Volodymyr Stelmakh is an iconic personality in the Ukrainian banking system. Two-time Governor of the National Bank of Ukraine (2000-2003 and 2004-2010) and former Chairman of PrivatBank’s Supervisory Board (2015-2016), V. Stelmakh has shared his views of the market’s largest bank nationalization and generally of the NBU’s policy in recent years in a Finbalance interview.

1. Stelmakh: PrivatBank was not in need of
nationalization
Volodymyr Stelmakh is an iconic personality in the Ukrainian banking system. Two-time
Governor of the National Bank of Ukraine (2000-2003 and 2004-2010) and former Chairman of
PrivatBank’s Supervisory Board (2015-2016), V. Stelmakh has shared his views of the market’s
largest bank nationalization and generally of the NBU’s policy in recent years in a Finbalance
interview.
Finbalance: Volodymyr Semenovych, who in your opinion should head the NBU, a
macroeconomist or practicing banker?
V. Stelmakh: Basically, a macroeconomist must lead the National Bank. It could also be a
practicing banker but he or she must understand macroeconomic processes and not to view the
NBU’s operations as a business because profit-making (even for such an important institution as
the state budget) is not the Central Bank’s objective.
The NBU must assure stability of the national currency. Supporting the economy through an
efficient banking system shall promote this goal and help fill the public treasury.
The organic state building theory views the state as a human organism in which money is the
blood, and banks are the heart of the economy. Like with people, the economy also suffers from
strokes and heart attacks. When there is too much “blood” (more money than product offerings),
it is bad as this provokes inflation. And it is also bad when there is too little “blood”, as
production drops. We need equilibrium, and it is the NBU’s task to ensure it.
In your opinion, are there deserving candidates for the position of the NBU governor in the
market or in the government agencies? Could you name someone?
It is unethical to talk about this publicly. If I were asked by authorized persons, I would voice my
point of view confidentially.
According to your estimates, how adequate or inadequate has been the NBU’s response
since 2014 to the challenges faced by the economy and banking system?
We had just one year when the exports approached imports. Due to the permanent gap between
them we are not able to achieve the purchasing power parity. Hence the problems.
In October 2008 when the global financial crisis came to Ukraine, the NBU’s gross foreign
exchange reserves amounted to 37 billion USD approximately (with net foreign exchange
reserves, i.e. excluding borrowings, amounting to 21 billion USD). A lot of foreign currency was
sold at the time but we replenished the reserves in 2009-2010.
On December 26, 2010 I handed over the NBU’s balance sheet to Mr. Arbuzov, listing $35.3
billion of foreign exchange reserves (with $25.6 billion of net reserves). During 2011-2013 the
reserves were sold in an attempt to keep the inflation and exchange rates at low levels. As a
consequence, Mr. Kubiv, having assumed leadership of the NBU in 2014, received $15.5 billion
of gross reserves. He passed $17 billion of gross reserves to Ms. Hontareva in June 2014. As at
the end of December 2014 the reserves amounted to $7.5 billion, as at the end of February 2015 -
$5.6 billion.

2. How was NBU’s 2014 policy different from the policy used by the National Bank during the
recession of 2008-2009?
In 2008 the US dollar in reserves cost 4.87 UAH/USD on the average. Having sold 21 billion
dollars then (at some point at 8 UAH, at another at 12 UAH), we actually extracted about 90
billion hryvnias from the banking system. Thus, against the background of deposits outflow, the
NBU refinanced commercial banks on account of what it took away. Meaning there was no
issue. As a consequence, only two or three banks withdrew from the market.
In 2014, on the other hand, the NBU governed by Ms. Hontareva implemented an extremely
tough restrictive policy, withdrawing from the economic circulation over 700 billion UAH. As a
result — destruction of banks and the economy
IMF representatives told me that the Fund had not given the above recommendations. Therefore,
there must have been other considerations for the “quasi-monetary” reform of the confiscatory
type. As a consequence, people and businesses lost several hundred billions of savings.
Since 2011 the NBU has become in substance a captive bank while it must be an independent
government body.
Could it be that even though stepped-up refinancing could have saved a greater number of
banks, it could also have provoked a deeper devaluation of hryvnia?
In other words, do you think that giving 60-70 billion hryvnias of refinancing in 2008-2010 led
to devaluation?
The political and economic situation was somewhat different in 2008-2009. If anything,
there was no military aggression on the part of the Russian Federation, and there was no
occupation of territories.
But even then we observed a massive capital outflow. When the exchange rate reached
8 UAH/USD, businesses adapted and settled into this cost. And for importers, considering their
margin, this level of devaluation was acceptable.
Refinancing should be provided to assure that the banking system functions, and the economy
accordingly. If the NBU sees that a bank has localized issues and is capable of overcoming the
difficulties in a month or two, it should be supported. Even though at a slightly higher — “penal”
— interest rate, but not a huge one.
But it turned out that the NBU faced the need of substantial capital increase against the
background of devaluation and depreciation of pledged assets provided by borrowers to banks as
loan collateral. Effectively no refinancing was performed. And then political aspects came into
play. This particularly affected PrivatBank.
What exactly do you mean?
Throughout Ms. Hontareva’s tenure as the NBU Governor, the National Bank representatives
had a presence in PrivatBank. But they did not pass a single official remark to the bank. Not a
single one.

