The central bank of Ukraine: a new game

Yakiv Smoliy took over as the Governor of the National Bank of Ukraine (NBU) in mid-March 2018. His goals are, among others, low inflation and efficient banking system.

Valeria Gontareva, who headed the NBU from 2014, submitted her resignation in April 2017, but it took some time to find someone to fill her place. Smoliy had previously worked at the NBU, which is both an advantage and disadvantage at the same time.

The 57-year-old Yakiv Smoliy is a trained mathematician. He served as the first Vice-Governor of the Ukrainian central bank from 2016. In the years 1987-1991 he worked in a radio plant, and starting from 1991 he worked at the regional structures of the NBU in the Ternopil Oblast. From there he went to work at Bank Aval, becoming one of its shareholders. In 2005, he was one of the founders of Prestige Bank, which was taken over by the Austrian Erste Bank. In the years 2006-2014, he was a member of supervisory boards of companies from the dairy industry.

Strategy of continuation

Shortly after the nomination, Smoliy presented the strategy of the Ukrainian central bank for the coming years. “We have analyzed the needs of the participants of the financial ecosystem, the conditions of the environment in which they are operating, and the trends that will be affecting it in the future. Based on this analysis, we have formulated a strategy for the central bank – a road map that we will be following over the next few years,” announced Smoliy.

“There is no doubt that we should stick to the solutions that we adopted four years ago. We will continue to go in this direction,” he added.

His strategy is based on several priorities :

  • low and stable inflation

The NBU wants to achieve it, among others, by amassing foreign exchange reserves enabling it to stabilize the market, by conducting informational activities intended to stabilize inflation expectations at a low level, by maintaining a floating UAH exchange rate with simultaneous interventions on the currency market, and by preventing the financing of the budget deficit through the issue of currency.

  • stable, transparent and efficient banking system

The central bank announced a transition to banking supervision conducted on the basis of risk analysis, in which the regulator will perform, among others, analyses of the banks’ business models and strategies and will introduce annual stress tests, the strengthening of control of the banks’ operations with related persons, the harmonization of the banking sector requirements with those applicable in the EU and with the recommendations of the Basel Committee on Banking Supervision, and the introduction of increased requirements for the protection of banks against cyber-attacks.

  • resumption of lending

The regulator wants to achieve this goal by launching a centralized credit register, simplifying the procedure for the disposal of pledged property, stimulating the development of the bad loans market, strengthening the rights of creditors, „improving” the bankruptcy procedure and increasing the powers of private debt enforcement agents.

  • effective regulation of the financial sector

The announced measures include, among others, regulating the activities of non-banking entities providing financial services, developing and implementing a program for the protection of the rights of customers in the non-banking financial sector, and reconstruction of the securities market with centralized depositary functions.

  • free movement of capital

The bank announced the liberalization of the current restrictions on the currency market.

  • financial inclusion

The NBU wants to promote the development of the payment infrastructure, the transition towards non-cash settlements, the popularization of international and domestic payment systems, and the promotion of non-cash transactions among the citizens. The NBU may also issue its own virtual currency.

  • modern, open, independent and efficient central bank

The bank announced changes in the organizational structure and communications activities.

According to experts, the Ukrainian central bank will have a very limited ability to pursue an independent policy. “The central bank’s policy largely depends on Ukraine’s commitments towards our international partners and creditors,” notes Ihor Petrenko from the International Centre for Policy Studies.

Disputes concerning the results of the central bank’s previous activities

During her farewell speech in the Ukrainian parliament, the former NBU Governor Valeria Gontareva insisted that she had successfully carried out her mission – the central bank had ensured the macroeconomic stability and managed to clean up the banking system and strengthen its stability.

In the period when Gontareva served as the Governor, the exchange rate of the UAH fell from 12 to over UAH26/USD1. The number of banks operating in Ukraine decreased from 180 to 82, and the rapid process of their liquidation became known as the “elimination of banks”.

Advocates of the course adopted by the former head of the NBU argue that devaluation is a natural process, and that the liquidation of banks was necessary in order to clean up the country’s banking system. Critics point out that many of these liquidations have already been recognized as unsubstantiated by the courts. This happened, among others, in the case of the controversial collapse of the Khreschatyk Bank, which had mixed private and municipal ownership. In March 2018, the Ukrainian Supreme Court ultimately determined its liquidation by the NBU to be unlawful.

Serhiy Rybalka, from the parliamentary Committee on Financial Policy and Banking, presented a very critical assessment of the activities of the previous NBU leadership.

“The banking system was practically destroyed and the value of the UAH brought to collapse. The adopted course involved the destruction of small and medium-sized banks. The country started to function in a state of complete lack of confidence in the banking system. The banks have lost an ability to finance long-term infrastructure projects and the modernization of the industry,” comments Rybalka.

“We now have a strong foundation for the development of the financial system. Over the past two years Ukraine’s banks have regained the trust of the citizens,” stated Smoliy in response to the criticism.

“Perhaps some tactical errors were made, but they resulted from the scale of the tasks associated with the clean-up of the banking system. The NBU did not have enough resources to maintain the exchange rate of the hryvnia,” said Serhiy Fursa from the investment company Dragon Capital in defence of Gontareva’s legacy.

According to Taras Kozak from the UNIVER Investment Group, the positive effects of the work of the former NBU Governor include macro-financial stability, the floating exchange rate of the UAH, the policy of inflation targeting, the increase in the central bank’s reserves to the level of USD18.4bn, the healthy and transparent banking system which enjoys the highest trust of citizens since the beginning of Ukraine’s independence, and a modernized central bank.

According to the economist Alexey Kushch, the scale of errors committed by the NBU is best demonstrated by comparing two crises from the years 2008-2009 and 2014-2015, which hit the Ukrainian economy with comparable strength. “While in the first case the exchange rate of the USD went up from UAH5 to 8, which was seen as a disaster at the time, in the second case the devaluation was greater and the exchange rate reached UAH29/USD1. The devaluation was an objective process. But the depth of the devaluation depends on the abilities of the central bank’s leadership, and they unfortunately failed to demonstrate any abilities,” he commented.

According to Kushch, the process of “elimination of banks” has led to a non-competitive banking system in which 56 per cent of all assets belong to state-owned banks.

“It’s an inefficient system, which is absolutely unable to compete. Such a system cannot develop, cannot introduce modern technologies, or provide loans to the real sector of the economy. This is a monopolistic banking system with high interest rates on loans, low interest rates on deposits and terrible quality services,” argues Kushch.

As if to confirm his words, Privat Bank, which was nationalized more than a year ago, has recently introduced new regulations as part of the “fight against money laundering”, which make it virtually impossible for non-residents – i.e. potential investors in the Ukrainian economy – to use bank accounts.

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