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Ukraine’s banking sector: scandals, fraud & growing threats to cooperation with IMF

Privatbank, nationalized by the Ukrainian government in December 2016. Credit: depositphotos
Ukraine’s banking sector: scandals, fraud & growing threats to cooperation with IMF
Article by: Yaroslav Bozhko
Translated by: Christine Chraibi
Ukraine’s successful “bank failure” scheme, in which banks involved in fraudulent schemes were shut down in 2015-16, has consolidated some oligarchic circles in their opposition to cooperation with the IMF. Thus, a prominent issue for IMF visit to Ukraine is counteracting attempts to roll back reforms within the National Bank of Ukraine. The IMF’s confidence is not boosted by NBU governor Kyrylo Shevchenko, who himself has a shady past with Terrabank and Ukrgazbank. Neither is it helped by Ukraine’s continual harassment of ex-NBU governor Valeriya Hontareva.

The IMF has provided Ukraine with a $700 million tranche, but this should not be seen as a marker of the reforms implemented by Ukraine or the correctness of all of its decisions made. The country’s banking sector keeps hanging over the abyss of scandals and occasionally they involve quite significant figures.

The most pressing issues that accompany each visit of the IMF mission to Ukraine are as follows: the adoption of a realistic and balanced state budget – the prerogative of the Ukrainian Ministry of Finance, continued banking reforms and counteracting attempts to roll back the said reforms within the National Bank of Ukraine (NBU).

However, Ukraine’s cooperation with the IMF is directly hampered by some influential owners of banks, which were closed down in 2015-16 as part of the “bank failure” scheme.

This event constituted one of the important stages of Ukraine’s banking reform, when the NBU closed banks involved in illegal withdrawals of depositors’ funds and money laundering via fraud schemes. In the most high-profile case, oligarch Ihor Kolomoisky was stripped of his control of PrivatBank.

In fact, Kolomoisky withdrew US $5 billion of depositors’ funds and issued them as loans to fictitious legal entities.

The IMF directly supported the “bank failure” as it allowed honest banks to be filtered out, significantly improved the banking system, and changed the refinancing rules, which had previously been a major factor in the outflow of funds from the state budget to cover bank withdrawals.

However, the implementation of this “bank failure” scheme consolidated some oligarchic circles in their opposition to cooperation with the IMF, and this primarily concerned Ihor Kolomoisky, the former owner of PrivatBank.
Oligarch Ihor Kolomoisky (left); Volodymyr Zelenskyy (right. Photo: open source

Kolomoisky’s special relationship with newly elected President Zelenskyy and his team could have helped him return to PrivatBank after 2019. The Presidential Office’s loyalty to Ihor Kolomoisky was manifested in different ways: for example, the adoption of the so-called “anti-Kolomoisky bill” was accompanied by numerous spam amendments, primarily from pro-government MPs. However, due to pressure from Ukrainian society and Western partners, Ukraine managed to maintain at least the basic principles of banking reform.

In the future, the harassment of one of the authors of banking reforms, former governor of Ukraine’s National Bank Valeriya Hontareva, who has been severely criticized by Ihor Kolomoisky’s circles of influence, may become an important factor impacting the IMF decision.

In March 2018, Valeriya Hontareva revealed the alleged theft of $5.5 billion from PrivatBank, once the country’s largest commercial lender. The suspected masterminds are the bank’s two oligarch owners: Ihor Kolomoisky and Hennadiy Boholiubov, who stand accused of absconding with an amount roughly equal to 5% of the country’s GDP.
Valeriya Hontareva (left) became the enemy of Ihor Kolomoisky (right) after the NBU nationalized his Privatbank. Photo:

In fact, the Security Service of Ukraine (SBU) accuses Valeriya Hontareva of treason and financing terrorism, pointing to her alleged involvement in supplying coal to Ukraine from the occupied territories of Donbas in 2014. As Ms. Hontareva did not make any enemies in Ukrainian politics during her tenure as NBU governor, it is quite plausible that the ex-owners of banks nationalized or closed for fraud have mounted a strong lobbying force against her.

A similar case was filed against Hontareva’s former employee Kateryna Rozhkova, who was also involved in banking reforms. She was formally charged with providing confidential information to foreign legal entities and audit companies during the audit of PrivatBank.

In addition, an important factor contributing to the IMF’s distrust of Ukraine is the dubious past of NBU governor Kyrylo Shevchenko. According to previous investigations, in 2011 he was directly involved in withdrawing depositors’ funds from TerraBank under a similarly fraudulent scheme. In their investigation, activists of the Democratic Axe, a Ukrainian political party and NGO founded in 2018, showed that in 2014 Kyrylo Shevchenko was directly involved in the withdrawal of more than UAH 200 million from Ukrgazbank, which he chaired at that time.

Governor of the National Bank of Ukraine, Kyrylo Shevchenko. Photo: open source

According to the activists, Ukrgazbank paid huge sums of money to outside intermediaries for allegedly bringing clients to Ukrgazbank in the form of large state-owned companies. However, there should have been no intermediaries in this chain between state-owned companies and Ukrgazbank, as they were directed to this bank by a resolution of the Cabinet of Ministers.

The intermediaries, who were “paid” several million hryvnias for their “services”, included several individual entrepreneurs, most of whom do not have any relation to the banking sector. Moreover, many are low-income individuals, pensioners, students, etc. Most were small private entrepreneurs, people who sold their data to fraudsters for a small fee. These fraudsters then used the companies of the private entrepreneurs to withdraw millions in cash and subsequently disappeared into thin air.

Among the persons who received money from Ukrgazbank for these fake services was the Herasymiuk couple (UAH 19 million for their “services”).

First, Mr. Herasymiuk worked with Kyrylo Shevchenko as head of Ukrgazbank’s legal department. Shortly thereafter, First Deputy Prosecutor General Mykola Herasymiuk presided over several departments of the Prosecutor’s Office that were involved in withdrawing funds from TerraBank, which was then chaired by the present governor of the NBU, Kyrylo Shevchenko. However, the investigation of the Prosecutor’s Office in the case of withdrawal of funds came to a dead end.

“Banksters” vs Ukraine-IMF cooperation: only one can stay

Generally speaking, it is clear that bank management in Ukraine does not inspire much confidence on the part of the IMF. A certain video with Ihor Telbizov, head of Ukreximbank’s banking security department, recently exploded on social media. Despite the fact that Telbizov was fired for attacking investigative journalists of the Skhema project, during an interview with the ex-director of Ukreximbank Yevhen Metzger, he was given a standing ovation when he again showed up at the bank.

Ihor Telbizon (foreground) and Yevhen Metzger (in the background) during an assault on Skhemy journalists. Photo: RFE/RL

The attack was strongly condemned by the public and journalists, but it was not the direct reason for Telbizov’s dismissal. The situation looks even more suspicious when we examine the personal relationship between the bank’s ex-director Yevhen Metzger and President Volodymyr Zelenskyy, as well as the active role that Ukreximbank has played in the President’s much-touted “Big Construction” road reconstruction program.

In conclusion, in terms of cooperation with international creditors, there is an urgent need to clean up the banking environment in Ukraine. Persons whose reputation has been tarnished by participation in illegal schemes or by unethical behavior cannot hold high positions in the banking sector or in the national financial regulator (NBU).

Indeed, trust is built over time and can be destroyed in a few days. As long as Ukraine’s relations with the IMF and the overall situation of Ukraine’s banking sector are constantly at the epicenter of scandals, this trust is regularly put to the test.

Translated by: Christine Chraibi
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