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The NBU Governor Valeria Gontareva’s Report at the Verkhovna Rada of Ukraine Before Resignation

15 March 2018



Dear members of the parliament,


At last, after ten months of awaiting, I have the opportunity to report to the Verkhovna Rada on three years of my work as the Governor of the National Bank of Ukraine. 


From the very beginning I emphasized that I had come to the NBU to introduce reforms. That is why, at the time when all reforms that were critical for the Ukrainian economy and banking sector have been implemented, I consider my mission to be accomplished. Last April, I submitted the official application for voluntary resignation to the President and have not been working at the NBU since 11 May.


What has been done?


First of all, macrofinancial stability is ensured. The country switched to a flexible exchange rate and launched a new monetary policy of inflation targeting. And successful cooperation with the International Monetary Fund and other international creditors allowed increasing reserves to USD 18.4 billion.


Secondly, we have cleaned up the banking system from insolvent banks and strengthened its stability for the future. Banks are healthy, transparent and ready to restart lending.


Thirdly, we have performed the complete transformation of the National Bank - rebuilt all processes and transformed it into solid modern institution.


And therefore, I believe that my mission is fully implemented because the reforms are made.


I would like to draw you attention to the fact that this is the first time when resignation of the NBU Governor has not been a political decision.


And now I’d like to give more details on the implemented reforms.


Let’s recall the conditions the new NBU team and I as the Governor faced when we started the reforms.


When I joined the NBU in 2014, the economy and the banking system were in distress.


Huge macroeconomic imbalances, unrealistic hryvnia exchange rate, substantial fiscal dominance, unhealthy banking system, practically no banking supervision, large shares of related party loans, nontransparent ownership structures, ineffective anti-money laundering procedures and so on...


The country was stricken by three crises at a time – macroeconomic, foreign exchange, and banking crisis.


On top of that, Ukraine was in the state of war. Along with a part of our territory, we lost almost 20% of GDP and 30% of foreign currency revenues. That was a “perfect storm” indeed!


Ukraine was thought to collapse economically and fall apart as a country. My fellow central bankers as well as leading financial experts said that the mission was impossible.


However, I believe that any crisis – even such a severe one – cannot be an excuse to abandon the path of reform.


The NBU team took the responsibility to conduct reforms at these hard times and today we have something to be proud of and something to report to you.

All NBU’s decisions were aimed at stabilizing the financial system, putting an end to lawlessness in the banking sector and laying foundation for its further development, steady economic growth and rising living standards in the country.


So what are the NBU’s accomplishments during the three years of my term in the office?



First, we have recovered the macrofinancial stability.


To do this, we made the uneasy and painful but long overdue and inevitable decision to shift to the floating exchange rate regime.


Politicians’ wish to hold the hryvnia exchange rate at any price for the sake of their own interests was a real drag on all other macroeconomic indicators. We have finally got rid of the anchor that pulled us down.


Moderate foreign exchange fluctuations are no longer viewed as an apocalypse and don’t cause panic. You can compare the current situation on the foreign exchange market with the situation three years ago.


In 2015, the NBU received a new mandate to ensure price stability in the country. For this purpose, two years ago, we reset and rebuilt a new effective monetary policy – the inflation targeting policy. Please note that Ukraine has no alternatives so far. The global experience shows that the regime we chose is the most effective way to ensure low and stable inflation rate in our country.


During my time in office, the NBU, for the first time, committed itself to achieving inflation targets. In 2016, the inflation target set at 12% was achieved.


That achievement only marked the beginning of the path. The medium-term inflation target was set by the NBU at 5%, which is an acceptable rate of inflation for emerging markets. However, I’d like to underline, the concerted actions of all branches of power are required to bring inflation down to its target range in the next two years. In first place it’s up to you.


Moreover, macroeconomic stabilization allowed us to start the gradual easing of foreign exchange regulation.


As you know, I have a market-related professional background and I have always advocated market-based economy. Unfortunately, economic risks, particularly hostilities in our country’s territory, not only prevented us from removing foreign exchange controls at earlier stages but made it imperative to impose unpopular administrative restrictions by the NBU. We had to stop panic from spreading and unproductive capital outflows due to unfair foreign exchange transactions. With the administrative measures put in place, the NBU managed to curb demand for foreign currency, ensured its regular inflow in the interbank FX market, and stemmed unjustified FX outflows from Ukraine.


Stabilization was attained and over the past two years the regulator has been prudently deregulating the market not to undermine a fragile financial stability in our country.


Moreover, the NBU has committed to overhaul archaic currency regulations, the goal itself being a very ambitious one. Ukraine is ready to abandon its practices established as far back as 1993 and make a transition to a modern model for the free capital flow based on European principles. According to the new model, everything which is not forbidden will be allowed, with all currency regulations to be consolidated into a single framework law. Thus, FX regulation in Ukraine will become transparent, simple and clear to households, business and banks.


Let me reiterate that these tasks and goals as outlined by the NBU cannot be achieved without coordination and support of other state institutions. However, to completely switch to liberal FX regulation model, the efficient tax regulation shall replace rigid FX regulation. It’s the tax regulation, based on the OECD global standards, which is very instrumental in controlling the unproductive capital outflows through low tax jurisdictions.


