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By John Helmer, Moscow

The International Monetary Fund (IMF) is preparing to release Privatbank, the largest commercial bank in Ukraine, from independent tests of its solvency and capital adequacy, and allow a bailout of the bank with Ukrainian public funds, backed by the IMF. The Ukraine mission of the IMF has also revealed this week that it is allowing Igor Kolomoisky (image above), the control shareholder of Privatbank, to direct his own audit and stress test of the bank. This is despite independent evidence of large related-party lending in which the bank has been engaged; and despite judgements recently issued in the UK courts that Kolomoisky presents evidence that is “false or materially incorrect.”

The bank, headquartered in the Dniepropetrovsk region of eastern Ukraine, is rated E, according to Moody’s Investors Service, the worst of its ratings for “Ownership and Organizational Complexity, Key Man Risk [and] Insider and Related-Party Risks”. Kolomoisky has been the governor of the Dniepropetrovsk region since March 2, when he was appointed by the new government in Kiev. The record of his attacks on Russia, and on President Vladimir Putin, can be read here.

The IMF, headed by Christine Lagarde, issued its terms for a two-year Stand-By Arrangement for Ukraine on April 22. Payment of Special Drawing Rights (SDR) of 10.98 billion has been proposed, equivalent to $17.1 billion. The first instalment of SDR 2.05 billion ($3.2 billion) has already been transferred to the Ukrainian treasury. A second, third, and fourth instalment of SDR 914.67 million ($1.4 billion) each will be paid to Kiev after the IMF completes reviews which are due on May 31, July 31, and September 30.

gueorguievThe head of the IMF’s Ukraine mission and chief negotiator of the payouts is Nikolay Gueorguiev (right). He is a Bulgarian by birth. He trained in economics in the US. Before joining the IMF he was briefly a deputy finance minister in the Bulgarian government of Ivan Kostov, head of the right-wing Union of Democratic Forces.

According to a statement by Lagarde on April 30, after the IMF board agreed to the bailout, “showing unprecedented resolve, the [Ukrainian] authorities have developed a bold economic program to
secure macroeconomic and financial stability.” Lagarde claimed “the authorities are determined to stabilize the financial system, maintain confidence in banks, and strengthen balance sheets and financial regulation and supervision. To this end, they have launched diagnostic studies of the largest banks and started reforms which are critical to restore confidence and stem deposit outflows.”

The IMF programme appears to require direct IMF investigation of the Ukrainian banks, starting with the 15 largest ones. “We will monitor the banking system closely and send inspection teams to the field as needed. If a bank’s capital declines below the regulatory minimum, the NBU [National bank of Ukraine] will require that the shareholders submit an action plan to recapitalize the bank, as well as impose restrictions on the bank’s activities in line with the law. If the capital of the bank is below one-third of the minimum legally required level, the owners will be required to bring the bank immediately back into solvency in line with the existing legal framework. Otherwise, the institution will be put under temporary administration that removes bank managers and suspends the powers of general shareholders’ meeting, supervisory board, and board of directors. We commit to subject all banks under resolution to an official investigation by the DGF with the aim to identify whether wrong doing or bad banking practices led the bank into insolvency and to prosecute those found responsible” (page 68).

Speaking on the record from his office in Washington, Gueorguiev said that no IMF inspection team will be sent to investigate the banks. Instead, he said an “independent auditor” will make an assessment, and report by July 31. The IMF will not appoint the auditors, Gueorguiev said. Instead, “the NBU has issued a letter to the banks listing eligible auditors”. Each bank should select an auditor from the NBU list. “The bank selects the auditor under restrictions to prevent conflicts of interest.”

The National Bank of Ukraine (NBU)

No bank may be audited, he said, by an auditor who has conducted an audit at that bank for the past three years. Gueorguiev refused to identify the list of approved auditors, but then conceded: “there is no reason for the selection not to be public.”

He was asked next how the IMF has assessed conflicts and the independence of auditors if the IMF does not appoint them directly, and if the Ukrainian banks to be audited are part of larger holding owned by a single individual? Gueorguiev replied: “The aim is to ensure that they can act independently. We do not comment on individual banks.”

The IMF is not paying for the audits or investigations, Gueorguiev acknowledged, nor will the Fund in Washington be receiving the audit results and reports. “It’s a programme of the [Ukrainian] authorities. The [audit] reports will go to the NBU by July 31, and will be determined by the [national] bank. The IMF then reviews its recommendations.”

“As with any audit, the banks pay for it themselves. This is a standard practice.”

The published IMF programme requires the assessment of the loan books of the Ukrainian banks; the value of their non-performing loans (NPLs); the bank’s liabilities to depositors and foreign lenders; the profit or loss line; and the adequacy of bank capital, according to the IMF’s stress tests. Gueorguiev said the IMF is still discussing the tests and audit criteria with Ukrainian officials, and with the Ukrainian banks. For the time being, agreement on the test results is up to the banks to agree with the auditors, and then with Ukrainian government officials.


