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Ukrgasbank: The word ‘competitiveness’ became just a fetish to us


The cloud of crisis that looms over the country has a silver lining: the authorities are not ignoring the people anymore and have to heed industrial managers, bankers, and experts. Ukrainian politicians are still unable to reckon with anything other than their personal interests and popularity ratings, so at most councils and consultations they focus on their image instead of looking for effective responses to the challenges that are confronting the national economy.

Yet, it is vitally necessary to find a cure for the crisis through an honest diagnosis. This was the subject of the interview with Ukrgazbank Board Chairman Vadym LYASHKO.

— Will you please answer the question which is put to all bankers these days: how painful is the crisis for our banking system and how much will the recovery cost?

— To answer this question we should see first why this crisis has taken on such a form and depth in this country. We shouldn’t put the blame on the global financial crisis alone. We should admit honestly that the degree of our vulnerability and the depth of our integration with the global financial system don’t quite correlate.

We should admit that apart from external factors there are “homemade time bombs” which detonated all at once. We simply availed ourselves of favorable circumstances on global markets but did nothing to make our economy and financial system really competitive. Moreover, I have a feeling that the word “competitiveness” became just a fetish to us. We ignored the essential nature of competitiveness as one of the key prerequisites for sustainable development. Instead, we tried to earn more and more, using the favorable environment on external markets which existed until mid-2008 and increasing the gap between economic growth and consumption growth. In the last three years of such “prosperity,” individual consumption grew three and a half times faster than production. We were so sure that our banks were safe and that our metal and workforce would be in demand forever. Under the spell of this illusion we forgot to diversify our economy, reduce energy consumption, modernize basic assets, improve the business climate, stimulate small private entrepreneurship, and do many other things needed for stability.

As a result, we found ourselves unprepared for the global crisis, though its early symptoms were seen more than a year ago.

Moreover, the political show that we’ve been watching for the last few years wouldn’t have been possible under different external market circumstances. There was an illusion that the national economy was immune to political developments. Being minimally integrated with the global financial-economic system, we had good chances to avoid the head-on impact of the global crisis, but we missed them.

The national banking system as the locomotive of integration was objectively destined to feel the impact, because the crisis was caused by aggravated monetary-credit relations involving debt, the exchange rate, liquidity, trust, and the conduct of financial agents. Besides, one-third of Ukraine’s external debt is bank debt.

I think the steps taken in October to stabilize the national banking system helped to minimize the loss of our most valuable asset – the people’s trust in banks. Their further activity depends directly on the people’s activity and attitude to them.

— Do you think you can seriously count on their positive attitude after the ban on the preterm withdrawal of cash from deposit accounts?

— This moratorium is one of the most difficult and painful factors in our relations with clients. We build them on the principle of mutual respect. Our bank takes a flexible approach to each client. It makes exceptions, considering individual social and humanitarian circumstances, and takes measures to minimize our clients’ losses from exchange rate fluctuations. It concentrates on satisfying their financial needs even at the expense of its development. It has also reinforced and improved its ATM network.

The measure taken by the National Bank [the ban on the preterm withdrawal of deposits], even though questionable in legal terms, was a reasonable alternative to panic and long lines at bank tellers’ desks. Further steps should be aimed at creating and developing economic and administrative compensators and counterbalances that would mitigate the pain.

— What exactly do you mean by pain?

— The first painful spot is our balance of payments, balance of trade and quality of investments into our economy in the last three years. The main problem is not that our total foreign debt constitutes about 60% of GDP, but its short-term nature. Hence, we are really exposed to global crisis that, in the first turn, affected our financial market due to the outflow of short-term speculative capital. Afterwards, we realized that we were not able to refinance our current debt liabilities.

Secondly, we must look at currency policy. It is no secret that the panic in the foreign exchange market was provoked by the expectation that hryvnia would be devalued. That’s why it is very hard today to substantiate and implement a reasonable policy on exchange rate volatility. Nevertheless, this task should be accomplished as a response to currency swings that took place in summer and fall of this year. This policy should be based on fundamental and not on situational factors of cost formation and should be financed by additional stabilization resources.

The uncoordinated policy conducted by the government and the National Bank of Ukraine is only aggravating the pain. The decisions on import stimulation and “acupuncture” of inflation with the help of the exchange rate became just another challenge for the balance of trade and trust to the national currency.

The deliberate aloofness of the Prime Minister from the problems of hryvnia stabilization can hardly mislead anybody, especially considering the political and economic decision on revaluation made last summer. However, it is more important today to keep the National Bank from dissociating itself from the current problems. If it does, the national currency’s exchange rate would be stable even without liquidity, but our economy would slip into a recession…

Nevertheless, I am sure that that we will be able to reverse the situation not owning to the pro-Ukrainian conjuncture, but rather owing to this very crisis which, I hope, will force us to conduct the necessary reforms. I always agree with those that say that crisis is a high temperature that any creature affected by the infection has, and it is a quite natural reaction of a viable organism to infection or parasites.

— Do you think that the organism we are talking about is viable?

