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By John Helmer, Moscow

The International Monetary Fund’s senior officials have known that Stepan Kubiv, Governor of the National Bank of Ukraine, was removed six years ago for his involvement in a massive bank loss and loan diversion, when Kubiv was in charge of Kredobank, a west Ukrainian bank owned by PKO Bank Polski, the leading bank of Poland. The affair cost Bank Polski at least $350 million in 2008 and 2009. Another $144 million was provided by Bank Polski to save Kredobank from insolvency. At the time, Kubiv’s management performance led to his replacement by the chief executive of Bank Polski, Jerzy Pruski. The bank scandal was discussed officially, Bank Polski has reported, with the National Bank of Ukraine (NBU) and with the Central Bank of Poland.

The Kubiv dossier resurfaced in Warsaw after February 24, when Kubiv was named by the new Ukrainian Government to head the National Bank of Ukraine (NBU). In that role, Kubiv has been identified by the head of the IMF Ukraine Mission, Nikolay Gueorguiev, as the key Ukrainian official, under President Petro Poroshenko, who will decide what audits will be conducted of Ukraine’s commercial banks, and how much IMF money will be requested to bail them out.

kubivLast week Gueorguiev confirmed by telephone from his IMF office in Washington that Kubiv (right) is in charge of the investigations the IMF has ordered of Ukraine’s banks. Gueorguiev also said that Kubiv is currently discussing with the IMF mission the criteria to be adopted in order for IMF funds to be used to recapitalize the Ukrainian banks, when its shareholders either refuse to pay, or lack the funds themselves. That story can be read here.

Gueorguiev isn’t saying how much he knows of the Kubiv dossier. According to a Polish source, who warned Gueorguiev of the Bank Polski investigation of Kubiv, Gueorguiev has asked for “any specific information you can share that will help us in this respect.”

Kubiv, 51, was born in eastern Ukraine, but he has spent most of his life in the western provincial capital of Lviv. A Reuters publication at the time of his appointment to the NBU in February noted that he “headed several commercial banks before he was elected to the parliament”, but omitted his removal from Kredobank. “I promise … the transparency of the National Bank”, Reuters claimed Kubiv said. After he had been dismissed from Kredobank, Kubiv says he was appointed “professor of marketing and logistics” at a local university, and took a seat on the board of Bank Lviv.

peturssonBank Lviv’s financial report for 2013 reveals it is locally owned by an entity called New Progress Holding, associated with two Iceland-registered entities belonging to Margeir Petursson (right) Petursson is the owner of MP Investment, an Icelandic bank. As an Icelandic chess grandmaster, Petursson was identified at a Lviv tournament last July as having “switched to business after leaving professional chess, and the businessman path led him… to Lviv. Now he is at the high office in the one of the banks of Lviv and lives here permanently.” According to Bank Lviv, “there are no foreign investors among the shareholders of Joint Stock Bank Lviv.”

In 2013 Bank Lviv’s retail banking business was lossmaking, and its offsetting corporate business resulted in a bottom-line income that was close to zero. Its loan book at the end of 2013 was UAH 686 million ($83 million). An auditor’s note discloses that 12% of its loans were to related parties.

In 2012 Kubiv was elected to the Verkhovna Rada as a member of the Batkivshchyna party headed by Yulia Tymoshenko.” In January he was active in the protests against President Victor Yanukovich in Lviv. Ukrainian media reports claim Kubiv was “a compromise candidate” who would keep his NBU post until after the election of the new president.

Polish reporting of Kubiv’s role in the Kredobank losses were summed up by Jacek Łęski, a leading Polish journalist, in a Twitter posting on February 24. According to Łęski, Kubiv’s NBU appointment was “bad news. PKO BP [Bank Polski] issued 1 billion zł to repair what he did in Kredobank.” Speaking from Kiev this week, Leski confirms calling Kubiv “aferzysta”, the translation of which he said should wait until he has returned to Warsaw.

Lagarde has claimed publicly that “on the implementation front, we are taking all the precautions we can in order to mitigate those risks”. Lagarde was asked what she knows of the extent of the loan loss audit by Bank Polski of Kredobank, Kubiv’s removal, and his responsibility for a half-billion dollars in financial damage?

Conny Lotze, Lagarde’s spokesman in Washington, said: “Ms. Lagarde is currently traveling and will not be able to respond to your query on this short deadline.” When the deadline was extended to accommodate her and the gravity of the Kubiv dossier, Lotze replied: “Ms. Lagarde will not be able to respond to your query, but the staff will.”