“As specified in the published Memorandum of Economic and Financial Policies (MEFP), the deadline for completion of the independent audits for the first group of 15 banks is July 31 indeed. Where the audits show adequate capitalization, no further action will be needed. Banks for which the studies reveal capital deficiencies will be required to submit recapitalization and restructuring plans to the NBU by end-September 2014.”

The IMF has announced publicly that “if existing fit and proper shareholders are unwilling or incapable of recapitalizing in full a weak bank, public funds could be used to bring it back into solvency or orderly restructure it, according to strict criteria. Government and the NBU will reach agreement with IMF staff on these criteria by May 31, 2014 (structural benchmark).”

Gueorguiev said this deadline has slipped, and no agreement on what these bailout criteria should be has been reached yet. “We are now discussing this with the authorities. We are discussing the technical criteria. We will publish the criteria for all to see.”

The IMF, Gueorguiev added, does not expect the election on May 25 of President Petro Poroshenko to result in any change of officials at the Finance Ministry or at the central bank. In the meantime, Gueorguiev admits in interview, the IMF has dropped the deadline it set in April for implementing the reorganization of the Ukrainian banks. “There is no specific deadline. We will discuss these matters with the Ukrainian authorities during our first review mission in late June.”

lagardeBailout money for the Ukrainian banks, which Lagarde (right) promised Kiev in April, must be subject to criteria the IMF has issued. These “should include requirements to ensure that losses are passed to the shareholders before public funds are injected to recapitalize or restructure a bank and the appointment of a monitoring trustee to oversee the bank’s activities on behalf of the state. They will also include the requirement for a voluntary suspension of voting rights of shares held by any party that may be in process of filing documentation establishing ultimate ownership before the NBU. For these purposes, we will make the necessary legislative changes.” (page 67).

Gueorguiev said that Ukrainian budget funds, backed by the IMF, may be used for commercial bank bailouts. But he said the conditions in which this might happen, and which banks will be selected to benefit, are “technical”, not political. “I’m not going to comment on political matters.”

In interview on June 4, Gueorguiev claimed that Poroshenko’s election would not affect his negotiations with Oleksander Shlapak, the former economy minister and former deputy head of the NBU, who was appointed the Ukraine’s finance minister in February, after the ouster of President Victor Yanukovich. Stepan Kubiv, appointed the new chairman of the NBU on February 24, is also engaged in negotiations with Gueorguiev. About these officials, Gueorguiev said: “we do not comment on political and personnel matters.”

Shlapak (below left) and Kubiv (right) are both from Lviv, in western Ukraine. Shlapak was director of Privatbank’s Lviv branch in the 1990s, then head of its western regions’ division, and finally deputy chairman of the Privatbank board. Kubiv is reported in the Ukrainian press to have been a member of the Verkhovna Rada for the Batkivshchyna Party of Yulia Tymoshenko, and one of the organizers of the Maidan demonstrations in January. In the past Kubiv headed the Lviv-based Kredobank, which is owned by the PKO Bank Polski group.


Gueorguiev says his talks with them “are about putting in place strict criteria for the use of public funds for bank recapitalization or restructuring, in case private shareholders are unwilling or unable to do so, with the objective to safeguard the stability of the financial system. This is a matter of public policy, not politics.” The “strict criteria” have not been made public.

By several standard measures, as reported in a study by BNP-Paribas, Privatbank is the leading commercial bank in Ukraine:

Source: http://media-cms.bnpparibas.com/
(Click to enlarge)

Kolomoisky, the identified control shareholder of the bank through companies registered in Cyprus and elsewhere, has subscribed less capital than is the case at other Ukrainian banks.

Source: http://media-cms.bnpparibas.com/
(Click to enlarge)

A report on Privatbank by Moody’s, released in April, warned that its “concentrated private ownership gives rise to corporate governance risks.” The bank’s capital, the reports says, “is immobilised by reportedly high and potentially understated levels of related-party lending.”

Source: Moody’s

According to the Moody’s report, the available data it analysed from the first half of 2013 indicted that the total amount of the bank’s loans to its top 10 borrowers came to UAH13.5 billion “or close to 62% of the bank’s shareholders’ equity.” More than a quarter of the loan book was concentrated in oil trading ventures “in which the bank’s shareholders have business interests. The bank most likely has exposures to entities that are controlled (directly or indirectly) by its shareholders, which raises the possibility that loans may be more risky for the bank’s standalone position.”

International banking sources claim there was an increase in related-party lending in the second half of last year, as the internal opposition to the Yanukovich government intensified, and Kolomoisky publicly sided against Yanukovich. Privatbank’s press and investor relations offices were asked: what is the volume and value of the current related-party loans the bank has on its books; what proportion of its Non-Performing Loans (NPLs) is related-party lending; and what is the extent of Kolomoisky’s control of these related parties? There has been no response.

