There are more than six hundred lawsuits linked in any way with the nationalization of PrivatBank. On the one hand, the Ministry of Finance as the current shareholder of the bank is trying to call the former owners ‒ Ihor Kolomoisky and Hennadii Boholiubov – to account, on the other hand, the former shareholders are trying to abolish the nationalization and regain the bank. And if the former owners rely on the Ukrainian justice, the Ministry of Finance and the new leadership of PrivatBank are looking for the truth in foreign jurisdictions, because they do not hope for an unbiased consideration of the case by domestic judges. In numerous court battles, each of the parties has already had a number of tactical victories and defeats, but determining the final winner requires much more time. And since we are talking about the bank which owns 35% of the entire banking market, the main thing is to make sure this enmity doesn’t destroy the financial sector of Ukraine.

Between the first and second rounds of the presidential elections, the former owners of PrivatBank ended up with several decisions positive for them: the Ukrainian courts recognized the nationalization of PrivatBank illegal, canceled the list of persons associated with the bank determined by NBU, and canceled the agreement of personal guarantee of Kolomoisky on the NBU refinancing credits. Considering that at that time the odious former owners did not just return to Ukraine, but also developed serious media activity, many began to worry, even in very high offices. And for good reason.

Why was PrivatBank nationalized?

The legendary “bankfall” happened not because of the financial crisis, but rather the last financial crisis in Ukraine was so powerful precisely because of the peculiarities of the Ukrainian banking sector at that time, because all the banks on the market, with the exception of the banks with foreign capital, had the signs of captivity. That is, their ultimate owners used them for crediting their own businesses. The banks collected money of the population, credited the companies of their owners, of course, these loans were not repaid, the companies received new loans to pay off the old ones, also from the money of depositors, then these loans were restructured, mortgages were withdrawn, new loans were taken and the scheme would have continued to work if the country had not been hit by the political crisis. A healthy financial sector would survive it with little loss. The unhealthy one was almost immediately on the verge of collapse, pulling the whole economy down.

In 2015, the NBU stated that if you played by the rules, you had to withdraw all Ukrainian banks from the market, because none of them had enough capital. Therefore, PrivatBank was not unique. But it was the biggest, which is why its fate was given so much attention not only by the NBU and the Cabinet of Ministers but also by the IMF and other international partners of Ukraine. Its withdrawal from the market would automatically mean the bankruptcy of the Deposit Guarantee Fund because there were funds for compensating to depositors neither in the Fund nor in the state budget. In addition, PrivatBank provides the lion’s share of payments in the market through its own terminals and serves a huge number of clients-entrepreneurs. In the West, such banks are said to be “too big to fall”.

Ihor Kolomoisky and Hennadii Boholiubov were guided by the same logic, refusing to implement the plan of “recovery” of the bank, developed for them in the NBU. Moreover, given the size of the bank, the regulator gave more time to PrivatBank than to the rest of the banks, and also made several postponements in hope that the owners will finally come to their senses and start to save the bank.

The “recovery” actually provided that the real assets would enter the capital of the bank, instead of “the right of demand for future deliveries” which PrivatBank already accumulated for the sum of 142 billion UAH at that time. Now the former owners of the Bank argue that the NBU’s decision not to take these rights into account in the capital of the bank was politically motivated and was taken solely in order to take away their bank. Is that so? Imagine that the company took a loan secured, for example, by an elevator. The loan was not returned, the bank took the elevator, sold it, covered the losses incurred by the lender and paid off the depositors on time. Now imagine that the company did not return the loan, the mortgage of which was the right of claim for future supplies of grain. What will the bank do with these papers? Will it be able to find a buyer for them, cover the losses on time and pay off depositors? In fact, it is strange that the NBU and the bank’s auditors had so long turned a blind eye to the presence of such mortgages in its capital.

Only in September 2015, after the diagnosis, the regulator strongly advised the former owners to solve the problems with the bank’s capital. Each step of the “recovery program” was approved by the former shareholders of the NBU and from February 2016 they would have to start to implement the plan of capitalization. But already in August, everyone understood that the plan is not being implemented and will not be implemented. Could the NBU wait further, if the net interest income of the bank for nine months of 2016 was already negative, that is, the loans in the bank were not serviced? No, because of the number of clients of the bank and the huge systemic risks.

Why was the nationalization alternativeless?

In fact, the nationalization was never considered as the best way out of the situation, at least because the presence of the state in the banking sector at that time was already significant, because it owned Ukrgasbank, Oshchadbank and Ukreximbank, and this did not bring closer but distanced the banking system from normal market practices. In addition, both the government and the NBU understood that by nationalizing the bank, they make enemies for life among quite influential people in Ukraine. But in fact, there was nothing to choose from, because the alternative to the nationalization was the liquidation of the bank, which, we remind, is too big to fall.

