Ukrainian MPs are demanding the dismissal of the management and changes in the scope of responsibility of the central bank of Ukraine.
The bank’s governor is sending notifications to the security service and the prosecutor’s office, accusing the MPs of acting to the detriment of the state. Valeria Gontareva, who was appointed as the head of the National Bank of Ukraine (NBU) in the autumn of 2014, was previously the CEO of the Investment Capital Ukraine (ICU), the company handling President’s Petro Poroshenko’s investments. She is accused of causing the gigantic devaluation of the hryvnia and the wave of bank failures which took away half of the citizens’ savings and ruined thousands of companies.
The ISD vs. the ICU
A renewed debate on the quality of her work was sparked by the publication of the report entitled “Gontareva: A threat to the economic security of Ukraine” prepared by Serhiy Taruta, the head of the Industrial Union of Donbass (ISD) and also a member of the Ukrainian Parliament. The document was initially handed out to the participants of the IMF and the World Bank forum organized in October in Washington, D.C. (IMF – World Bank Annual Meetings, 2016), and later distributed in the Ukrainian Parliament.
The document contains, among others, allegations that Gontareva’s company ICU participated in the financing of the Russian businesses of the Roshen corporation belonging to Poroshenko, allegations that the influence of Russian banks in the Ukrainian economy increased during the time when Gontareva served as the governor of the central bank (according to the authors of the report, as a result of the activities of the NBU their participation in the Ukrainian banking sector has increased from 12 per cent in 2014 to 40 per cent in 2016, which constitutes a threat to the security of the state), allegations of links between the management of the company ICU and the Russian Bank VTB and claims that public money was being siphoned-off from the state budget through currency speculation.
The NBU strikes back
The central bank filed a request for the prosecution of the authors of the report to the Security Service of Ukraine, the Public Prosecutor’s Office and the National Anti-Corruption Bureau of Ukraine.
“The brochure which was distributed personally by Serhiy Taruta is a collection of false information and unsubstantiated allegations of corruption, destroying the banking system and creating a threat to the economic security of Ukraine, directed against a public official. It is obvious that the objective of those who distributed the above-mentioned material at a meeting of the member states of the IMF and the World Bank was a deliberate attempt to discredit the activities of the head of the central bank, interfere with the performance of her professional duties and to negatively affect her activities in this way. Such action should be punished.” “Unfortunately, some of our domestic oligarchs do not want to contribute to the development and prosperity of Ukraine. They are concerned about their own greedy interests thwarted by the central bank, which shut down the “vacuum cleaner” banks that they used for decades to finance their own business and siphon-off billions of hryvnias from the country’s economy. Therefore, instead of constructive dialogue with foreign partners and friends of Ukraine they choose the path of innuendo and dirty provocation, and they are shameless enough to distribute the false material even at the meeting of the IMF,” said Natalia Gontareva in an official statement of the NBU.
Economists are pointing out the errors
“The criticism of the governor of the NBU is fair. There are three criteria used when assessing the work of the head of the central bank. The first is the stability of the national currency exchange rate. The second is the availability of credit, that is, the interest rates at which the industry or the agricultural sector can take out loans. The third is the confidence in the banking system as a whole. According to international assessments, the Ukrainian banking system is the worst in the world. You can take a loan in the hryvnia with an interest rate of 25 per cent annually and more, which means that real production cannot be credited. And we can see what is happening with the exchange rate of the hryvnia. If we were to take into account all these criteria, the assessment of the work of the NBU’s head would be exclusively negative,” commented the chairman of the Committee of Economists of Ukraine, Andriy Novak.
The actions of the Ukrainian central bank were also criticized by Stanislav Arzhevitin, the head of the banking department of the Kyiv National Economic University.
“The double standards of monetary policy, its dependence on the IMF’s demands, the credit crisis, the demonetization of the real economy sector and permanent shocks in the banking system force us to wonder whether the central bank has any strategic approach and how well thought-out and effective its positions are in the negotiations with the IMF,” he wrote (the full text is available here). In his opinion, the long-term depression that Ukraine plunged into requires a change in the monetary policy carried out by the central bank.
