Privatbank

http://euromaidanpress.com/2016/12/29/nationalization-of-privatbank-a-promising-chapter-in-ukrainian-reforms/#arvlbdata

Article by: Dirk Mattheisen

The nationalization on December 18 of Privatbank, Ukraine’s largest bank by assets, opens a new and promising chapter in the reform of Ukraine.

Privatbank’s nationalization due to a slow boiling insolvency crisis that threatened to undermine Ukraine’s financial system was a necessary and overdue measure to stabilize Ukraine’s financial system given the size of Privatbank, which holds about 20% (or US$10.3 b) of Ukraine’s banking assets, even if it’s recapitalization puts additional pressure on the national budget. The cost to the state of nationalization will be partially offset through a “bail-in” of bondholders, but the principal burden will still fall on taxpayers.

Read more: Nationalization of PrivatBank, Ukraine’s largest bank, explained

The public guarantee of Privatbank’s deposits, amounting to about a third of total Ukrainian deposits, was also necessary to prevent a run on the bank. The other two systemically important banks identified by the Ukrainian Treasury–Oschadbank and Ukreximbank–are already government owned.

Privatbank, though, highlights as almost nothing else can, the depth of financial and economic mismanagement and corruption by Ukraine’s old guard political and business elite that reformers in the current government are struggling to uproot.

As detailed in several blistering articles in BNE Intellinews (including here and here), Privatbank’s owners, oligarchs Ihor Kolomoyskyi and Hennadiy Boholyubov, used the bank, as BNE describes it, to “vacuum up” ordinary Ukrainian’s savings and use those savings as collateral to obtain loans for themselves and other closely related parties. BNE reports,

“The National Bank of Ukraine (NBU) found that a massive 97% of the bank’s loans had been made to shell companies, many of them offshore, that are believed to be owned by the bank’s oligarch owners.” BNE estimates that “around 90% of the Privatbank loan book comprises loans to related parties, mostly shell firms linked to the [Kolomoisky’s] fuel trading business.”

Much of the money that left Privatbank was transferred overseas, enabled by correspondent banks in Austria and Luxemburg, as well as intermediaries in Cyprus and shell companies in the UK. Without the help of institutions and individuals in developed countries, the drain on the Ukrainian financial system could not have taken place, once again highlighting the role of the developed world in enabling corruption in the developing world. The offshore correspondent banks were often not shady fly-by-night financial institutions, but venerable banks, such as the Vienna’s Bank Winter that has operated as a private wealth management bank since 1892. How the scheme to transfer Ukrainian wealth offshore worked is worth quoting from BNE;

“The back-to-back funding scheme worked thus: Ukrainian banks placed depositors’ funds with the Alpine banks, and the Ukrainian bank shareholders received loans from the Alpine banks using their depositors’ funds as collateral. The shareholders then used at least part of these loans to recapitalize their banks, another part they simply moved offshore.

There is no reason to believe that PrivatBank’s arrangement with the niche Alpine banks was any different to that of around a dozen smaller brethren. Since 2011 up to 10 Ukrainian banks were reportedly involved in a scheme of siphoning of assets, where money was said to be unlawfully withdrawn by the owners and/or insiders of the insolvent Ukrainian banks through correspondent accounts of different banks incorporated in EU.”

What is extraordinary is that Ukraine may never recover the domestic or foreign-held money because it does not have adequate fiduciary laws and enforcement resources to protect savers from the likes of Kolomoyskyi and Bolholyubov.

With the nationalization of Privatbank, and the closure of over 80 smaller banks over the last couple of years by the National Bank of Ukraine (NBU), as well as tightening of regulations and oversight, led by reformist head Valeriya Hontareva, Ukraine has taken a major step in reforming its financial sector and ensuring its stability. Governance problems remain, including that the four largest banks are now government owned, limiting the opportunity to diversify the financial system and invigorate private sector investment. The four largest banks have assets of about US$25.5 bn and account for about half the banking sector. Ukraine is reported to intend to re-privatize Privatbank but privatization of any government-owned bank may be a long way off. The largest private bank, Raiffeisen Bank Aval, has a capitalization of only US$1.9 bn —a fifth that of Privatbank — so how to generate sufficient private capital to invest in banking is unclear.

Through schemes such as Privatbank, economic mismanagement and, most importantly, rampant corruption, had catastrophic consequences for the Ukrainian economy and for the Ukrainian people. The control of Ukraine’s financial resources by a small number of individuals, who offshored the gains and invested only to their own business interests limited productive investment in Ukraine and distorted the efficient allocation of capital to the advantage of those few individuals who reaped a disproportionate share of any economic gains. In other words, they stole it.

