Ukraine’s great silence

Kyiv, Ukraine: Don’t mention “the banks” within earshot of the President.

Far from displaying confidence-building competence, America’s pick as Ukraine’s Prime Minister, Arseniy Yatsenyuk, has lost control of events catastrophically. 

By Gary Scarrabelotti

On February 6, 2014 extracts of a transcript of conversation, apparently between Victoria Nuland, Assistant Secretary of State for European and Eurasian Affairs, and the US ambassador to Ukraine, Geoffrey Pyatt, were posted on YouTube.

In the conversation, Nuland backs Arseniy Yatsenyuk, leader of the Front for Change opposition faction, to head up a new Ukraine government to succeed the on-the-ropes régime of Viktor Yanukovych.

“I don’t think Klitsch [Vitaly Klitschko, leader of UDAR] should go into government. I don’t think it is necessary. I don’t think it’s a good idea … I think Yats [Yatsenyuk] is the guy who has got the economic experience, the governing experience …”

Yats the guy 

How does that favourable judgment on Yatsenyuk, particularly in regard to his “economic experience,” stack up today? 

By the time Nuland and Pyatt were steering pieces around the Ukraine chessboard, “Yats” had acquired a lot of experience as an economic manager at the provincial and national levels. 

After serving as Minister for the Economy in the then Autonomous Republic of Crimea and as Vice-Governor of Odessa province, Yatsenyuk was promoted to First Deputy President of the National Bank of Ukraine (NBU) — Ukraine’s reserve bank — a job he held through 2003 – 2005.  From there he rocketed onto the national political stage.  During the presidency of Viktor Yushchenko, Yatsenyuk was Minister for the Economy during 2005 – 2006 and, subsequently, in 2007, Minister for Foreign Affairs.

When he took up the reins as Acting Prime Minister in 2014, following the Maidan revolution, Yatsenyuk came to the job with a reputation for probity and a knack for banking and economic affairs. Since that time, however, his skills have not matched the needs of the hour.

War, collapsing consumer demand, soaring inflation, and the currency plummeting against a backdrop of loans written in foreign currencies: conditions like these would test the skills of the best economic managers. So, when Yatsenyuk comes to write his political memoirs, he will be able to point, with some justice, to the terrible hand fate dealt him.  But no matter how bad it was, in the dock of Ukrainian history he – and President Petro Poroshenko with him — will have to wear responsibility for the brutal banking system ‘shakeout’ now unfolding on their watch.  Far from displaying confidence-building competence, Victoria Nuland’s pick as Ukraine’s Prime Minister has lost control of events with catastrophic effect. 

The heist 

I wrote about Ukraine’s banking crisis back in April. Things, however, have got worse since then; and, quite remarkably given the scale of the disaster, it’s all but invisible to Ukraine’s western allies. 

Well, here’s the state of play. 

Since February 2014 over 50 banks have been liquidated, or are on the road to liquidation – 53 as of writing.  Banks owned by Ukraine’s oligarchs dominate the ranks of the liquidated. 

As a result, savings to an estimated value of 100 Billion UAH (Hrivna) have been wiped out. [1] 

The protection of Ukraine’s Deposit Guarantee Fund (DGF) does not extend to this money.  This is because it was held, for the most part, in high-interest fixed-term accounts greater in value than 200,000 UAH, the cut off point for DGF protection.

In this case, the depositors were members of Ukraine’s middle class: professionals, small- and medium-sized business operators, entrepreneurial farmers and the like.  They provided the backbone of both the Orange and Maidan revolutions and their votes made Poroshenko president in May 2014. 

Most of this middle class money would have been invested well before the Maidan when banks began offering high interest rates for savings that hitherto had been stashed in peoples’ apartments. At this time the $US-UAH exchange rate ranged between 1:7 and 1:8.  If we accept a savings loss in the vicinity of 100 Billion UAH, then that would amount to, say, $US 12.5 Billion, roughly equivalent to 10 per cent of Ukraine’s pre-revolutionary GDP (Nominal).

According to activist groups set up to represent the plight of bank depositors, some 5 million deposits – of both individuals and businesses — have been drained of funds.

Yes, the money has “disappeared”.

Prostobankir, an online Ukrainian magazine following financial and banking events, made the observation that the 5 million figure claimed by depositor activists is plausible given that just one of the, so far, 53 banks to have gone down, Delta Bank, had 500,000 depositors. 

Not only depositors’ funds have disappeared but also new capital injected into banks by IMF-sourced loans. 