3. On December 16, 2016 [i.e. several days before nationalization, - ed.], acting as PrivatBank’s
Chairman of the Supervisory Board, I had sent a letter to Ms. Hontareva, giving an estimate of
the bank’s financial standing.
It communicated that the bank maintained secure stability, complied with the target solvency and
liquidity ratios, paid large taxes (6 billion UAH in 2015, 4.9 billion UAH in 2016), and repaid
12.5 billion UAH of refinancing debt to the NBU.
It was mentioned in the letter that when exercising its supervisory functions the NBU had not
always kept to impartiality and parity in its approaches in comparison with other banks, thus
violating the constitutional principles which require from government authorities the equal
treatment of all entities regardless of their incorporation form.
The NBU imposed deposit restrictions on PrivatBank while government-owned banks were
provided much more liquidity against customer funds outflows.
The total refinancing amount received by PrivatBank during the crisis was 0.43 hryvnia per 1
hryvnia of deposit outflow. In Oschadbank this indicator amounted to 1.6 hryvnias (i.e. almost 4
times bigger), in Ukrgazbank – 2.7, Khreshchatyk – 1.38. The average monthly refinancing
interest rate in PrivatBank was 17.3% in 2014, 22.8% in 2015, and 22.6% in the 10 months of
2016, while this rate for state-owned banks amounted to 10.69%, 16.95% and 13.3%
accordingly. The term of PrivatBank’s refinancing was up to three years, and for government-
owned banks – up to five years.
We had asked to extend the refinancing term to five years, as envisaged for state banks, and to
fix payment at the refinancing rate. And that is it.
Ms. Hontareva stated that 99% of PrivatBank’s corporate portfolio consisted of loans granted to
related persons, while the bank’s statements already transferred to the responsibility of public
management and audited by Ernst & Young reveal a figure of 6%.
This means that the nationalization decision was dominated by completely different goals than
those declared.
Which goals?
Whichever you like but not economic ones.
That is, you insist that PrivatBank could have stood afloat on its own and could have done
without nationalization if the NBU had applied the same approach as it does regarding
other market participants?
Absolutely. I repeat: NBU is a national authority. According to the Constitution and laws, it has
to treat all banks equally and not to favor some of them and discriminate against others.
As I have said, the NBU should not aim to obtain profits. Nonetheless, the National Bank
extracted massive income from commercial banks (i.e. the economy) by fixing a staggering
refinancing rate (up to 30%) and thus receiving huge profits and creating reserves.
PrivatBank offered conspicuously higher deposit rates than most market participants,
which can hardly be a sign of robust financial health, and not to mention the restricted
capacity of lending with such an expensive resource.

