At a time when publication of the so-called “Panama Papers” has revealed the financial evasions of some presently at the pinnacle of power in Ukraine, you’d think the last thing ordinary Ukrainians would want is a whiff of fiscal self-dealing from its government. Yet that is what the Poroshenko administration has just done, and the aroma is unmistakable.
At the ostensible suggestion of its own ministry of finance (more likely, at the demand of higher ups in the government), Ukraine’s cabinet recently approved regulations to overhaul the system through which banks handle payments to government employees.
This seemingly benign reform will actually do severe harm to Ukraine’s private banks. Many of them may not survive this government attack on their independence.
The new regulations require Ukrainian banks to meet eight criteria to be eligible to handle these payments. Some are perfectly reasonable, and appropriate by international standards; for example, under the new rules neither a bank nor its owner may be under international sanctions, nor can a bank be in regulatory trouble with the National Bank of Ukraine (NBU).
Others, however, are more troubling.
To be eligible, a Ukrainian bank must keep 20 percent of its regulatory capital in Ukrainian government securities. This requirement restricts the pool of eligible banks to just four — Oschadbank, Ukreximbank and Ukrgasbank and “Raiffeisen Bank Aval” — and four of these are state-owned. All other privately owned banks will be ineligible.
This is an obvious attempt by the Ukrainian government to fill its own coffers as well as further centralize control over the country’s banking system and economy.
But that’s not the only problem. The cabinet has also directed that, even if state-owned banks don’t hold the right amount of government bonds, they nonetheless can be agent banks even though they don’t qualify — provided the state owns at least a 75 percent interest in the institution, in which case the bank is appointed on a “permanent” basis.
This virtually eliminates the ability of Ukrainian privately owned banks to stay in what until now has been a critical part of their business — and stands in stark contrast to the past, when government employees’ payments were handled by the banks with the most reliable and advanced technology.
The public outcry has come from all sides. This includes the Independent Association of Ukrainian Banks (IAUB), which asserts that the Ukrainian government is implementing this not just to divert revenue to otherwise failing state-owned banks, but also increase demand for government debt. Elena Korobkov, executive director of the IAUB, said that the criteria “does not have anything to do with healthy competition in the market” and that this redistribution is, essentially, a “fine for efficiency” for private banks.
The 20 percent capital requirement allows the government to subsidize its own borrowing costs and finance its deficit by forcing banks to buy government bonds with a low interest rate of 12 percent. Compare that with the National Bank of Ukraine certificates of deposit, yielding 21.5 percent. This should deeply trouble not only Ukrainians, but also the International Monetary Fund and international investors.
Even Valeriy Gontareva of the NBU (a uniquely intrusive organization whose overreach I discussed recently) agreed: “[T]here should not be a criteria about 20 percent of regulatory capital in government bonds.”
The IMF and other international institutions should pressure Ukraine’s cabinet to overturn these regulations before they do serious damage. State-owned banks should not be given special advantages in capturing government employees’ business, especially when they lack sufficient infrastructure and technology to handle it.
At a time when the nation faces so many critical challenges in all sectors, such politically motivated special treatment and self-dealing risks causing immense and unnecessary harm to the Ukrainian economy — and may well fuel further doubt among Ukrainians and foreign investors alike about the integrity of the Ukraine’s state institutions.
Stan Collender is an executive vice president with MSLGROUP in Washington, D.C. and the author of “The Guide to the Federal Budget.” Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