At 11 on Monday evening, Washington time, a second Lagarde spokesman issued this statement: “With regard to your questions about operations of the Kredobank and PKO Bank Polski, please note that the IMF does not comment on specific cases involving commercial entities.”

According to the IMF staff report issued when Lagarde secured IMF board approval of the $17.1 billion Stand-By Arrangement on April 30: “banks should be required to conduct enhanced due diligence on business relationships with domestic politically exposed persons, and NBU is going to properly assess the fit and proper requirement, including requirements to check the source of wealth/funds of owners of qualifying holdings of banks.” On Monday Lagarde ordered a blackout on the due diligence the IMF has done on Kubiv.

Christoph Rosenberg, a German national, was the IMF resident representative in Warsaw when Bank Polski and Pruski intervened at Kredobank, uncovered the loan losses, and fired Kubiv. Rosenberg, still at the IMF, was asked what he knew then, and what he reported to Washington. He responds that he is forbidden to say.

kredobankIn October 2008, a Polish press report, citing Bank Polski sources, revealed that Kredobank had collapsed into scandal. “The bank ceased to be controllable. The biggest mistake PKO BP [Bank Polski] made was it put management in the hands of management [Kubiv] over which [the bank in Warsaw] then lost control. Initially, the seating of someone Polish as chief executive of Kredobank was not possible because none of the [Polish] managers met the restrictive requirements for candidates for the position [set] by the NBU.”

In October 2012, four years after the scandal, Jan Cienski, then the Warsaw reporter of the Financial Times of London, reported that Kubiv had authorized an unusual volume of loans which then disappeared. “In Kredobank’s case, NPLs [non-performing loans] hit an extraordinary 71 per cent of the portfolio.” Cienski claimed “the explosion was pretty costly for PKO BP as well. It bailed out Kredobank and last year set up a ‘bad bank’ taking 1.6bn hryvnia ($200m) of dud loans off Kredobank’s books.”

Cienski did not mention Kubiv’s name, and omitted what Bank Polski had done with him. “Kredobank has shed its reliance on a few big borrowers – prior to 2009 its 30 largest corporate clients were responsible for 70 per cent of loans. Ukraine’s high level of corruption makes it easy for big borrowers to pay off judges and not repay loans…The new focus will be on retail clients and small and medium sized businesses, with strict limits on the amounts that can be lent. Most of the lending will be for items like cars and agricultural equipment, things that can be taken away if payments stop.”

Cienski intimated why the affair had been hushed up by the Polish and Ukrainian Governments. “PKO BP is central Europe’s biggest bank by market capitalization, worth about €9.1bn, but has no large foreign operations – its only non-Polish investment is Kredobank, with a tiny 0.4 per cent share of the Ukrainian market. Despite being so small, Kredobank has been a source of worry and costs for state-controlled PKO BP ever since it bought it in 2004 from KBC for $54m. The Polish investment was driven by politics – Aleksander Kwasniewski, the Polish president at the time, wanted to show his Ukrainian counterpart that Polish companies were interested in Ukraine.”

kwasniewski_pinchukOn retirement from the presidency Kwasniewski (right) became a booster for Ukrainian membership of the European Union. He was employed to do that by Victor Pinchuk (left), who put at least a million dollars into Kwasniewski’s Amicus Europae foundation.

After Bank Polski removed Kubiv, it reported to shareholders what it had done to repair the damage at Kredobank. Pages 32 and 33 of the annual report for 2008 list the measures ordered by Pruski: “PKO BP increased the size of the supervisory board and added one new management board member (responsible for controls); PKO BP added its own internal audit expert to the internal control commission at Kredobank; PKO BP increased the capital of Kredobank by 48 million PLN; PKO BP loaned 6 million $ subordinated to Kredobank; PKO BP provided Kredobank with credit lines of 90 million $, to maintain its liquidity; PKO BP met four times with NBU representatives to discuss Kredobank; PKO BP met with the Polish Central Bank (NBP) to discuss problems of PKO BP as investor on Ukrainian market; PKO BP commanded loan portfolio audit at Kredobank, performed by PwC [PriceWaterhouseCoopers]; PKO BP started to implement better internal procedures at Kredobank.”

pruskiPruski left Bank Polski a year later; he is now one of Poland’s leading bank regulators as head of the Bank Guarantee Fund. He also describes himself as “Economic Advisor to the President of the Republic of Poland since October 2010. He is also the representative of the President of the Republic of Poland at the Polish Financial Supervision Authority.”

