Privatization in Ukraine has a chance, but there are mountains to climb
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Opinion

Privatization in Ukraine has a chance, but there are mountains to climb

Although the relative health of some nationalized banks may facilitate their privatization, major obstacles to any sales remain.

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A drastic banking-sector clean-up in the mid 2010s, together with the 2022 invasion of the country by Russia, has left most of Ukraine’s banking sector in state hands. Important elements inside the Ukrainian government, as well as international institutions, are keen for this situation to end – and for good reason, given the need to move towards European market norms.

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Kateryna Rozhkova, National Bank of Ukraine

Speaking at a conference on Ukrainian banking in London this May, first deputy National Bank of Ukraine governor Kateryna Rozhkova lists three top-10 banks as among the most likely to be sold first: Sense Bank (formerly Alfa-Bank Ukraine), Ukrgasbank and Oschadbank.

One senior banker in Ukraine says Sense could be privatized within just six months.

It is the smallest and, perhaps, most ready for privatization as it was very recently privately owned and is relatively well run. Its nationalization after the 2022 invasion was not due to asset quality or corporate governance, but because it was controlled by Ukraine-born Russian-Israeli billionaire Mikhail Fridman.

The key question is, of course, who would buy these banks?

European influence

There are pools of domestic money that fund managers such as Dragon Capital and Horizon Capital could mobilize, and a local buyer is perhaps the most likely scenario, especially for any sales in the near term.

But most of the larger private banks in central and eastern Europe and Ukraine are owned by international groups, partly because those firms often have international expertise as well as relatively deep pockets.

Being part of an established European Union-based groups would be a plus for a Ukrainian bank, given the need to move towards EU regulations as part of the country’s EU candidacy.

EU lenders BNP Paribas, Crédit Agricole, Intesa Sanpaolo and RBI, as well as Hungary's OTP and Polish state bank PKO today all own banks in Ukraine. As these banks cannot repatriate their profits, they have had capital trapped inside Ukraine that could be put to better use.

The direction of travel by western European banks lately has been about simplifying businesses and de-risking

Buying another bank in Ukraine could be a public-relations coup – showing commitment to the country in its time of need. This could be especially useful for a bank such as RBI. Its need to rebalance its business and public perception away from Russia is even more urgent after it had to back out of a deal to transfer value out of Russia this May by buying a stake in Austrian construction company Strabag, which was previously owned by sanctioned oligarch Oleg Deripaska.

The direction of travel by western European banks lately has been more about simplifying their businesses and de-risking by selling banks, especially when it concerns retail operations in smaller and riskier emerging-market economies.

The reality is that it doesn’t get much riskier than Ukraine, especially when there is a good chance of pro-Russia Republicans winning the presidential election in the US this year. Ukraine already appears to be on the backfoot militarily, thanks to wavering US congressional support.

BNPP’s Ukrsibbank is the largest foreign-owned bank in Ukraine after RBI. But the French parent has spent years shrinking its exposure in Ukraine and has recently been selling businesses elsewhere in central and eastern Europe, including in less-risky markets.

Likely buyers

More likely to take a plunge would be banks such as UniCredit, Belgium’s KBC and, perhaps, Erste Bank after the installation of new chief executive Peter Bosek. But they would likely rather buy in safer and more-developed markets such as Romania – where, some whisper, Societe Generale could be selling its local bank, the country’s third biggest – or Poland, where Cerberus Capital Management will soon be looking to sell Velobank, and where Commerzbank could put mBank back up for sale.

Perhaps the foreign bank most likely to deploy further capital and buy another lender in Ukraine would be OTP, which has already bought much of the former SocGen network in the region, as well as a bank in Uzbekistan.

OTP is based in Hungary and is not state-owned. But any association with Hungarian prime minister Vitkor Orbán seems unlikely to go down well in Ukraine, given how friendly he appears to be with Russia.

Poland’s PKO might be better placed in that regard, although the upheaval recently in its top management may not be conducive to big strategic decisions soon.

The Ukrainian government may want bank privatization to progress more slowly than its international partners do. The slow speed of removing foreign-exchange controls might indicate that some in Ukraine have different ideas about the best way to manage its economy.

The domestic state-owned banks have continued to lend since 2022 to a greater extent than the private and internationally owned banks. And, for example, when it comes to PrivatBank (the number one bank by assets, state-owned since 2017), the government might be loath to forgo the large profit pools accumulating on the back of high interest rates.

Add to these factors the prospect of former owners of some state banks – including Sense – continuing to pursue legal action related to their nationalizations, and it looks like privatization in Ukraine will be an uphill battle.

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