This information was also not provided to the Moody’s analysts. “In our opinion,” they wrote in April, “the reported level of affiliated loans is likely to be understated….if loans to affiliated companies are to become problematic, Privatbank would not be able to use work-out instruments to a full extent given the inherent conflict of interest stemming from the common ownership.”

Moody’s and other sources indicate that Privatbank currently owes international bondholders more than $1 billion. A $200 million bond which matures in 2015 and is traded in Berlin, suffered from a sharp loss of confidence in the bank during the first three months of this year, as this chart of the bond price trajectory shows:

Source: http://www.boerse-berlin.com/

A $150 million bond is due for repayment in 2016. Another bond for $175 million was issued last year, and falls due in 2018. Swiss banks appear to be the lead arrangers for Privatbank’s bonds; a Geneva source confirms that UBS is also Kolomoisky’s personal banker. Credit Suisse has also arranged the bank’s bond sales.

According to Moody’s, “the bank has a comfortable debt repayment schedule with the next wholesale debt repayment being due in 2015-16 and in 2018.” A current report on the bank by Dragon Capital estimates that Privatbank’s assets by end of last year came to $26.8 billion; shareholder equity to $2.5 billion, with the ratio of equity to assets falling over the past five years to 9.47%. Bottom-line income for the bank, according to Dragon Capital, was $234 million, up 22% on the year before.

How much of Privatbank’s publicly reported condition can be relied on is regarded sceptically by Russian and international bankers. They believe the IMF programme for the Ukrainian banks will not be decided on the financial data nor the technical criteria, but on political grounds. According to an IMF veteran and country director at regional international banking institutions, “whatever Privatbank has on its accounts, the authorities are hostage to its survival. Yes, the IMF will tolerate a manipulation. They must keep financing the Ukrainian authorities regardless. But, of course, they still pretend that there are rules. There aren’t.”

An international banker says: “You can’t do a genuine stress test in the Ukraine in the present circumstances.” Speaking of Privatbank, he said: “I can make myself look very poor. I can then put in equity of $50 million, and use that to get $500 million in a cheap loan, and then recover my $50 million at a profit. [Ukraine] is now a huge honey pot. Everything is for free; everything is worthless. And Poroshenko is powerless to do anything about it at the Finance Ministry or the National Bank.”

The IMF has announced its plan to “set up a central credit register at the NBU. This register aims to monitor credit risk concentration and enhance the monitoring of large business groups (including those related to bank owners) and become an important tool of off-site and on-site banking supervision. To this end, the existing legal framework for the credit register will be revised by end-August 2014, in consultation with the IMF and [World Bank] staff, with the aim to become operational no later than August 2015.”

“How can Lagarde can justify delegating the IMF’s Ukraine bank investigations to political allies and employees of Kolomoisky,” asks a London banking source who has done business with Privatbank. “Has the IMF seen the recent High Court and Court of Appeal judgements on Kolomoisky’s credibility and honesty?”

judgeThe source is referring to the UK High Court judgement of Justice Sir George Mann (right), issued on August 30, 2013, and two judicial orders which followed on October 1. “At the centre of this case,” ruled the judge, “is a Ukrainian businessman called Mr Igor Kolomoisky.” The claims in the case turn on allegations that Kolomoisky had concealed an attempted raid on the shares of a London-listed oil and gas company, JKX Oil & Gas, with assets in Ukraine. The judgement was that he had done so, falsified the record of his intention, and according to the applicable company law, was guilty of an “improper purpose”.

A three-judge panel of the UK Court of Appeal subsequently reviewed the evidence in the case and the rulings. The appellate judgement was issued last month, on May 13, 2014. This upheld the earlier findings that Kolomoisky had made statements which “were false or materially incorrect”. The judgements also found that Kolomoisky had tried to manipulate his control of a proposed Privatbank loan with “a demand that one of his nominees be given a shadow management role [at the oil company], sitting with the general director of PPC which, were it to prove unattractive to Dr. Davies’ fellow directors, Mr. Kolomoisky suggested could be achieved without disclosure to them. Attempts to raise capital by the issue of further shares had been opposed by Mr. Kolomoisky. Since their issue for cash, otherwise than pro rata, would have required a special resolution, he controlled sufficient shares to prevent it happening.”

Gueorguiev of the IMF has acknowledged that in order to be independent, the appointment of the auditor to report to the IMF on Privatbank ought to be transparent. He concedes the IMF is not selecting the auditors, and that this process is being conducted between the NBU and the bank itself. Asked to identify what auditor has been picked by the Ukrainians, the IMF official refuses to say. “We do not comment on individual banks,” Gueorguiev replied.

Is it possible that IMF funds may be passed through the NBU to support Kolomoisky’s bank, Gueorguiev was also asked. He declined to say.

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