According to Arzhevitin, the provisions of the memorandum with the IMF negotiated by the NBU are structured in such a way that Ukraine, “cannot in fact use its own monetary policy to stimulate domestic lending to the economy, export production, the filling of the internal market with goods and services and, finally, economic and employment growth.” In his view this could lead to the freezing of the Ukrainian economy at the crisis level.
Gontareva was defended by Volodymyr Lavrenchuk, the CEO of the Austrian-owned Raiffeisen Bank Aval. “I believe that the central bank currently has the best experts in the field of banking activities, and their managerial experience, especially over the last 18 months, is extremely valuable and unique. I would like to protect it. In our common interest,” commented Lavrenchuk.
The head of the NBU also received support from Marie Yovanovitch, the US ambassador in Kiev. “Terrific meeting with Governor Gontareva today. I strongly support her efforts to clean up the Ukrainian banking sector,” she wrote on Twitter.
Conflict with the parliament
At the beginning of October the parliamentary Committee on Financial Policy and Banking issued a notification to the President, the Prosecutor’s Office and the National Anti-Corruption Bureau of Ukraine (NABU), accusing Gontareva of torpedoing its activities by refusing to participate in its works and provide clarifications on the policy of the central bank.
“The development of each company and the economy as a whole depends on the activities of the NBU. All the members of our Committee are convinced: both the Committee and the general public should learn about all the important details of the NBU’s activity,” commented the chairman of the Committee, Serhiy Rybalka, in an interview with the government news agency Ukrinform.
At the end of October the State Commission for Securities and the Stock Market of Ukraine punished the largest Ukrainian state-owned bank, Oschadbank, for manipulations in the trade in government bonds conducted in 2014.
According to the statement of the Commission, “individual operations of the purchase and sale of bonds, which were concluded with the participation of Oschadbank, have certain features of price manipulation: the contracts were often concluded within one day, with a slight difference of minutes, for the same quantity of securities, and at the end of the day the owner of the securities did not change. All this indicates the lack of obvious economic reason for such operations from the point of view of Oschadbank, which traded in the securities.”
A group of MPs has announced the submission of motions to dismiss Gontareva from the position of the head of the central bank and the establishment of a parliamentary commission to investigate the activities of NBU’s management.
Will there be changes in the constitution?
On October, draft amendments to the constitution were submitted in the parliament, aimed at extending the scope of responsibilities of the central bank. In accordance with the proposed changes, the NBU, which is currently constitutionally responsible only for ensuring the stability of the national currency, would have the responsibility to, “develop and conduct monetary and credit policy oriented towards the realization of the potential of long-term economic development of the country, secure the price and exchange rate stability of the national currency, a moderate level of long-term interest rates and encourage the maximum level of employment of the population,” According to the authors of the proposed changes, their adoption, “will raise the level of responsibility, stability and efficiency in the activities of the National Bank of Ukraine, as well as improve its cooperation with the government.”
A measure of trust: millions under the mattress
At the end of October, the dispute concerning the NBU was unexpectedly summed up by the Ukrainian politicians, who were forced by the West to submit declarations of assets available for inspection by the citizens. From the declaration of the Prime Minister Volodymyr Groysman it follows that he holds savings of nearly USD1.5m in cash, and ten times less in bank accounts. Ruslan Demchak, the deputy head of the parliamentary Committee on Financial Policy and Banking, revealed that he holds UAH133m (more than USD5m) in his closet. That is at least 250 kilograms of banknotes.
In Ukraine it is noted that such a low level of trust in the domestic banking system presented by key politicians is the best illustration of its present condition, and at the same time the best review of the activities of the central bank supervising it.
According to the Minister of Justice Pavlo Petrenko, holding savings in cash is “uncivilized”.
“But for Ukraine, which lost 80 banks within a few years and in which half of the citizens lost their savings, this is reality for now. I hope that in some time the banks in the country will become stable and it will be possible to keep your savings there,” said Petrenko in an attempt to explain the behavior of his colleagues.