— Undoubtedly, it is. I can proof my opinion with a number of arguments. Peculiarities of the traditional sectors of economy, favorable geographical location, reserves of natural resources, professional manpower, traditions and culture – all these make our economy viable. We have not taken advantage of these factors, but we still possess tremendous potential.

The new trendy interest in agricultural investments, infrastructure potential, as well as rapid growth of small and medium-size businesses demonstrates that our economy may become quite strong in the future.

— Does your bank cooperate with small and medium-size businesses? How actively do you work with them?

— Small and medium-size businesses currently comprise about 90% of our corporate clients. These are enterprises that earn less than UAH 20 million per year. However, the share of these entities in our credit portfolio is not more than 12%.

— Speaking of small and medium-size businesses, the main restraint for the banks to work in this segment more actively is high risk: small enterprises quite often don’t have collateral that qualifies; the percent of failures to disburse loans is very high is this segment …

— I consider this thesis to be groundless. Unfortunately, we have established a “re-marginal” banking business in Ukraine. Why “re”? Because we have adopted a banking system similar to the systems in western developed countries, but it is absolutely alien to the post-Soviet economy and demands.

I have already said that rapid growth is akin to fast downfall. We have been thoughtlessly developing retail chains for the last three to four years. Competition for a greater share in the retail market overshadowed the problems connected with a lack of adequate sources of funding, risk and infrastructure assessment, and led to the usage of surrogate sales networks, deprived the retail chains and distorted the structure of consumption.

The only reasonable explanation for all that was tremendous demand for Ukrainian banking assets on the part of strategic investors interested solely in retail banking.

As a result, we witnessed considerable growth in retail business. Today it accounts for 30% of all banking assets. Actually, this is not very much. However, let’s remember that Ukraine has got the second lowest standard of living in Europe; Moldova is the only state that is worse. We knew that!

About 85% of retail loans were in foreign currencies. We transferred exchange rate risks to our borrowers and tried to reassure ourselves with the knowledge that there were no open foreign currency positions on our balances. However, it was just an illusion of security. When the hryvnia’s exchange rate was surging, all the bankers prayed: “Stop the exchange rate!” What does the exchange rate more than six hryvnia for one dollar mean? It means that it is not reasonable and almost impossible to pay off debts.

We consider most of our clients to be very responsible borrowers. However, if the exchange rate is more than six hryvnia for one dollar, their debts grow by 20-30% and it becomes impossible to pay them off. As a consequence, the biggest share of retail portfolio – around UAH 200 million – would have been written down as losses the same way the American banks did.

Therefore, comparing retail banking services and services to small and medium-size businesses, you can’t say that banks don’t develop this segment because of high risks. On the contrary, the risks are much lower than in retail since it is absolutely clear on what small and medium-size businesses are spending their loans and the mechanisms of reproduction of this money are also understandable.

The second aspect you mentioned is collateral. Let’s analyze the current structure of mortgages. We allegedly have about UAH 80 billion in mortgage loans. However, we forget that only 30-40% of that sum is loans issued to borrowers for the purpose of buying real estate.

The remaining 60-70% is real estate taken as collateral for the loans that borrowers received for some different purposes. Thus, the greater part of mortgage loans includes loans issued to entrepreneurs who decided that it was more gainful for them to receive loans as individuals and spend them on the development of their businesses.

That’s why I believe that when the work of the banking systems is resumed, when the banks formulate their new business-models and establish new priorities, they will, undoubtedly, start financing small and medium-size businesses.

— You have mentioned the risk connected with the devaluation of the hryvnia – risk of mass failures to repay loans. On the other hand, it is, obviously, very hard to stabilize the situation with balance of trade without correcting the exchange rate. What exchange rate can counterbalance the interests of all sides?

— My opinion on this matter is definite: (+/-) 6 UAH/USD. There are no economic preconditions for it to be lower than that.

Any exchange rate higher than 6 UAH/USD is dangerous from the standpoint of repaying debts and the validity of banking capital. It is no secret that foreign currencies account for approximately 30-40% of the assets of the banking system. Thus, reassessment of those assets at the 5.75-5.80 UAH/USD rate can practically make the banking system lose its validity.

Nevertheless, I would like to note that validity is a secondary factor here. It is more important to keep economic reasonability, motivate borrowers to repay debts and keep deposits.

— However, 6 UAH/USD is also a 20% increase of debt load on a borrower who took out a loan in foreign currency…

— Sure it is. You have asked me to define a level at which a compromise between common sense, demands of the economy, expectations of the citizens and requirements of the International Monetary Fund can be found. My opinion is that it is 6 UAH/USD. Any attempt to strengthen the hryvnia is bluffing and might cost us more since no fundamental factors for this currently exist. Making the exchange rate lower or higher is dangerous for the entire financial system.

— Was the loan received from the International Monetary Fund a reasonable step under the current circumstances?

— It is absolutely clear today that the loan received from the IMF was necessary for securing the National Bank of Ukraine and for maintaining the stability of the hryvnia.

I am not aware of the details of the agreement with the IMF and I think that the full list of the IMF requirements in known only to a selected few. However, if we could not create compensators taking advantage of a favorable conjuncture, if we had ask for help from the international organization, then the loan received from the IMF actually demonstrates the existence of a crisis.

