With his party in majority control of parliament following a second landslide election victory in four months, the country’s new president, Volodymyr Zelensky, now has unprecedented freedom to deliver the changes he promised. The most important of these is his signature pledge to give Ukrainians “a life without corruption, without bribes”.
A series of new initiatives to crack down on low-level graft is planned, including a shift to e-government and a bonfire of petty regulations that allow officials to demand bribes for the provision of basic services. These have long been the bane of Ukrainian life and a serious impediment to entrepreneurship, so radical measures could transform the everyday experience of voters. It’s in regard to the top end of Ukrainian society that the sincerity of Zelensky’s pledge to put an end to corruption has to be questioned.
Zelensky’s party, Servants of the People, faced accusations during the campaign that it continued the established Ukrainian practice of selling places on its electoral list. The arrangement thrives because parties make money and successful candidates are able to recoup their investment many times over by soliciting bribes in exchange for legislative votes and other favours. No parliamentarian can legitimately claim to be a servant of the people if they are willing to sell their votes to powerful vested interests. This is not the cleaner politics Ukrainians thought they were voting for.
More ominous still is Zelensky’s failure to dispel the impression that he is the junior partner of Ihor Kolomoisky, an oligarch accused of corporate raiding, money laundering and fraud. Indeed, Zelensky chose to double-down following his election as president in April by promoting Kolomoisky’s lawyer, Andriy Bogdan, from campaign manager to head of presidential administration, the second most powerful post in the country. Bogdan is said to wield extraordinary influence within the president’s office. A significant number of Zelensky’s new MPs also have known links to Kolomoisky through his media empire and his political movement the Ukrainian Association of Patriots (UKROP).
Much of the concern about this relationship centres on the future of PrivatBank, Ukraine’s largest commercial bank, which was owned by Kolomoisky until it was nationalised following the discovery of a $5.65bn hole in its balance sheet in 2016. That decision is now the subject of a fractious legal dispute, including accusations of fraud against Kolomoisky, a counter-demand for $2bn compensation from Kolomoisky and hearings in the Court of Appeal in London.
Among those worried about Zelensky’s intentions are Ukraine’s international creditors. It was significant that the IMF’s representative in Kyiv felt moved to issue a statement two days before Zelensky was elected president reminding Ukrainian politicians that the nationalisation of PrivatBank had been necessary to guarantee financial stability and calling on them to “continue their efforts to recover losses from former owners and related parties of failed banks.” That looks like wishful thinking.
There are major issues at stake concerning the integrity of Ukraine’s financial sector and the willingness of the Zelensky administration to defend the independence of the National Bank of Ukraine (NBU). Around a hundred banks have been declared insolvent by the NBU as part of its efforts to clean up the banking industry over the last six years. Many of their former owners have become part of an informal oligarchic coalition that would like to weaken the NBU’s powers of banking supervision and return to the days when they were able to run Ukraine’s banks effectively as private treasuries.
Last month, the first deputy governor of the NBU, responsible for banking supervision, Kateryna Rozhkova, was suspended from duty following a court case apparently brought by someone using a false identity. The day after the presidential election in April, the former NBU Governor responsible for the PrivatBank decision, Valeria Gontareva, became the target of an investigation and a Facebook campaign alleging involvement in Yanukovych-era corruption. The Facebook campaign was launched by Alexander Dubinsky, a journalist on Kolomoisky’s 1+1 TV channel, now elected to parliament as one of Zelensky’s new MPs.
These attacks appear to be part of an effort to undermine the NBU’s independence and make it more susceptible to external influence on decisions concerning insolvency and other regulatory issues. One of these is the unresolved question of how to address the local subsidiary of Sberbank, the state-owned Russian bank sanctioned since the start of the Ukraine crisis in 2014. Regulators have come under increasing pressure from oligarchs keen to acquire its lucrative portfolio of loans and assets, even though selling it would breach national and international sanctions. The NBU is wisely refusing to bend the rules.
The struggles over PrivatBank and Sberbank Ukraine are important indicators of the Zelensky administration’s attitude to the financial sector and the seriousness of its pledge to deal with corruption. The creeping return of oligarchic influence over banking supervision would damage efforts to combat money laundering, instil a culture of prudent banking and guarantee macrofinancial stability. It would also bring to an end financial support from the IMF and other international lenders, bringing Ukraine to the brink of default.
Western governments and international financial institutions need to be forceful and united in be signaling their concern to president Zelensky and his new government. It should be made clear that independent banking supervision and regulation is a red line for continued support and that PrivatBank is a test case of Ukraine’s commitment to reform. Efforts should be made to step up support for Ukraine’s financial regulators, including the provision of information and advice needed to resolve the future of Sberbank Ukraine in a way that is both transparent and legal.
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