The liquidation of PrivatBank, given the number of its clients, would destroy the entire banking system and lead to a significant economic crisis. These issues have been repeatedly discussed with the international partners of Ukraine, with the owners of the bank and with the leaders of the state. The conclusion was one: the nationalization is the lesser evil for the economy. So, after it, the bank’s capital was refilled with 155 billion UAH, the lion’s share of which was government securities, and the state itself became the owner of half of the banking system, which is also a problem. But due to the nationalization, the bank was maintained and made profitable again. The cooperation with the IMF continued, and the banking sector avoided other shocks.

Can we replay it the way the former owners wanted? Unlikely. First, the provisions of the law “On the system of guaranteeing deposits of individuals” directly say that after the transfer of shares of an insolvent bank to the new owner, their return to the former owners is impossible, as well as the payment of any compensation in their favour. Secondly, after the state leaves the bank’s capital, it will take the shares contributed to it, and the capital will have a “hole” of 155 billion UAH again, which needs to be filled by the new owners. Since we are talking about a very significant sum of money, even for Kolomoisky and Boholiubov, it is likely they won’t be able to do it instantly. Accordingly, the NBU will be again forced to recognize the bank insolvent and nationalize it again to avoid its liquidation. The NBU has repeatedly stressed this, the former owners of the bank are aware of this, but they continue to try to abolish the nationalization in the courts because they have other motives.

Blind and Seeing Themis

The trials on the nationalization are closed in Ukraine at the request of Kolomoisky’s lawyers and to the delight of the judges who conduct these cases. Since it is impossible to disclose what conclusions and why a particular court came to in the process of consideration, it is difficult to assess the impartiality of the judges themselves. However, the crumbs of already made decisions in Ukraine which were leaked by mass media are the best explanation why the present management of PrivatBank and the Ministry of Finance as the shareholder of a bank look for the truth in other countries.

The Ukrainian courts revoke the NBU’s decision on the PrivatBank audit, which formed the basis of the nationalization, cancel the list of persons related to the bank defined by the regulator, independently assess the correctness of the definition of credit risks and the need to form reserves for loans issued by the bank (which is generally outside the judicial competence and requires the involvement of the third-party experts), terminate personal guarantee agreements on refinancing loans. So far, the state confidently wins only when the cases reach the Supreme Court, and before that, it is systematically defeated, which is difficult to explain by anything else but the bias of judges. And the only purpose why the former owners of the bank began an active offensive in Ukraine was to start the negotiations with the state and withdraw the claims of PrivatBank against them in other jurisdictions. This is the real goal of Kolomoisky and Boholiubov, not the desire to regain the bank – to get some compensation or just banally to revenge.

Now, other jurisdictions are considering four claims against the former shareholders of the bank: in London, the bank is trying to hold them liable for the damage, in Geneva – to return the debt of 9 billion UAH on refinancing loans issued under the personal guarantee of Kolomoisky, in Cyprus – to appeal against the actions of the former auditor of the bank PricewaterhouseCoopers which did not notice the problem of the bank in 2013-2015, and in the United States – to prove the participation of the former owners in the schemes for laundering money withdrawn from PrivatBank. The materials of the latter claim, unlike the previous ones, are public, on 100 pages they describe the scheme by which the companies of Kolomoisky and Boholiubov took loans from PrivatBank to finance their current activities, but the loan funds were immediately withdrawn to other accounts and sent to the United States to the companies that are also associated with Kolomoisky and Boholiubov, and then these companies spent the received funds for the purchase of real estate and enterprises. The charges themselves are very serious, and according to American media, in addition to them, the FBI launched an investigation in the United States on the facts of money laundering of Kolomoisky and Boholiubov. But the process in the US will not be fast and will last at least 18 months.

This is enough to ensure that the former owners of the bank will start a large-scale campaign for the return of the bank which initiated these claims and is the only that can cancel them, and the dubious decisions of the Ukrainian courts should help them in this. And the former owners of the bank place the greatest stake on their proximity to the newly elected president and the head of his administration. These people will play the main role in taking the decision whether the state will negotiate with Kolomoisky and Boholiubov on the abolition of the nationalization and whether it will contribute to the investigation launched in the United States.

Unfortunately, so far, the forecasts regarding the readiness of Zelensky’s team to defend the interests of Ukraine, and not his business friends, are disappointing. Bankova Street hardly realizes that while passions around the PrivatBank will not cease, the risks to the financial system remain. At the end of May, when the Ukrainian courts made decisions one after another in favour of the former shareholders, the clients withdrew almost 4 billion UAH from PrivatBank within a few days. It is terrible to imagine what will happen if the bank will start to “return”. And if Privatbank is shaken, the entire banking sector will be shaken as well.

Text by Valentyna Yushchenko

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