Ukrainian 2016 nominal GDP per capita is less than a quarter of Russia’s, and a sixth of Poland’s, which is roughly comparable to Ukraine in terms of economic potential. There is no economic basis for Ukraine’s poverty other than pervasive corruption such as that practiced by Privatbank.

To be sure, Russian aggression and economic interference have had a devastating impact as well but, in Ukraine’s first 25 years of independence, mismanagement and the capture and transfer of wealth out of Ukraine on the scale seen with Privatbank has been the primary impediment to sustainable economic growth and the distribution of economic benefits to the people of Ukraine. The local criminal with his hand in Ukrainians’ pockets has been more destructive than the neighboring criminal with a gun to Ukraine’s head.

Over the last two years, President Porochenko has delivered stability and the necessary reforms to keep the essential IMF support program from slipping off the rails, but the outlook is shaky for the 2018 elections because he and many others have one foot still lodged in the old school, pre-Maidan oligarch economy.

Rosneft--Strategic Genius Or Shell Game?

Photo Credit

Two versions of the surprising and murky Rosneft deal, one 😋 pro (Rosneft's Triumph) and one 😖 con (The Story That Russia Does Not Want You To See)--strategic genius or shell game?

Either way, the complexity and lack of transparency of the convoluted Rosneft deal, which is key to meeting Russia's budget target this year and to Russia's privatization program, strongly suggest economic reform is captive to Russia's political sclerosis and, therefore, economic growth is an ever more distant prospect.  😔

Putin's Long Descent (Post 2)

Photo Credit: Euromaidan Press

Having written my last post on "Putin's Long Descent", Foreign Policy has an excellent article this week by Mark Galeotti, visiting fellow with the European Council on Foreign Relations, that makes the same point that Putin's tactical successes are not translating into strategic gains, including that,

"The Russian president’s tactical instincts for how to seize an opportunity are so brilliant, and yet the strategic outcomes are almost invariably disastrous."

 and

"The Kremlin’s problem, among others, is that Putin the Opportunist is consumed by the moment. He is focused on what he can accomplish tomorrow, without necessarily thinking through to what the consequences may be the day after. He also too easily assumes that he will remain in control of what he started..."

The Foreign Policy article rightly points out that, in my words, Putin's successes are not victories and they cost more than they are worth.  There is a pattern here.  Putin’s tactical successes to date do not translate into strategic gains due to his penchant for miscalculation.  (Putin's Long Descent)

Putin’s Long Descent

Photo Credit:  Euromaidan Press

As airstrikes resume in Aleppo after a brief pause, Putin seems to be on the verge of another tactical success and to hold the fate of Aleppo in his hands.  Yet Putin would have preferred that Syrian forces had already taken Aleppo.  Syrian forces, Iranian Guards and Hezbollah fighters have failed to sew up a clear win over tenacious rebel forces.  In addition, even if Aleppo now falls, Russia will pay a high price for success because it will require carpet-bombing reminiscent of Putin’s conquest of Grozny during the second Chechen war.  The West is already united in condemning Russia’s barbarism in Syria and further brutality will have unpredictable consequences for Russia (even if the EU failed at its meeting on October 20 to threaten sanctions).

In fact, Putin finds himself where he has been before.

His successes are not victories and they cost more than they are worth.  There is a pattern here. Putin’s tactical successes to date do not translate into strategic gains due to his penchant for miscalculation.  Consider each of Putin’s supposed successes.

Putin hoped to gather a new pan-Russian world under an Eurasian Economic Union, for which Ukraine was key.  He attempted to maneuver former Ukrainian President Yanukovych into keeping Ukraine under Russian suzerainty, including through bribes, threats and subversion of state institutions, especially the military and security services.  Not only did Putin misjudge the resistance and strength of civil society in Ukraine, his actions strengthened resistance to Russian dominance across all the former Soviet Republics. 

Putin attempted to base Russian economic power on rents from resource extraction and a corrupt keptocracy, but he misunderstood what drives a dynamic economy.  GDP growth slowed due to lack of investment and poor governance.  Russia then plunged into economic crisis when commodity prices collapsed in 2014 and sanctions were imposed on Russia for the seizure of Crimea and invasion of eastern Ukraine.  GDP feel 3.7% in 2015 and is expected to fall 1% in 2016.  Russia is currently running a budget deficit that may reach or exceed 4% this year, putting an enormous strain on social spending, including all-important public sector salaries and pensions upon which a large share of the population depends and upon which his support is based.  Even the modernization program for the military, with which Putin hopes to project Russian power, is subject to budget cuts.  GDP growth is projected to be nearly stagnant into the foreseeable future, without deep economic and governance reforms, and the Russian Economic Ministry projects no change in Russians’ living standard before 2035.

