Ukraine to change law on bank insolvency in bid for IMF loans

File photo. Ukrainians walk next to the branch of PrivatBank in Kyiv, Ukraine, 19 December 2016. On that day the Ukrainian government nationalized troubled commercial bank Privatbank, taking control of the country's largest lender. [Roman Pilipey/EPA/EFE]

Ukraine is finalising changes to legislation on bank insolvency in consultation with the International Monetary Fund as part of efforts by Kyiv to secure a new loan programme, a senior state official told Reuters.

Ukraine wants an IMF deal worth around $5 billion-6 billion over three years to support its economy and signal to investors that the new government of President Volodymyr Zelenskiy is committed to reform.

The IMF has sought reassurance that Ukraine will make a serious effort to claw back money from banks which have been rescued in bailouts or whose depositors have had to be compensated, a top central bank official said last week.

It also wants to make sure that the 2016 nationalisation of Ukraine’s largest lender, PrivatBank, will not be reversed. PrivatBank was forcibly nationalised in 2016 as part of a clean-up of the country’s banking system. A protracted legal battle between the Ukrainian government and oligarchs Ihor Kolomoisky and Gennadiy Bogolyubov has continued ever since.

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Banking reform is politically sensitive because Zelenskiy has longstanding business ties to Ihor Kolomoisky, PrivatBank’s former owner.

Zelenskiy said on 9 November he would make “every effort to recover funds spent on compensation to the depositors of failed and nationalised banks” but the details of how the government would do this have not previously been reported.

A deputy head of the State Guarantee Fund, which compensates the depositors of failed banks, told Reuters the proposed legislative changes would make it illegal for insolvent banks to return to their former owners.

It would also shorten the often lengthy legal processes for resolving an insolvency dispute between the state and former owners.

“We are currently finalising this bill with the participation of IMF experts,” Viktor Novikov said.

The IMF and central bank declined comment.

Under current legislation, owners can challenge an insolvency decision in district courts and appeal courts that are widely seen as riddled with corruption. The process can take years and hampers the state’s ability to sell banks’ assets.

Under a proposed new bill, which must be approved by parliament, insolvency disputes will go straight to the Supreme Court. “The bill envisages speeding up trial processes,” Novikov said.

The new legislation also stipulates no court can prevent the state from selling the assets of insolvent banks even if the insolvency were later found to be unlawful. Instead, the state could be ordered to pay compensation to the former owners.

Between 2012 and October 2019 the authorities spent 89.3 billion hryvnia ($3.7 billion) on compensating depositors of failed banks, according to data from the State Guarantee Fund.

The government has also spent 155 billion hryvnias ($6.4 billion) propping up PrivatBank, saying the lender had become insolvent due to shady lending practices under Kolomoisky’s ownership.

Kolomoisky vehemently disputes that and has challenged the nationalisation in court. Zelenskiy denies suggestions he is helping Kolomoisky win back control of PrivatBank or gain compensation.

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