) – the first tranche of a €15 billion loan – in so-called Russian debt, via a eurobond that included special conditions from Russia. Yanukovych concluded this deal only because it was absolutely clear from a macroeconomic point of view that Ukraine was already in collapse. But the Ukrainian people were against this idea. They wanted closer association with Europe, and that’s why the revolution happened. But we had all these problems at the same time. How much did you sleep in an average week? The first year at the central bank, I didn’t sleep more than five hours per day. It was wartime. [Russian- backed separatists were fighting the government in the east of the country]. I was also a member of Ukraine’s ‘security council’ – the only woman among all these men: military men; the president; and the prime minister. So, for the first nine months, I did not have one weekend off, and no more than five hours’ sleep. It is rare to undertake major banking reform at the same time as a major exchange rate reform, especially during wartime. How did you manage it? I remember in July 2014 that I met with the vice-chairman of the Federal Reserve, Stanley Fischer. As I recounted these problems to him, I was keen to seek his advice about what I should do with the military expenditure. When it came to deficits, it wasn’t just the unplanned war. [State-owned natural gas monopoly] Naftogaz had a huge deficit. There were all these big deficits and military expenditures that needed somehow to be accommodated in our budget. But who should finance it all? How could we help banks if we didn’t know if the bank was solvent or not – because we didn’t know their asset quality and we hadn’t done any stress tests? I sought out Mr Fischer’s guidance, as he was previously governor of the Central Bank of Israel – and Israel is always on a war footing. But he explained the situation was very different in Israel, as it has a special budget for military expenditure. I remember he said the mission was “impossible”. But then he added that the first priority has to be how to finance the war, the military expenditure. If your army cannot stop the real war in your territory, there is little point worrying about anything else. Did that make life difficult when implementing reforms? I understood that war financing should not be the area for the central bank. But there was little choice. I even promised to write a special article for the International Monetary Fund about what to do when you work with a country engaged in war because you cannot pretend that it is business as usual. You cannot immediately switch to a flexible exchange rate when your industry is physically destroyed. You can do that if something has happened to commodity prices, for example – but when it’s real destruction, absolutely different steps should be taken. That’s why it was very difficult for us to follow the proper steps and stabilise the situation. We introduced incredibly draconian administrative measures in the foreign exchange [forex] market. It was very difficult, and not really recommended as proper steps. It was a very painful exercise. But finally, together with the international community – the IMF, the World Bank, the European Bank for Reconstruction and Development [EBRD] and the EU – which really supported us, we introduced a programme of macro-financial support that stabilised the situation. Macro-financial stability is one of our big achievements. For two years in a row now, we have lived in a more or less stable macro-financial situation. Were you worried at any point when you put those draconian forex restrictions in place that you could publish those decrees, but that nobody would actually put the measures into effect? It was very difficult to introduce new rules at a time when our banking system was completely dysfunctional. We had to have very strict monitoring processes. For example, we immediately stopped all capital transactions. When we cleaned up the Ukrainian banking system, we closed 20 banks, which were not really banks, but money-laundering machines. Ukraine came off the FATF [Financial Action Task Force] blacklist more than 10 years ago, but all these companies and all these banks were still doing it. We introduced a special division within the central bank. They started to do deep diagnostic examinations of banks – asset quality reviews and stress tests. And finally we created a proper plan for the recapitalisation of the Ukrainian banking system. It was very difficult. Was there are a lot of resistance from powerful or well-connected people in Ukraine, when you started doing this? We pushed 89 banks [as of April 11] into liquidation, and we nationalised the biggest Ukrainian bank [PrivatBank], which belonged to an oligarch, at the end of last year. Asset-wise, we revamped 60% of the Ukrainian banking system. Number-wise, it was 50%. This was not something the NBU had been able to do before. Did any of the oligarchs resist your efforts to liquidate banks? If the central bank had done its job properly after the crisis of 2008 and implemented appropriate supervision, we would not have faced these problems.