4. That they issued loans at lower rates than its deposit rates is big kudos for the bank as this
supports the country’s economy. The bank covered this rate difference on account of other
activities and, as I have said, paid substantial sums to the budget.
Yes, it offered the best conditions to reliable long-term customers. But, forgive me, Western
banks also grant lower-interest loans to the most reliable customers. The Libor rate, for example,
has been used for reliable customers in the global banking practices since 1930 (the above rate is
generally 1-2 p.p. higher than the refinancing rate).
If they had said that the bank had not complied with the liquidity ratio, this is one thing, but no
concern had been voiced. Not a single time.
Judging by the enclosures to the IMF Memorandum, the possibility of issuing a large
volume of domestic government bonds to increase PrivatBank’s capital has been left open
since 2015…
Wait, wait. I have been aware of IMF’s operations since 1971. The IMF never interfered on the
specific counteragent level as this is not allowed. It looks at the banking system at large, it looks
at balance sheets.
Of course, if the NBU management and governor had said that “we have very disagreeable
questions for such and such bank, and we envisage…”, a lot of things could have been written.
If PrivatBank’s owners were sure of its stability, why did they give it to the state?
If all details of that nocturnal epic [on the eve of nationalization – ed.] were revealed, then
impartial conclusions could be drawn.
There is a prevailing opinion in the market that PrivatBank’s business model was a
peculiar Ukrainian variant of “Islamic banking” (which means making profit not so much
from loan interest but from participation of the creditor’s beneficiaries in project profits -
ed.). Can you confirm or challenge these views?
There are international standards and ratios. If these were complied with, what is the issue here?
Islamic banking? So what? This model works fine in the world. When a banker does not receive
interest income from loans but a share of borrower’s profits, this means that they are interested in
the efficient operation of the borrower.
NBU evidently looked at the situation from one perspective, and ex-owners and ex-
managers of PrivatBank from another.
We should look into the core.
Anyhow, the NBU had serious claims regarding pledged assets.
How could a stadium be appraised at 1 UAH or a plant producing large tires at 1 USD?
Concerning stock-in-trade. In Kolomoyskyi’s case, this includes airplanes, for example. An
aircraft with 150 seat capacity was pledged, and it was found afterwards that this is a 220 seat
aircraft. Meaning it yields more income etc., but this was a reason to pick on – due to “non-
conformance.

5. What is to be done with PrivatBank’s corporate portfolio whose service quality has
deteriorated, judging by the statements?
This is an issue for and responsibility of the bank’s new management. Like any other state
enterprise, they get by on grants.
Consider the increase the bank’s capital through domestic government bonds. They could issue
long-term loans. But they do not do it.
Sell the loans you call insider loans, or place them in a separate entity, like with other state
banks. Suppose that entity makes 20% less but the business will not be destroyed. Restructuring
can be performed, with the bank introducing an independent board member into a borrowing
company, etc.
If we assume that there was impartiality in the NBU’s actions, was it manifested with
regard to PrivatBank only, or other banks as well? Could you give specific examples?
There is a number of banks that proved the unlawfulness of NBU decisions. Their names are
known to everyone.
Back to the refinancing issue. How it was in our time. A bank provides justification why it needs
a loan from the NBU and how it is going to repay it. This plan is evaluated by the NBU
Management and Board, it is reviewed in a Board meeting attended by heads of regional NBU
administrations, top managers of the bank. The plans were rarely approved the first time.
Remarks were made, adjustments were implemented in a week or two etc. But with Hontareva,
they would get together once and pass the decision for unclear reasons. The publicity principle
was violated.
There are two types of audit. One is the accounting audit which shows whether everything is in
place or something is missing as a result of a banking transaction. The other type is the
performance audit. I believe Mr. Kolomoyskyi could apply to international courts and demand
this audit for the NBU, including a review of the bank’s relations with the regulator.
Speaking of a pure performance audit of the NBU, it can be performed by the new government
only, to see how many businesses were destroyed, how many people lost their jobs and savings;
to investigate private or indirect interests that were pursued.
What is your attitude towards changes in the NBU itself in the recent years?
Even now I do not understand why they had to destroy regional administrations. Yes, there was a
need to reduce them due to digitization, but not to bring them to zero. But they had to “save up”,
to give away premises etc. The NBU must feel the nation-wide “pulse”, to see that many rights
are passed from the center to the community level.
We built the Ukrainian banking system using the principles of the German system which in its
turn was founded on the US reserves system. Here is the central bank and land banks. There
were talks of the concept providing for 6 lands in Ukraine instead of 27 administrative units…A
reliable system had been built. But it was destroyed.
What specific actions should be taken in the economy to minimize the risk of currency
crises which had already happened twice in the last decade?

6. We need to think how to develop import substitution and export oriented industries in order to
change the GDP structure and at least level out the export — import ratio.
For instance: meat prices have gone up against the background of decreased pig and cattle stock.
Why not stimulate these areas?
When a bank applies to the regulator for two or three years’ refinancing for an enterprise which
will export 80% of its products, the NBU should support it.
We have an excellent workforce, low salaries, a good raw materials base. We need investments.
But investments require encouragement.
It is necessary to cancel the VAT and duties for equipment imports. Also, it is advisable to
exempt new enterprises from profit tax and domestic VAT for two or three years, to allow
businesses to write off depreciation in their discretion. Then the investments, including foreign
ones, will come. There is a need for financial stimulation of investments, especially those
undertaken on the basis of loans.