Ukraine’s hesitant efforts to privatize state-owned banks

Customers pictured at a branch of Privatbank in Kiev. (REUTERS / Valentyn Ogirenko)

As of July 2021, the Ukrainian state owned more than half of the total assets of the Ukrainian banking sector. The government has formally committed to drastically reducing its stake in the sector, but progress towards this goal has so far been extremely slow.

The government’s current strategy sets a target of reducing the state’s share in the Ukrainian banking sector to 25% by 2025. However, the government has already failed to achieve similar targets on several occasions. which has led to repeated reviews of the official privatization strategy. . Understandably, many observers are now questioning whether the current plan is achievable.

The first version of the Ukrainian government’s banking sector privatization strategy was drawn up in February 2016. At this stage, the state banks Oschadbank, Ukrgasbank and Ukreximbank were not profitable and often needed additional capital from the budget of state due in part to the large existing portfolios. non-performing loans (NPL).

The reasons for this unusually high share of non-performing loans in Ukrainian state-owned banks include mismanagement and corruption. At this initial stage, the government’s strategy involved the formation of independent supervisory boards to prepare banks for privatization.

The situation changed dramatically in December 2016, when the Ukrainian authorities were forced to nationalize the country’s largest bank, Privatbank, in order to ensure the stability of Ukraine’s banking sector. The move boosted the government’s share in the banking sector from around 26% to 55%. Inevitably, the nationalization of Privatbank meant that the government’s initial privatization strategy had to be revised.

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The updated plan identified a new timeline for steps towards a reduction in the state-owned share in the banking sector. Ukrgasbank was chosen as the first bank to be privatized. In line with the government’s strategy, the International Finance Corporation (IFC) would acquire a 20% stake in the bank by the end of 2018 and identify a strategic investor for an additional 75% stake in the bank by the end of 2018. January 2020.

At the same time, the European Bank for Reconstruction and Development (EBRD) would take a 20% stake in Oschadbank by mid-2020, this share rising to an unspecified amount by 2022. The Council of Ministers was also committed to finding a minority shareholder for a 20% stake in Ukreximbank by 2021. The privatization plan also provided for the sale of Privatbank by mid-2022.

This ambitious strategy would have reduced the share of state-owned banks in Ukraine from 55% to 24%. Unfortunately, the slow pace of reforms in the country and the turmoil caused by the 2019 presidential and legislative elections meant that none of the goals set out in the government’s revised strategy were actually achieved. Then came Covid-19 and other disruptions.

The most recent update of the government’s privatization plans for the Ukrainian banking sector was approved by the Cabinet of Ministers in August 2020. In the latter document, the deadline for the reduction of government participation in the banking system has been pushed back considerably to 2025. However, even this much more modest target date can be overly optimistic. Privatization still faces a number of major obstacles which make it very doubtful that real progress is possible.

One of the main problems is the dysfunction of the Ukrainian legal system. This is a huge red line for international investors. Without credible guarantees of the rule of law, it will be difficult to attract the type of investment necessary for successful privatization. Since 2014, Ukraine’s various attempts at judicial reform have repeatedly failed or failed to convince.

Question marks also remain about the independence of the National Bank of Ukraine. This is crucial for the effective regulation and functioning of the entire banking sector. Unless they receive guarantees about the independence of the country’s central bank, serious investors are unlikely to view Ukraine’s banking sector as a viable option. Concerns about political interference in the work of the NBU first surfaced in mid-2020 with the sacking of the widely respected central bank governor amid accusations of government pressure, while the alarm s ‘is further increased following a series of resignations from the NBU in the summer of 2021.

Another obstacle to the Ukrainian government’s banking sector privatization plans is the current state of the country’s economy. While Ukraine recorded four consecutive years of stable but unspectacular GDP growth from 2016 to 2019, the economy shrank by 4% in 2020 mainly due to the negative impact of the Covid-19 pandemic. While most sources predict a return to solid growth in 2021 and beyond, investors are likely to remain cautious after the disappointing economic performance of 2020. This is especially true given the slow progress of the economy. Ukraine in the country’s vaccination campaign and the potential for a new pandemic. -the linked lapels.

Meanwhile, some skeptics are still not convinced that the current government has the political will to proceed with privatization. They argue that Ukrainian state-owned banks will not be sold anytime soon as they are a very practical instrument for financing the country’s budget deficit.

In light of these challenges, it is easy to understand why doubts persist about the credibility of Ukraine’s latest bank privatization strategy. While few members of the government or the banking sector would question the need to reduce excessive state participation in Ukraine’s banking sector, progress towards privatization remains elusive. This is bad news for the banking industry itself and for the economy as a whole. It also means that Ukraine is not meeting an important reform target set by the IMF.

Mark Savchuk is the head of the Civil Oversight Committee of the National Anti-Corruption Office of Ukraine (NABU).

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The opinions expressed in UkraineAlert are solely those of the authors and do not necessarily reflect the views of the Atlantic Council, its staff or its supporters.

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UkraineAlert is a comprehensive online publication that regularly provides information and analysis on the development of politics, economy, civil society and culture in Ukraine.

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