There is a saying: “What does ‘the golden rule’ mean?” “It is a rule established by the one that has gold.” This is true for the IMF’s loan – they now establish rules for us.

In my understanding, IMF’s loan is an “anabolic steroid” for our state power. It might help improve the economy and the system of management. However, if we ourselves don’t undertake any steps to improve our system, to reform regulative, fiscal and investment policy, to renew our state management team, nothing will happen. We will just have a diseased liver as it often happens with those that misuse anabolic steroids.

— How useful from the practical point of view is the formation of a stabilization fund and the possibility to refill it at the expense of distressed banks?

— The operation of stabilization funds in some form is a common practice in developed countries. However, the creation of stabilization fund without any transparent mechanisms for control over its resources is not rational in our country.

If there is no effect from the very fact that such a fund has been created as a preventive stabilization measure, its effectiveness is questionable.

That’s why it is very important today to demonstrate our capability to boost the solvency of the banks which are experiencing problems. The recovery of Prominvestbank would be a good test to assess the prospects of employing the mechanisms of crisis management offered by the stabilization fund.

— Do you agree with the opinion that raiders are the only ones to be blamed for the problems of Prominvestbank?

— No, I don’t agree. Raiders’ attacks were only one factor. Who is a raider? A raider is a person that takes advantage of an entity’s weaknesses. Anyway, the problems that Prominvestbank had been experiencing were the main cause of the panic in the market. That’s why I think that the news that Prominvestbank and Nadrabank have an investor is one of the reasons to hope for the better.

I think that if there is progress in the process of attracting the investor (i.e. helping these banks recover), then it will be a great, reassuring sign for the entire market which can be compared with the loan from the IMF. And this is the first important circumstance.

Secondly, this may help to restore trust in our capability to reorganize financial establishments effectively.

Thirdly, it is a positive example that shows that there actually is a real investor ready to support the banking system. When we talk about a “real investor” we mean that the investor has all the necessary resources to confirm his or her intention to fulfill investment obligations.

Fourthly, which is very important to me, is that this investor is Ukrainian. And the fact that the investor, as it was announced, has a fundamental status, not intermediate, should reinforce our trust in national investment opportunities.

— Where can local investors get their funds? Shouldn’t we worry about their origin?

— What the NBU has to do now is to liberalize the procedures for the formation of banking capital. If we act in accordance with the instructions and regulations developed in the last century, then we will not be able to stimulate the national investor to support the banking system.

I think that today, unfortunately, is the most suitable time for the liberalization of capital. It is necessary to do that to attract more money into the official turnover. It is necessary to create favorable conditions for the financial and industrial groups as well as individual persons to invest into the banking system.

If Mr. Ivanov or Mr. Petrov or Mr. Sidorov are ready to support the national banking system, then I am not interested in where did they got their money.

At the same time, I think that the latest developments should force the NBU to improve its regulative base and simplify procedures for the consolidation of banks, including compulsory incorporations.

— Your opinion is that the state should reorganize and replenish the banks’ capital only in extraordinary cases, after all other alternatives are exhausted, correct?

— My opinion is that the state should not reorganize, but rather do its best to stimulate the unconscious interest of national and foreign investors in the national banking system. Those that will buy or support the banks should be afforded the opportunity to gain control over the banks promptly in order to provide them with operative financial support. There is not any regulative base for this yet. It is necessary to create the preconditions for this. I am sure that there will not be 180 banks in our country.

— Therefore, you support the idea about the consolidation of banking capital, don’t you? However, the efficiency of a bank is defined not according to the size of its capital but rather according to its ability to fulfill obligations. If some small specialized bank (district or town) complies with all the standards, why can’t it also operate?

— I am not talking about consolidation as the liquidation of small district banks. I am talking about the creation of the preconditions necessary for operative reorganization in case of emergency. It is necessary to create conditions for the voluntary incorporation of financial establishments and enable unhealthy banks to integrate with more healthy ones so that the latter can reorganize the former with the help of the state’s financial support.

— Are the interests of depositors sufficiently secured in this case?

There are a couple of problems in this regard. For example, the fact that we have raised the level of security deposit reimbursement is not enough. It is necessary to reform the entire system of deposit reimbursement, make it more selective. We should form a caste of the most efficient banks by banning some financial establishments from working with the population.

One more issue is the unification of regulative and monitoring bodies. Our small financial market can’t have three regulative bodies, the powers of which are very similar. How can, for example, credit unions be licensed and regulated by a separate supervisory body when they operate in the same sphere as banks. It is unreasonable and inefficient.

Additionally, the owners and top managers of the banks are now able to review their own strategies, improve their operation and optimize their structures and expenses. Intensification is the main alternative to conquering the market share at “any cost.” There are a lot of reserves in this regard: in revenue structure, in the specialization of sales network, in the centralization of business-functions.

All the necessary reforms and improvements of the banking system can’t be delayed as it is exactly the banking system – recovered and effective – that should and is able to stabilize the situation.


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