Second, I am proud of the large-scale reform we were able to implement in the banking sector, now being referred to as an example of best practices in central banking.


We started with the comprehensive diagnostic analysis of the banking system, which allowed us to shed light on the actual situation with banks. Banking sector had to be rehabilitated within the shortest possible time. To this end, in 2015 together with banks we developed capital increase programs mandatory to implementation.


From the beginning, those programs were fairly compromise: banks were given a four-year timeframe to complete recapitalization, and three years to handle repayments of related party debt.


As part of the programs implementation, banks have already built up their capital for a total of UAH 319 billion. It was a step to insure their financial stability in the years to come, hence, to restoring confidence in banks. At the same time, banks that had failed to comply with their capitalization programs were declared insolvent and withdrawn from the market.


What is more, the NBU started to clean up the banking sector from money-laundering banks, which concealed behind numerous forged owners and activity of which was not even related to banking.


Eventually, our measures have resulted in the whole banking sector “landscape” being overhauled. Out of 180 banks operating in 2014, some 82 retained their operations and now gradually revive lending to prop up the economy. And Ukrainian banks have resources to start full-scale lending renewal, which is more than UAH 100 billion and USD 4 billion of free liquidity. So our efforts have helped make the banking system 100% transparent to the extent that any bank customers can check background information on who they trust their money. The banking system is sufficiently capitalized and completely liquid.


The trend that indisputably proves resolving of systemic problems of the past is the repayment of banks' refinancing loans.


You might remember how I was blamed for some of incredible volumes of refinancing issued to banks. But I would like to give you the figures that speak for themselves.


In June 2014, at the beginning of my term in the NBU office, the debt on refinancing loans totaled UAH 111.7 billion.


As of 10 May 2017, the figure for solvent banks amounted to UAH 15.2 billion, UAH 14.4 billion of which fell on the state-owned PrivatBank and half a billion hryvnias - on the state-owned Ukrgazbank. At that time, the debts of insolvent banks to the NBU totaled UAH 45.2 billion. The rest UAH 50 billion had already been repaid.


Let us look in details at this unpaid UAH 45.2 billion. Our country should know its so-called "heroes" in person, so I will give you the list of insolvent banks that are the largest debtors on refinancing loans, and the names of their ex-owners, as they are well-known oligarchs and businessmen in our country:


- Unconditional leader is Oleh Bakhmatiuk who owes the NBU more than UAH 10.2 billion on the loans to his two banks - Finansovaya Iniciativa and VAB Bank;


- Nadra Bank. Dmytro Firtash owes the NBU UAH 9.8 billion on his loans;



- Mykola Lahun owes the NBU UAH 8 billion on the loans to Delta Bank;


- Kostiantyn Zhevago and his Bank Finance & Credit owe to the NBU UAH 6.3 billion;


- Leonid Klimov, who is still an MP and even a member of the Parliamentary Committee on Finance and Banking, owes the NBU UAH 3.4 billion on the loans to IMEXBANK.


All the others owe the NBU UAH 7.5 billion.


I emphasize that insolvency of the banks does not mean that now these notorious owners are completely free from the debts of their banks. Public money should be returned - that’s all there is to that!


For this purpose the NBU has filed 12 applications to law enforcement bodies regarding crimes committed by the shareholders of these banks.


We have also filed 44 lawsuits in court seeking to recover the debts owed by these banks to the NBU from financial and property guarantors. For two years already, we have been expecting a comprehensive and unbiased investigation of all the cases.


Let us not forget that we are talking about refinancing loans, which were mainly granted to banks by the NBU as early as in 2008. These loans were backed by inappropriate collateral, such as illiquid assets that were excessively overvalued. These banks have either already been liquidated or are currently under liquidation procedure. Therefore, starting from mid-2014, the NBU’s team tightened its requirements for an appraisal of collateral pledged against refinancing loans, introduced practice of shareholders personal guarantee provision and invited international independent appraisers to perform assets appraisals. Loans were granted to banks only to cover household deposit outflows up to a guaranteed amount of UAH 200,000, with the NBU supervisor monitoring all such payments.


Thereupon we can account for every hryvnia of refinancing loans we provided to banks during this time.


It was my team, which stopped activities of banks involved in illegal transactions. For instance, as of mid-2014, some 17 Ukrainian banks used correspondent accounts of several European banks for withdrawal of money and false increase of capital. The transactions totaled about USD 2 billion.


We stopped that.


For almost two years now, none of the operating banks in Ukraine is engaged in such transactions, nor maintain relevant accounts. We provided all the banks with a list of such European entities (regretfully, I cannot disclose it). Currently, any bank that opens an account with a bank from that list and conduct a transaction involving it, will be subjected to 100% provisioning requirement. Thus, you may well understand, no one will do it ever again.


However, the complete clean-up of the banking system would not be possible without resolving PrivatBank issue.