These loans were made to Ukraine to refinance those banks whose Capital Adequacy Ratios (CAR) were looking sick.  A large number of Ukraine’s banks, including all the oligarch-owned banks that ended up in liquidation, have benefited from refinancing loans. These infusions of capital could not stop 53 banks from being wiped out. In fact, according to the IMF’s March 2015 Country Report on Ukraine, CAR actually fell while new capital was being poured into the system. 

One of the more shocking aspects of this smash-up is that depositors’ money and refinancing capital funds are alleged to have disappeared from banks during their time in “temporary administration” (which normally proceeded liquidation) when they were supposed to be under the control of the NBU. 

The silence 

So here, then, is the situation: depositors’ funds — disappeared; refinancing loans – evaporated.  It sounds like one of the greatest heists in history.  Meantime, Ukraine’s mainstream print and broadcast media is almost silent about it. 

That’s not surprising, when you come to think about it. The people who dominate ownership of the liquidated banks are Ukraine’s oligarchs. (There are only about 100 of them, but of these as few as 20 really count.)  They also effectively control the political system; and they happen to own all of Ukraine’s principal media businesses. 

So the only way you can keep track of how the banking crisis is panning out is through blogs, web magazines and social media. And, given that almost all of this material is in Russian or Ukrainian, and given that very few Westerners can read either, we are in the dark about what’s happening in Ukraine. I daresay that the people who are now running the country hope we remain that way for a good while yet. 

For that matter, President Poroshenko and Prime Minister Yatsenyuk would rather prefer it if Ukraine’s thoroughly fleeced depositors would also join the conspiracy of silence.

Bank depositors protest outside Cabinet Office, Hrushevskoho Street, Kyiv, 16 June.

On 16 – 17 June several thousands of them turned up in Kyiv to protest the way they had been sheared and they did so outside the Rada, the cabinet office, and headquarters of the NBU. 

On each occasion, police applied a cordon sanitaire to screen off the crowd from their political masters and high bureaucrats. The measures seemed a tad excessive. This was not, after all, a rally of Right Sector but of respectable members of the Ukrainian middle class whose behaviour was overwhelmingly civil.  When the crowd eventually moved off towards the offices of the presidential administration, however, they were confronted with something altogether over-the-top: a deep phalanx of police and riot police (see photograph at the head of this story). The government’s security dispositions suggest that it’s afraid of the people who put them into power – and, given two revolutions in 10 years, I suppose they should be.  On this occasion, though, the crowd dispersed in a melancholy mood.

Bad governance  

So, this is the strategy: keep silent and see off the protestors.  It would be very uncomfortable, indeed, for the Poroshenko-Yatsenyuk government, and for the nationalist political parties that support it, if their western well-wishers understood just how serious Ukraine’s failures of governance have proved. 

Now that it is clear that Ukraine cannot militarily roll back the Russian position in the Donbas, it would be deeply alarming for the those in power if we turned our attention from Russia’s invasion-in-disguise to the institutionalized incompetence and crookedness of Ukraine’s government, bureaucracy and oligarchy.  That might prompt hard questions in the minds of western governments, none of whom want a war with Russia. Questions like: 

“If the Ukraine government allows the very people who put it into power to be robbed blind, why should we lift a finger to help it?”

“Since we have no interest in propping up institutionalized banditry, why wouldn’t we bring peace to the region by cutting a deal the Russians?”

The solution

If I were the Ukrainian president or prime minister, I’d think hard about this.  If they don’t wish to be sidelined, they had better come up fast with a solution to the disappearing loans and deposits.

That is not as hard as it would seem.  Just apply to the oligarchs and top bureaucrats the “torture” techniques perfected in Georgia by Mikheil Saakashvili when he was there in power.

Throw them, one by one, into prison — tax evasion charges are a good standby in the case oligarchs; unexplained riches in the case of bureaucrats — and keep them there until they disgorge sufficient to repay: first depositors, then the IMF. If that means that they have to sell some of their businesses or properties, so be it. 

The man who has done this kind of stuff before – Saakashvili – is now a naturalized Ukrainian citizen and the newly appointed governor of Odessa province, a stepping stone to greater things.

If our man Yats can’t gird his loins and reinvent himself as the “restitution Prime Minister,” then Saakashvili could end up taking his job. 

Not good for the Yatsenyuk memoirs … nor a recommendation for Nuland’s judgement.

[1]  Ukrainian activist groups representing bank depositors have given various figures on savings lost. They are rough estimates and have ranged between 100 Billion to 200 Billion UAH. Out of native caution, I have decided to go with the lower figure. The scale of the loss is rendered hardly the less astonishing for opting to understate the case.

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