Pluses and Minuses of Ukraine’s National Bank Leadership

Over the past weeks a number of critical performance reviews of the National bank’s senior leadership has significantly increased. Deeply critical have been not only bankers and economists but also journalists and even artists. This article aims to systematize the positive and negative actions of the NBU.

Pros and cons are presented regardless of their relative importance, as author’s subjective assessment. It is quite possible that one negative fact outweighs all the positive ones, or vice versa.

Thus, let’s start from the positives:

• Reorganization of the NBU structure – a new form is much more understandable in terms of functional distribution between the departments and their responsibilities.
• The new team brought in by Gontareva consists of professionals with experience and reputation, both from the banking sector and international organizations; some officials with tarnished reputation have been dismissed.
• The process of staff reduction from 11 to 5.5 thousand and cutting the number of regional offices. Staff reduction per se cannot be considered as a reform, but at the NBU a general number of employees per 100 thousand of population is significantly higher than in most of the EU countries, so probably Ukraine does not need so many officials at the Central Bank.
• Non-core assets are taken off the balance – all sanatoriums and pools. This favorably distinguishes the NBU from the Rada and the State Management of Affairs. The question about the problems in the NBU’s Pension Fund is being raised, which means that the problems are not being hidden, although the fight with the previous authorities could prompt these actions. Even if this fight is intended as a showcase, it still is going on which distinguishes the NBU from the other governmental agencies.
• The initiated process of the banking system cleanup – more than 30 banks will go into liquidation, most of them having problems not because of the “new authorities”, this is just the cleanup of the existing Augean stables. So far, the NBU has opposed a strong pressure coming from the large Ukrainian business – for example: VAB Bank associated with Oleg Bakhmatiuk (the 7th place in the list of Ukrainian Wealthiest Men according to Forbes) was intended to be “saved” at the expense of the state money, but it did not happen. All-Ukrainian Bank of Development – aka “Yanukovych Family Bank” will be liquidated. Compare this with the court’s decision to lift the arrest of Arbuzov’s bank accounts and feel the difference. It is quite likely that such an active campaign against Gontareva was initiated by the bank owners who oppose the cleaning of the banking system.

Certainly everything is not as problem-free, otherwise it would be impossible to raise the wave concerning Gontareva’s dismissal.

Among the drawbacks, we can distinguish the following ones:

• The lack of real independence of the National Bank. NBU buys out the government debt on the secondary market – more than UAH 149 billion since the beginning of the year (2/3 of the amount – to increase the capital of Naftogaz of Ukraine for current payments and debt repayment to Gazprom), pays to the budget not the actual profit (which is known after the end of the reporting period), but the “estimated profit” for the current year established by the Ministry of Finance. State-owned companies have the actual preferences for the right to buy currency from the reserves.
• There was no moratorium declared on early withdrawal of bank deposits or banking holidays –actions that proved themselves as effective in Ukraine in 2004 and 2008. This mistake was left for the current Head of the National Bank by her predecessor, Stepan Kubiv, but not correcting it continues to have a negative impact on the banking system.
• The National Bank could not resist the idea to peg the exchange rate before the elections, the volume of interventions on the interbank market in October amounted to $3.2 billion, and another $0.6 billion in November. The hryvnia weakened, but still there is a significant difference between the official exchange rate (UAH 15.85/USD on December 22) and informal market rate (UAH 19-21/USD), which allows those who can buy foreign currency at the NBU auctions and on the interbank market to enrich themselves. It also gives the exporters an incentive to hoard the foreign currency. The information about the operational state of the interbank market of Ukraine sometimes suggests that some transactions are being performed at a rate significantly different from the rate that was fixed for most of the transactions on that day (ex., November 20)
• Preference for administrative measures – the obligatory sale of foreign currency revenues by exporters, restrictions on foreign currency purchases by private persons, payment only for physically delivered imports, etc. The introduction of so many sanctions is due to the difficult situation in the economy, but the lack of clear signals about their cancellation schedule and transition to the market-based mechanisms provokes a natural negative reaction of economic agents
• The situation with refinancing is still non-transparent – it leads to suspicions that not all banks are treated equally in terms of possibilities and conditions of refinancing. There are no currently confirmed facts or even the actual lawsuits against the NBU on refinancing but this topic is constantly being discussed at the rumors level. Gontareva promised to submit the amendments to the legislation concerning the possibility of disclosing the information about the recipients but so far even the draft laws on the NBU website are missing.
• There is no public promotion of changes to the legislation – regarding the issues on early termination of deposit agreement, futures and derivatives market development and many other important issues. According to the Constitution the Central Bank has lost its ability to initiate laws but it can still submit a draft law through the President or deputies.
• Until recently, there was no prompt reaction to the events. There are the statements made by the Head of the NBU, for example, about the rate, which are perceived as the forecasts, but “inaccuracy ” of these forecasts reduces NBU’s credibility. There is no much attention being paid to communications and explanation of its actions. Yet, there is hope that with the new team in place and the new structural transformations (namely the creation of a single administration responsible for internal and external communications, and its subordination directly to the NBU’s Head), the situation will change for the better.

To conclude, in my opinion the abovementioned “positives” demonstrate that the NBU is trying to make changes, and “negatives”, which are very important, probably will not disappear after a change of the current administration, which is being proposed. On the one hand a larger independence for the National Bank should be achieved so that it could fulfill its primary mission – to ensure hryvnia’s stability. On the other hand, one should push for the NBU to become more transparent, accountable and have better coordinated actions.