Reputedly, when deciding to seize Crimea, Putin asked his advisors if Russia could weather a year of adverse international reaction.  Putin mistakenly believed that the West was so dependent on Russian energy and so weakened by economic and political disarray--encouraged in part by Russia--that it could not sustain diplomatic opposition to Russia’s land grab for longer.  Putin appears not to have anticipated the scale of sanctions that were imposed by the US and the EU.  Nearly three years later, international isolation and the prospect of continuing sanctions looks only stronger due to lack of progress on a settlement in eastern Ukraine and events in Syria.  Meanwhile, Russia continues to bleed resources to sustain Crimea and Russian-backed eastern Ukraine, as well as conduct military operations in Syria.

Buoyed by the first flush of success when seizing Crimea, Putin attempted to take control of the east and south of Ukraine through Odesa to the Moldovan border, calling it “Novorossiya.”  The people did not rally to Russia as expected, and Russian provocateurs and local agents who attempted to seize control of the region were overwhelmed.  Russia had to send in “unmarked” regular troops and armor to stop the Ukrainian military advance in eastern Ukraine.  The price in dead Russians and diplomatic fallout became too high and Putin was beaten to a standstill.  During the course of the conflict, Russia and/or its proxies committed an act of international terrorism by shooting down a civilian aircraft, MH17, killing nearly 300 persons.  A Dutch-led investigation released in September 2016 confirmed Russian involvement and the identification, and possible prosecution, of guilty Russian military and political leaders is expected in the future. 

Putin pivoted to Syria, looking for new leverage over the West.  In Syria, Putin believed he had seized the initiative from a feeble EU and American response to the crisis, while avoiding an Afghanistan-like quagmire by relying solely on airpower to support the Syrian army, Iranian Guards and Hezbollah fighters.  And, indeed, the West looked flatfooted and outmaneuvered.  But the Syrian army proved unable to make the gains that Russia expected.  Russian Special Forces and “irregulars”, as well as barbaric methods, had to be added to sustain gains.  Putin was compelled to add support for a campaign to take Aleppo.  As of this writing, the combined pro-government forces have yet to take the city.  In the meantime, the brutality of the campaign has alienated the EU, which condemned Russian supported bombing and threatened prosecutions for war crimes.  Rather than gaining leverage over the West, Russia finds itself even more isolated. 

Meanwhile, Russian hacking of the Democratic National Committee (DNC) and others is disruptive but has given the US new resolve to confront unconventional Russian interference and aggression.  The US has promised a firm and unmistakable response.  Ecuador cut Julian Assange, the Wikileaks founder who is believed to be working hand-in-hand with Russia, off from the Internet on suspicion of interfering in the US election, and the Russian news service, RT, accused of propaganda, had its bank accounts frozen in the UK.  If Russia had hoped to undermine Hillary Clinton’s presidential campaign, it failed miserably.  Russia’s capacity to be disruptive will now be confronted by firm US and European counter-measures.

Even if one steps back and looks at Putin’s probable strategic objective of a West too weak and in disarray to counter Russia’s interests, it is not clear Putin is making any headway.  Discord in Europe is the result of homegrown political mismanagement and of events elsewhere, such as Syria, that Putin can only hope to exploit but not control.  Even where Russia has had an outsized influence, such as using illicit money and offshore financial centers to corrupt Western elites, the window is closing after numerous revelations, including the Panama Papers and Spanish indictments of Russian mobsters and serving political figures.  Everyone is now alert to Russia’s corrosive influence.  That elites can be corrupted or that institutions can be undermined is not an insight that Putin alone has.  Europe and the US understand it also and can be effective in confronting it.  In short, what the Soviet Union could not do, Russia cannot do either.  Although Putin has managed to elevate Russia’s profile on the international stage, its standing is fragile because Russia’s role is seen as more disruptive than constructive.

Putin may deflect, feint, cut his loses, and pivot to a new provocation to distract from his failure to translate tactical successes into strategic gains, but the costs are mounting and his opportunities are narrowing.  Fundamentally, Putin cannot overturn global leadership on the foundation of political deceit and corruption, nor on militant nationalism.  Lack of political credibility and corruption through which Putin hopes to undermine the West are more deeply rooted in Russia.  And militant nationalism—especially if based on ethnicity--is a formula for catastrophe, whether in Nazi Germany, post-Yugoslavia Serbia or contemporary Russia.

