Ukraine must continue down the path of reforming central bank

Ukraine must continue down the path of reforming central bank
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Ukraine is a nation in transition. In 2004, it endured a revolution. A decade later, Vladimir Putin seized Crimea. Even now, it continues to fight to preserve its territorial integrity and keep eastern Ukraine from falling into Russian hands. Buffeted by these conflicts, Ukraine’s banking system was rocked by crisis.

From the looks of things, Ukraine appears to have turned the page. In large measure, credit for this reversal goes Valeria Gontareva, who until recently served as the governor of Ukraine’s central bank, the National Bank of Ukraine. Earlier this month in her final report to Ukraine’s parliament, Gontareva wrote, “I believe that my mission is fully implemented,” and few disagreed.

Since 2014 when Gontareva started at the central bank, Ukraine’s outlook moved from negative to positive, and its sovereign debt has received a boost in its credit rating. Along the way, Ukraine has implemented a series of economic and legal reforms and rid itself of its failed and failing banks, much to the chagrin of entrenched interests.

By 2017, the era of zombie banks, or financial institutions that had dragged down Ukraine’s economy and stymied growth, was over. At the same time, the country embarked on a path of economic liberalization. The central bank imposed a flexible exchange rate for Ukraine’s currency, the hryvnia, and embraced a more stable monetary policy.

When Gontareva first took the reins of National Bank of Ukraine, chaos ruled. The country was at war with Russia over Crimea. As a result, Ukraine lost 20 percent of its gross domestic product and 30 percent of its foreign investment. Its economy was on the verge of collapse.

Among her first steps, Gontareva, a former investment banker herself, closed 87 ailing banks, and nationalized PrivatBank, Ukraine’s largest lender. Weak banks were given time to recapitalize, and banks that failed to comply were declared insolvent. In the case of PrivatBank, it took $5 billion to help right things for Ukraine’s depositors. Some 20 million Ukrainians now look to the government as their banker.

As a coda, Kroll, the international investigative company, in January concluded that PrivatBank fell victim to a $5.5 billion fraud prior to its nationalization. According to Kroll, the bank was used as a vehicle for a “large-scale money-laundering scheme,” with loan origins and destinations methodically disguised. Also, a shadow bank within the bank embarked on a “recycling scheme” to repay principal and interest on existing insider loans.

On Gontareva’s watch, the National Bank of Ukraine also committed itself to tame inflation. From a peak of more than 60 percent in 2015, inflation now stands at approximately 18 percent. In the course of cleaning up the banking system the National Bank of Ukraine discovered malfeasance that continues to reverberate across Europe. Last December, a British court froze more than $2.5 billion in assets belonging to Ihor Kolomoyskyi and Gennadiy Bogolyubov, who were among the bank’s shareholders. Their names have also surfaced in the Paradise Papers.

In addition to Kolomoyskyi and Bogolyubov, some of the biggest players in Ukrainian business reportedly still owe money to the National Bank of Ukraine, including Dmytro Firtash and Leonid Klimov, according to Gontareva. Ironically, Klimov is a member of Ukraine’s parliament and a member of its finance and banking committee, a fact noted by Gontareva in her final report about the National Bank of Ukraine.

As for Firtash, he is presently facing extradition from Austria to the United States, where he is criminally charged for allegedly attempting to bribe India for mining contracts. Firtash was once targeted by human rights groups to be sanctioned under the Magnitsky Act, a law designed to punish people involved in major corruption and human rights violations.

Practically speaking, the Trump administration has applied the Magnitsky Act to both categories of violators, including Sergey Kusiuk, a former Ukrainian police commander who directed the attack of peaceful protesters, and to Artem Chayka of Russia, who used his position of privilege to essentially extort noncompetitive contracts. Past sanctions present a template for future actions by the U.S. government.

While in office, Gontareva angered the powerful and paid a price for it. She received death threats including a coffin, with an effigy of her own corpse inside, placed in front of the National Bank of Ukraine. As the Washington Post framed things, “She fixed Ukraine’s economy — and was run out of her job by death threats.”

Gontareva’s tenure will be remembered for a job well done. Ultimately, how well her handiwork endures remains the test for Ukraine.

Lloyd Green was the opposition research counsel to the George H.W. Bush campaign in 1988 and later served in the U.S. Department of Justice.