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Wednesday, September 18

Burning of Gontareva Home Wakes Up Westernizers...Many Fear Kolomoisky’s Hands Are Reaching for Levers of Economic Power...PM Flip Flops on PrivatBank Talks...Chorus of Commentators Criticize...Ze May Try to Ride Out on His Polls
James Brooke
by James Brooke
UBN Morning News is reported and written by James Brooke, a former New York Times foreign correspondent and Bloomberg Moscow Bureau Chief

Tuesday’s arson attack on the Kyiv region home of the former head of the central bank is prompting a strong backlash from Westernizers worried that the Zelenskiy administration will fail to fulfill promises to provide impartial justice. In the pre-dawn hours of Tuesday, a man wearing a balaclava threw flammable materials than a flare into the suburban home of Valeria Gontareva, who lives in London. The empty house was gutted.  The attack followed one month of setbacks for Gontareva: a car ran over her foot in London, her family car was destroyed in an arson attack in Kyiv, masked raiders claiming to be police raided her Kyiv apartment.

“This is no longer a series of incidents, it is TERROR,” the National Bank of Ukraine posted in a statement. “Its purpose is to intimidate reformers, past and present, to paralyze our activities, to make us silent. We will not be silent.” Gontareva became central bank governor in June 2014, at the start of the nation’s banking crisis. By the time she stepped down three years later, she had declared 87 Ukrainian banks insolvent, about half the total.

“The banking sector reform has been the most successful reform in Ukraine,” VoxUkraine, an influential free market economic group, writes in an online petition. “The Privatbank case was the pivotal case of the entire banking sector reform,” Vox said, referring to the Dec. 2016 nationalization of a bank with a $5.5 billion hole in its books left by an ownership group led by Ihor Kolomoisky. “Almost any genuine reform in Ukraine implies stepping on oligarchs’ toes or touching vested interests. The new President and the government have to very clearly show that their primary interest is equal rules for everyone, the well-being of the country and its every citizen, and not of just some influential persons.”

In a display of solidarity, Jeffrey Okamoto, Acting US Deputy Secretary of the Treasury, met Tuesday at the central bank with Gontareva’s successor, bank governor Jacob Smoliy. “The parties consider that the independence of the NBU is extremely important for Ukraine’s financial stability and its attractiveness to foreign investors,” the US Embassy tweeted later.

While protests come from G-7 ambassadors and foreign business chambers, concerns grow that Kolomoisky is fast expanding his influence in the government. Last spring, he was the primary media backer of  Zelenskiy, the candidate. One of his lawyers, Andriy Bohdan now is Zelenskiy’s chief of staff. Three of his former journalists are now members of the Rada. One, Oleksandr Dubinsky, now heads a commission that will control board appointments to state-owned banks, including PrivatBank. Last Tuesday, Kolomoisky went to the presidential office, meeting with Zelenskiy, Bohdan and Prime Minister Oleskiy Honcharuk. The next day, police in Dnipro, Kolomoisky’s home city, raided the national headquarters of Privat Bank.

On Friday, Kolomoisky made a surprise appearance Yalta European Strategy forum in Kyiv. The oligarch who claims to have filed 600 lawsuits against PrivatBank’s nationalization told reporters:“There is a good window of opportunity today…This dispute is easier to resolve today than under the previous president.”

Over the weekend, Prime Minister Honcharuk told the Financial Times that Kyiv is seeking a “compromise,” adding: “Whatever solution we find, we have to find it together with the IMF.”  He said Zelenskiy and Bohdan, both former employees of Kolomoisky, are taking the lead on the PrivatBank issue. On Tuesday, Honcharuk backtracked, saying his words were taken out of context and that the Zelenskiy administration is not negotiating a deal with Kolomoisky. But later, Kolomoisky told Reuters: “Honcharuk is the first smart prime minister in recent times. He understands that there must be a compromise.”

If PrivatBank, the nation’s largest bank, was too big to fail three years ago, the $5.5 billion bailout, 4% of Ukraine’s GDP today, is too big to reverse today. Reuters writes: “The International Monetary Fund may freeze aid if the nationalisation is reversed.” In contrast to the mountain of nonperforming loans wracked up by the insider loan practices of the previous owners, the bank reports a net profit of $1 billion for the first eight months of this year, almost three times the level of last year. Petr Krumphanzl, a Czech, has been board chairman since Jan. 2018.

Western press reaction is negative.

A re-privatization “scenario would risk spooking foreign investors who’ve so far welcomed Zelenskiy’s reformist agenda,” writes Bloomberg. “It could also sink the prospect of a $5 billion loan from the International Monetary Fund, which had pushed for the nationalization.”

“The optics are terrible,” Melinda Haring writes for the Atlantic Council. “Zelenskyy needs to maintain the appearance of fighting the oligarchs…if the new administration wanted to reassure the IMF and the West, this was exactly the wrong way to do it.”

Dragon Capital writes: “A scenario has been mooted of offsetting the Privatbank ex-shareholders’ obligations to the state against a possible state compensation. However, any such “compromise” risks undermining cooperation with Ukraine’s western creditors.”

Concorde Capital’s Alexander Paraschiy writes: “The IMF and other partners of Ukraine are unlikely to tolerate other “compromises,” in our view. So far, we do not see a simple solution to the Privatbank case that could satisfy both the former owners and IFIs.”

Ihor Mazepa, owner of Concorde Capital, tells Bloomberg: “There’s a consensus among investors that the government is doing a lot of good things…But any wrong decisions on Privatbank would erase that positive effect very quickly.”

Timothy Ash writes from London: “What is there to discuss? The bank was nationalized, and as is right and proper, the National Bank of Ukraine and Ministry of Finance are pursuing former owners for the losses incurred by the state, which were 5% of GDP. How about discussing with foreign partners the attacks and intimidation of proven reformers?”

As for President Zelenskiy, he has ordered the State Security Service to join police in investigating the arson of Gontareva’s house, located 25 km west of downtown Kyiv.

The President may be calculating that national elections are years away and his poll rating are sky high. According to a poll of 2,000 respondents completed one week ago, the President is the most trusted ‘government of public institution’, registering 79% support. In the poll conducted by the Razumkov Center for Economic and Political Studies, the President’s performance is positively rated by 70% of respondent. Only 9% give him poor marks.

From the Editor Talking to many readers at the YES conference, I realize that some of UBN’s new features are not well known. The UBN is now in English, Ukrainian, Russian and German. Highlight one of the little language flags on the upper right hand corner of the home page. The UBN is fully searchable. Use the magnifying glass, also on the on the upper right hand corner of the home page. Colleague Li Luo tweets the headlines every morning: https://twitter.com/the_UBN Follow us! Best regards, Jim Brooke jbrooke@ubn.news.