Although it has been touched on by policy analysts at times, Putin’s personality is an underestimated weakness that contributes to his penchant for miscalculation.  Putin is not fully aware of how the most human of qualities, “empathy”, informs judgment and, therefore, he does not understand how it affects political decisions.  Much like Benedict Cumberbatch’s Sherlock Holmes character in the hit series “Sherlock,” Putin is oblivious to societal norms because he is a “high-functioning sociopath.”   He recognizes societal norms based on empathy, such as aversion to doing harm and sympathy for those who suffer or are less fortunate, but he does not feel it, and because he doesn’t feel it he is suspicious and contemptuous of it.  He personally expresses little sympathy and evidences no effort to comfort those who suffer in Donbas or for the horror in Syria or the increasingly difficult circumstances of the Russian people, except at the abstract level of strategic policy when he condemns the actions of others that he perceives are directed against Russian power.  Putin perceives Western leaders' concern for the impact of their actions on people as weakness.

Putin is not only indifferent to causing harm, he is personally culpable.  Putin is strongly implicated in “terrorist” attacks that killed hundreds of Russian citizens in 1999 that propelled him into the Presidency on a law and order platform.   Military and security services under his command are also implicated in provocations in 1999 that launched the second Chechen war that killed tens of thousands.  Putin is believed to be responsible for the deaths of countless opponents, including investigative journalist Anna Politkovskaya and whistleblower Alexander Litvinenko whom a British Public Inquiry concluded had been murdered on orders by Putin personally.  The imprisonment--and torture--in Russia of numerous Ukrainian citizens, including Ukrainian pilot, Nadiya Savchenko, could not occur without Putin’s concurrence.  There are no checks on Putin’s behavior and deaths of ordinary Russians, opponents, and citizens of other countries, do not bother him and so are not part of his calculus of risk.

With less room to maneuver and an increasingly fragile base on which to support his actions, Putin will attempt further aggression.  His current bluster in Syria, moving missiles closer to the EU, and invading Finnish airspace may be carefully calibrated to convey threat without risking direct confrontation, but Putin’s hubris and inability to empathize mean that he will overreach yet again, and at some point his luck will collide with his penchant for miscalculation, and he will experience a categorical tactical failure.  At that point, rather than be unmasked as fallible, Putin will attempt to reverse his failure, possibly up to and including through a tactical nuclear “event” (not necessarily, but possibly, involving an actual limited strike). With the smoke and mirrors removed, Putin will be revealed to be, like Stalin, a plague on Russia and the world.

Putin's Attempt to Delegitimize a Revolution (Paul Niland, KyivPost)

photo credit

Paul Niland is a blogger (Twitter @PaulNiland) and regular contributor to the KyivPost, a Ukrainian English-language newspaper.

He writes with exceptional clarity in an objective, fact-based manner on the Ukrainian reform process and Ukraine's continuing democratization.

His latest article responds to remarks by Russian President Putin that badly mischaracterize Ukraine's recent history and the status of the Minsk agreement.  The article is essential reading for those that are too easily misled by Russian misinformation and propaganda; particularly those in the Western press who frequently fail to challenge Putin's false narrative about events in Ukraine.

The article can be read here:

Putin's Attempt to Delegitimize a Revolution

Paul has also provided a definitive narrative on Ukraine's Maidan Revolution and subsequent events that should be required reading for informed reporting on Ukraine.

The Way Forward For Ukraine (Part 3)

Euromaidan Revolution Myth and Reality (Part 2)

What Has Changed In Ukraine Post-Yanukovych (Part 1)

and

The Will Of The People?

The Curious Case of Benjamin Russia

http://euromaidanpress.com/2016/04/18/91786/

At his annual phone-in event with the Russian people on April 14, President Putin struck an optimistic note and projected that Russian GDP would contract by only -0.3% in 2016 and would grow 1.4% in 2017. Only days earlier, the IMF released its World Economic Outlook report and projected a fall in Russian GDP in 2016 of -1.8%, growth of 0.8% in 2017, and growth of 1.5% through 2021.

Russia’s economic growth is really two problems.  It has to return to growth and it has to keep up with other countries in order not to fall behind economically.  If Russia does not grow and if it does not grow as fast as other countries, Russia will, in a curious reversal, grow less developed because investment will be insufficient to renew its aging economic infrastructure.  Oil and gas, for  instance, will require massive investment to maintain production and to exploit more difficult fields.  Russia must attract new investment that is used productively.  That said, let’s see how Russia is doing based on comparisons using the IMF’s latest data.

