The legal standoff between Ukraine's largest lender JSC CB PrivatBank and its former owner is a test for the country's new government as it implements political and anti-corruption reforms.
PrivatBank is Ukraine's largest bank by assets and was nationalized in December 2016 due to allegations of fraud and concerns over sectorwide stability. The former controlling shareholder, businessman Ihor Kolomoisky, left Ukraine amid allegations he had used PrivatBank to launder hundreds of millions of dollars but has since returned. He wants to reclaim his stake in the lender and has taken the dispute to the courts.
For Ukraine's new government, legal decisions in favor of Kolomoisky would have serious implications in its bid to address graft, limit the influence of wealthy businessmen and convince the International Monetary Fund to extend its loan program with the country. The dispute also poses questions for Volodymyr Zelensky, the comedian turned president of Ukraine, who has vowed to crack down on graft but who also has links to Kolomoisky.
"If the PrivatBank legal cases in Ukraine are resolved in favor of the state, this will prove that the reforms in the country have worked and the old system of vested interests and state capture is broken," Artem Shevalov, supervisory board member of PrivatBank, told S&P Global Market Intelligence.
While Zelensky has not yet ruled out a settlement with Kolomoisky, he has said there should be no compensation — though resolving the dispute in this manner could imperil IMF loans, Reuters reported Oct. 11, citing Kateryna Rozhkova, deputy governor of the Ukrainian central bank.
PrivatBank was nationalized after a central bank investigation, backed by the IMF, revealed some $5.5 billion in missing funds from the lender's balance sheet.
But in April, just a few days before the election of Zelensky, the Kyiv District Administrative Court ruled the nationalization of PrivatBank illegal.
The Ukrainian central bank lodged an appeal against that decision, with a hearing scheduled Dec. 19. The Commercial Court of Kyiv City, which was set to make a final judgment on the case, has pushed back its ruling until the appeal is completed.
Zelensky has a prior relationship with Kolomoisky, who helped promote the presidential campaign on Ukrainian TV.
Prior to Zelesnky's election, the IMF supported Ukraine's banking system cleanup and reforms to stabilize the country's economy, which slipped into recession after Russia annexed Crimea in 2014. The IMF approved a $17.5 billion loan in September 2017 and a new tranche of its loan program to Ukraine is due to be renewed in January 2020.
The IMF has put the talks on hold until the resolution of the PrivatBank case. In a move to secure the IMF funding, Ukraine is in the process of amending bank insolvency legislation, which will ensure that the nationalization of PrivatBank cannot be reversed.
In October, the London Court of Appeal upheld a worldwide freezing order on PrivatBank's former owners' assets and said the lender has a "good arguable case" to recover $1.9 billion, or $3.0 billion including interest, from pursuing fraud claims against Kolomoisky and former shareholder Gennadiy Bogolyubov.
PrivatBank CEO Petr Krumphanzl said at the time the ruling was an "an important step towards achieving justice for the bank and the people of Ukraine."
With the outcome of the court battles still outstanding, the supervisory board tasked with restructuring the bank and preparing it for reprivatization must plan for all possible scenarios, Sharon Easky, chair of PrivatBank's supervisory board since July 31, said at a presentation Dec. 3.
Given the systemic importance of PrivatBank, the lender cannot cease operations even for a short period, she said. As of 2018-end, PrivatBank's total assets amounted to nearly $10.0 billion, accounting for roughly a fifth of total bank assets in Ukraine, according to S&P Global Market Intelligence data. The bank held $8.3 billion in customer deposits as of 2018-end, accounting for about a fourth of Ukraine's $34.1 billion total customer deposits, the data shows.
PrivatBank also processes about 60% of payments in the country, according to Easky.
The board has to deliver a new strategic plan in partnership with the government by the middle of 2020, and a tentative deadline for the reprivatization is set for 2022, she said.