Ukraine nationalises its biggest bank amidst talk of financial crisis and conflict between oligarchs

In a move which two years ago would have provoked world headlines, Ukraine acted over the weekend to nationalise PrivatBank, its biggest retail bank, which holds a third of Ukraine’s private deposits.

The ostensible reason for the nationalisation was to protect Ukraine’s financial stability after a hole of $5.5 billion was found in PrivatBank’s account.  Rumours have in fact circulated for weeks that PrivatBank was in serious trouble, and only a week ago the bank hit out at those it said were behind the rumours in a strongly worded statement

There is no legal concept or legislative way in Ukraine today to ‘nationalise’ this or that stably operating bank; this underscores the blatant ‘fakeness’ of relevant information being distributed to bank customers via SMS, instant messenger, call centres, phone calls and certain media. PrivatBank is in accordance with a schedule agreed with the National Bank of Ukraine conducting actions as part of a recapitalisation programme which goes through 2018.

The implication of the statement is that the bank was being deliberately destabilised in order to justify its otherwise illegal nationalisation, and there were indeed reports last week that the bank was experiencing a massive bank run.

In Ukraine nothing is ever as straightforward as it seems.  PrivatBank’s biggest shareholder before its nationalisation was Igor Kolomoisky, one of Ukraine’s most powerful and notorious oligarchs, and one of its five richest men.  In 2014 Kolomoisky played a key role in the fighting in the Donbass, funding right wing militias to fight the militias of the Donetsk and Lugansk People’s Republics, and maintaining an iron grip on the city of Dnepropetrovsk of which he had been appointed governor by the Maidan government shortly after the February 2014 coup.

Kolomoisky is however the bitter rival of Petro Poroshenko, Ukraine’s President, and a major oligarch himself.  Last year Poroshenko engineered Kolomoisky’s removal from his post as governor of Dnepropetrovsk, and it is widely believed that the two men remain on bad terms.

More to the point, Kolomoisky has recently formed a supposedly left of centre party – UKROP – of which he was elected chairman at a party congress last month.  There are also rumours that he is in de facto alliance with Poroshenko’s bitter enemy and rival Yulia Tymoshenko, who is openly challenging Poroshenko’s leadership, and who is increasingly putting herself forward as Poroshenko’s main rival for the Presidency.

PrivatBank’s nationalisation has been welcomed by the International Monetary Fund and by Ukraine’s western supporters, such as the Swedish economist Anders Aslund.   It is being presented as more “evidence” that Ukraine really is undertaking “reform”, and that by taking over the country’s biggest bank instead of bailing it out Ukraine is showing that it is prepared to act against the private interests of powerful oligarchs like Kolomoisky in the greater interests of the nation.  Already – and as one might expect – there is talk of selling off PrivatBank to overseas (ie. Western) buyers once the hole in its accounts has been closed.

A more cynical but unfortunately more plausible view is that the bank was intentionally destabilised and then nationalised by Poroshenko and the Ukrainian government as part of a pre-emptive strike against the emerging Tymoshenko-Kolomoisky axis, which is increasingly challenging them for leadership of Ukraine and of the Maidan movement.

Taking PrivatBank out of Kolomoisky’s control deprives Kolomoisky of a bank he has used as a cash cow to finance his various activities, and which he might have used to finance his new party, and weakens his position in the oligarchic feuding which in Ukraine passes for politics.

Whilst the Ukrainian authorities say Kolomoisky agreed to PrivatBank’s nationalisation, the bitter statement the bank put out last week tells a different story, and suggests that if Kolomoisky in the end agreed to the bank’s nationalisation he only did so because he was given no choice.

As for whether PrivatBank’s nationalisation really will shore up Poroshenko’s position (Tymoshenko is currently polling almost the same as him) or will in the end benefit Ukraine’s economy, past experience gives good reasons for doubt. If nothing else Ukraine’s hard pressed budget will now have to find the $5.5 billion needed to plug the alleged hole in its accounts.