One comparison is how Russia is doing in relation to the Commonwealth of Independent States (CIS), the collection of countries that were once part of the Soviet Union.  According to the IMF, the “CIS-minus-Russia” is expected to grow by 0.9% in 2016, 2.3% in 2017 and 4.2% by 2021.  In its own backyard, Russia is expected to be a laggard.  In fact, from 2017 when Russia hopes to return to growth through 2021 the IMF expects Russia to be the worst performer among CIS countries, with the exception of Belarus (which seems unfair since Belarus doesn’t have oil or gas, didn’t support Russia’s annexation of Crimea or invasion of eastern Ukraine, and has nothing to do with Syria—but economics is unforgiving).

 

Another comparison might be the IMF’s Emerging and Developing Europe (EDEU) group, including such struggling countries as Kosovo and Serbia, but also Hungary and Poland.  Here, Russia fairs worse.  EDE is expected to grow by 3.5% in 2016 and by 3.3% thereafter through 2021, more than twice as fast as Russia.

 Still another comparison might be with the European Union, that body of Western democracies that Putin believes is on the verge of economic collapse and whose collapse he earnestly promotes.  There is little comfort in the projections though.  The IMF expects the EU to grow about 1.8% from 2016 through 2021.  Even by 2021, the IMF does not expect Russia to catch up with Putin’s enfeebled European Union.  Although Russia and the EU’s growth rates converge, with the EU growing slightly faster, it is not the company Putin hoped to keep.

How about comparison with the states where Russia maintains Russian-separatist enclaves, Georgia, Ukraine and Moldova?  Again, things don’t look so good.  The three states are expected to average growth of 1.5% in 2016, 3.2% in 2017 and 4.3% by 2021, nearly three times as fast as Russia.  So much for economic subjugation through conquest.

 Perhaps further afield, among the BRICS?  As a group, the “BRICS-minus-Russia” (Turkey added separately for interest) are projected to grow at 2.7% in 2016, 3.7% in 2017 and 4.3% by 2021.  Even beleaguered South Africa manages to outpace Russia by a large margin.   Only Brazil does worse, declining -3.8% this year and next, although by 2021 Brazil is projected to also overtake Russia by a wide margin.  Brazil, as a fellow underperformer, should give Putin pause.  Racked by corruption and economic mismanagement, as of this writing Brazil is set to impeach its President, herself like Putin an old communist apparatchik.  In fact, as described by the Financial Times, plans to reform Brazil’s economy sound a lot like what Russia needs.   The Times quotes Brazil’s Vice President Temer as saying, “What’s needed is tighter fiscal policy, lower interest rates, a weak currency, and eventually structural reforms to raise savings and investment.”  The other underperformer, South Africa, although it outperforms Russia, suffered the same political crisis as Brazil, with its President Zuma narrowly escaping impeachment.  Economically speaking--as a BRIC in economic crisis--Russia sits in the uncomfortable company of South Africa and Brazil, an association Putin should find politically uncomfortable.

As bad as it looks, it is probably worse.  Not only does Russia perform poorly against comparator groups, it is likely to do worse than the IMF projects.  The problem is not oil or sanctions, although these make the situation more difficult.  The problem is that growth in Russia was falling for years before the fall in oil prices in 2014 and the imposition of sanctions.  Already in 2013, Russian growth had fallen to 1.3% because of lack of investment.  In 2014 and 2015 investment fell steeply.  This suggests that Russia will struggle to achieve growth of even 1.3%--if it is even possible--for the foreseeable future because there is nothing to drive a reversal in declining investment.  Without undertaking reform measures recommended by the IMF or, for that matter, by Alexei Kudrin, Russia will fall short of the IMF’s 2017-2021 projection and be that much more behind its comparators.

Put it all together and the chart to the left is how the IMF expects Russia to compare in 2021.  For a country that aspires to be a great nation and to lead an alternative international world order to the democratic West, this is not the path to power or to greatness.  It is the path of growth in reverse to lesser and lesser significance, if Russia does not correct course.  Like the character in the film The Curious Case of Benjamin Button, Russia may find itself regressing to a less developed state while the rest of the world grows.

 Dirk Mattheisen is a writer and blogger on political economy with a focus on European affairs.  He is also an independent consultant on institutional governance of international economic and financial institutions.  Dirk Mattheisen is a former Assistant Corporate Secretary of The World Bank Group.