Polish sources report that between 2010 and this year, Pruski’s role at the Polish presidency was more honorary than real. But on March 10, 2014, that appointment was cancelled, and he was engaged as a paid advisor in the chancellery of President Bronisław Komarowski.

Contacted in Warsaw at his office, following a meeting Monday of the management board of the Bank Guarantee Fund, Pruski was asked whether as chief executive of Bank Polski at the time of the Kredobank investigation, he knew whether the evidence on Kubiv’s conduct had been referred to the Ukraine prosecutor and police authorities. Pruski was also asked what information on the case had been passed to the IMF at the time, or since Kubiv’s NBU appointment in Kiev. Pruski asked for more time before answering; he then refused to reply.

At the IMF Rosenberg has charted Ukrainian and other country performance in the proportion of bank loans which are non-performing. Rosenberg’s research identifies Kubiv’s 71% NPLs at Kredobank as something of a worldwide record, and roughly five times higher than the Ukraine’s pre-2007 average:

Source: http://blog-imfdirect.imf.org/

Rosenberg has summed up the lessons of the Kubiv affair in a piece of IMF advice to skip prosecution of bank fraudsters, and absorb the losses. “Banks should step up the work-out of these loans, often with help from their more experienced Western parent institutions…Writing down unrecoverable loans shouldn’t be a taboo…Financial supervisors need to step up pressure to accelerate the resolution of bad loans. Ever-greening, overvaluation of collateral, and underreporting must not be tolerated; adequate capitalization and provisioning needs to be ensured.”

James Roaf, a British national (below left), is Rosenberg’s successor in Warsaw, and the current IMF representative for Poland. He also supervises Ukraine, where a Frenchman, Jerome Vacher (right), is the IMF resident.


Roaf was asked on Monday what he knew about the Kubiv affair at Kredobank; when he knew it; and how much of the Polish dossier he relayed to Lagarde’s office in Washington after the IMF started its due diligence on Kubiv’s appointment to the NBU in February. “Were you acquainted with Mr Kubiv before his appointment to NBU?” Roaf was asked. “Are you aware, or is there a record in the files of your office and of your predecessors, Mr Rosenberg and Mr Allen, that Bank Polski terminated Mr Kubiv as the chief executive of Kredobank after an audit investigation by Bank Polski revealed substantial loan losses, improper loan operations, and the like, requiring several hundred million dollars of recapitalization by Bank Polski?”

Roaf refuses to answer. He acknowledges he has been ordered by his superiors to stay silent. He also won’t say if he met Kubiv when the Ukrainian was in Warsaw for talks on May 14:

Source: Mariusz Szacho.
Kubiv is at far left; next to him is Ukrainian Finance Minister, Oleksandr Shlapak. They were participating in a meeting of the Polish-Ukrainian Chamber of Commerce (PUIG).

Last week Kubiv was in Vienna to address a meeting organized by the IMF, the European Bank for Reconstruction and Development, the World Bank, the European Investment Bank and the European Commission, as well as a number of country authorities. According to a World Bank record, Kubiv claimed: “By bringing together all the relevant stakeholders around one table, we have identified the key challenges in this sector as well as possible solutions to address them. The combination of views from both the public and private sectors helped identify a coordinated path to push reforms forward.”

Back at his bank in Kiev, Kubiv was asked four questions:
— How does Mr Kubiv describe and explain his dismissal from Kredobank by Bank Polski in 2008?
— What responsibility does Mr Kubiv believe he has for the loan losses which occurred during his leadership of Kredobank?
— did Mr Kubiv benefit personally from the unusually high NPL/loan loss rate?
— does Mr Kubiv believe that his experience of bank fraud, insolvency, and supervision failure at Kredobank make him eligible to run the NBU now?

At publication time, Kubiv and NBU have not responded. Kredobank is also not replying to questions about Kubiv’s performance at the bank.

An international banker who has been involved in IMF country bailouts in the past said: “Whether or not the Kredobank-Bank Polski matter was a case of bad judgement or something worse, the question now for the IMF is to review its own processes for Ukraine. The IMF was strict in Greece and Portugal. It ought to explain why it is less strict in Ukraine.”

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