Ukraine has a new banking law. On May 21, with much fanfare, president Volodymyr Zelensky finally put his signature on the bill, which had been in the works since last autumn. His supporters, and many of Ukraine’s international backers, hailed it as a big step in the country’s reform process.
So, what is the new law, and why was it so important?
Briefly, it addresses the question of bank resolution, which has been a hot topic in Ukraine since the Maidan revolution of 2014.
In the following three years, more than half of the country’s 180 banks were closed as part of a clean-up of the sector and one – market leader PrivatBank, owned by Ihor Kolomoisky and Gennadiy Bogolyubov – was nationalized.
The new law ensures that none of these decisions can be reversed. It forbids the return of banks to their former shareholders and directs courts to respect the conclusions of the regulator, the National Bank of Ukraine (NBU), in this respect.
It allows for the payment of compensation to former owners but only on the basis of an assessment by international auditors. It also strengthens the hand of the NBU by allowing the regulator to make decisions on insolvency based on its “professional judgement”.
As to why it was needed, the answer lies in the bill’s nickname. Dubbed the 'anti-Kolomoisky law', the new legislation is designed to prevent Ukraine’s most prominent oligarch from regaining ownership of PrivatBank or obtaining compensation for its takeover by the state.
Given that, according to the NBU and US investigators Kroll, Kolomoisky and his associates defrauded the bank – and by extension Ukrainian taxpayers, who had to foot the bill for the bailout – of $5.5 billion, this seems only reasonable.
Nevertheless, in April 2019 a Kyiv district court ruled that the nationalization was illegal. If upheld by the local court of appeal, the ruling would have been disastrous for Ukraine’s international credibility and particularly its relationship with multilateral backers, for whom PrivatBank was a symbol of policymakers’ appetite for reform.
Indeed, the IMF repeatedly delayed the signature of a new agreement with Zelensky’s government last year due to the uncertainty over PrivatBank and concerns about the new president’s links to Kolomoisky.
This was less of an issue for local policymakers in the pre-Covid era, when international investors were happily loading up on Ukrainian sovereign debt. When the pandemic hit, however, it quickly became a matter of urgency to secure multilateral funding.
Ukraine’s GDP contracted by 1.5% in the first quarter of this year, and analysts at local investment bank ICU are predicting a full-year fall of up to 8%. Meanwhile the total external sovereign debt refinancing requirement for 2020 and 2021 stands at a hefty $11.7 billion.
Even under these exceptional circumstances, the IMF made it clear that no cash could be disbursed until the banking bill had been passed.
This seems to have concentrated minds in Kyiv, and the law was pushed through despite strenuous attempts to block it by Kolomoisky’s supporters (including the tabling of more than 16,000 amendments by a handful of parliamentarians – a move that was thwarted by the introduction of an 'anti-spam' law).
Policymakers and analysts are now confident that the first tranche of IMF funding will be received by the end of June. This in turn, it is hoped, will allow Kyiv to unlock financial assistance from other foreign backers such as the World Bank and European Commission, as well as regain access to international capital markets.
The fact that it was necessary to pass this law at all is a shocking indictment of the lack of progress that has been made in tackling Ukraine’s endemic and crippling corruption
Clearly, the banking law was necessary – but did it really represent a big victory for advocates of reform in Ukraine?
In the sense that it forced Zelensky to move decisively against Kolomoisky, the answer is yes – although it would have been more encouraging if he had done so without the IMF and Covid breathing down his neck. (The bill only passed its first reading on March 30.)
Strengthening of the powers of the NBU was also a welcome signal of support for a respected institution that has been on the receiving end of a barrage of media and legal harassment by Kolomoisky and his associates over the last year.
At the same time, the fact that it was necessary to pass this law at all is a shocking indictment of the lack of progress that has been made in tackling Ukraine’s endemic and crippling corruption.
It is now three years since Kroll confirmed the NBU’s contention that Kolomoisky and Bogolyubov robbed PrivatBank blind – a bank, it should be remembered, that held more than a third of Ukrainian retail deposits – yet there has been no move to bring criminal charges against either.
Equally, there has been little attempt by the authorities to recover from their former owners the $10 billion it cost the state to bail out other failed banks over the last six years – which incidentally, pre-Covid, was one of the IMF’s conditions for a new deal with Ukraine.
Still more troubling is what this law – and indeed the whole Privatbank debacle – says about Ukraine’s judicial system.
The fact that Kolomoisky and his associates have been able to secure a series of judgements in their favour in various local Ukrainian courts – including rulings that the hiring of Kroll was illegal – has again highlighted the limitations of a notoriously murky system.
This matters because it is preventing Ukraine from obtaining the investment it desperately needs. Again and again, the number one reason cited by foreign investors for steering clear of Ukraine is the rule of law – or rather the lack of it.
No one wants to buy assets in a country where they could be appropriated overnight by vested interests with the cash and connections to influence the decisions of corrupt local courts.
The new banking law – which could still be overturned by Ukraine’s constitutional court – puts constraints on judges but makes no attempt to tackle the underlying issue.
Until policymakers show a willingness to get to grips with the latter, Ukraine will struggle to gain international credibility.