After stress testing, the NBU and PrivatBank developed a recapitalization program. Former owners, particularly Ihor Kolomoiskyi, provided personal guarantees to abide by the program, yet, neither the bank’s management, nor its shareholders have fulfilled the program requirements.


At the end of 2016, capital shortage of the bank reached UAH 146 billion. Furthermore, post-audit of the bank conducted by E&Y showed the need for recapitalization for UAH 38.6 billion. Direct fiscal costs for PrivatBank recapitalization were as high as 7% of GDP!


At the beginning of this year the international company, Kroll, that conducted the forensic audit of PrivatBank confirmed and recorded the biggest financial fraud of the 21st century. Massive orchestrated fraudulent actions of the bank shareholders and management inflicted losses on the state of at least USD 5.5 billion.


When I mention this figure to my fellow colleagues from other central banks-  USD 5.5 billion– what does it mean?. But when I say that it equals to about 33% of household deposits and almost 40% of our country’s monetary base, -, this fact does not just surprise them, it shocks them.


Transferring the systemically important bank servicing over 20 million of Ukrainian citizens under public control was the only right solution. It is thanks to the timely and coordinated efforts of the National Bank of Ukraine, the Ministry of Finance and the Deposit Guarantee Fund, that all these clients saved their money and continue to be financed by banks.


We believe that resolving of PrivatBank’s problems will become a case study as there are no analogues in the world for this project.


In parallel with systemic changes in the market, the NBU reformed its own supervision function. We have created a modern risk-based supervision. I believe we can be proud of the new supervision, which is already running.


Starting from this year, the diagnostics of banks will become annual, and its findings will be freely available.


I am sure that conscientious adhering to the standards by banks along with maintaining transparent, true and fair bank reports will help to avoid systemic crises in the future.


In the process of reforming, it was not only supervision which has undergone fundamental changes.


Our third accomplishment is that we have transformed the National Bank of Ukraine and built a strong modern independent institution.


In 2015, along with the new NBU mandate to ensure price and financial stability, the NBU gained real independence for implementing it.


The new structure of the National Bank of Ukraine laid groundwork to exercise such independence.


I can inform you that the NBU is no longer a ‘one man show’. Today it’s a cutting-edge European institution. We have made it impossible to make decisions solely and created the modern system to manage the central bank, which is based on collective decisions of the committees - Supervision Committee, Credit Committee, Financial Stability Committee, Monetary Policy Committee and others;


In the NBU we have brought together highly qualified and professional Board members and a great team. By the end of 2015, we not only managed to downsize 60% of the staff, but also engaged 710 new employees in terms of internal transformation.


We have centralized the functions, disposed of regional offices and non-core assets, as well as redesigned all processes in the National Bank of Ukraine.


All in all, for 2014-2016, internal transformations enabled to save UAH 7.3 billion.


I would like to pay special attention to our achievements on the way to our transparency and public accountability to Ukrainian citizens. We became open and more comprehensible to the society and international partners as a result of implementation of a new communications strategy for the central bank in general and a structured communications cycle for the monetary policy in particular. We are guided by the global standards and the best international practices in external communications.


Therefore, owing to the reforms put in place we have succeeded in building up a modern, open, and independent European central bank and reached the point of no return.


All these global changes and achievement would have been impossible without our strong team and constant support from our counterparties.


I am very grateful to the IMF, the WB, the EBRD, the IFC and central banks for their support - without your help neither economic recovery nor fundamental banking sector reforms would have been impossible.


In particular, the fruitful cooperation with the IMF has been the unconditional achievement of the three recent years, to say the least.


We succeeded in entering into a new EFF agreement amounting to of USD 17.5 billion of financing, and engaging international partners under the single ‘umbrella’ in helping Ukraine. It was the renewed cooperation with the IMF and the World Bank that kept the economy afloat under extremely difficult conditions. The NBU in its turn has never failed to fully and timely implement any of the reforms required by the international community that has provided support to Ukraine.


I am also very grateful to the G7 and EU Ambassadors. I cannot even describe how much support they provided to the NBU, enabling the central bank to carry out reforms.


I would also like to thank the government and all the ministers I had the honor to work with and to implement joint projects during my time in office.


It is no exaggeration to say that Ukraine has never before had so many professional and energetic patriots at the helm of state.


It is important that the NBU continue work in tandem with the government, just as my team did when I was in office because our cooperation is vital for ensuring the macrofinancial stability.


In particular, the NBU would not have been able to switch to the inflation targeting regime if Ukraine had not put an end to the so-called fiscal domination. This in turn became possible only due to counterbalancing budget revenues and expenditures as well as implementing the long awaited reform of the energy sector.


The NBU, supported by the professional financial community, bankers, and experts, has succeeded in enhancing the participation of stakeholders in decision-making. I would like to thank the main banking association - the Independent Association of Ukrainian Banks - for their help in finding solutions to improve the operation of the banking system.


I would like to thank all my colleagues for the professional dialogue and their constructive criticism.


And finally, on behalf of the entire NBU team, I would like to thank the President for his trust and support in creating an independent world-class central bank.


I am confident that Yakiv Smolii, nominated by the President as my successor, will be the NBU Governor that Ukraine needs now - highly professional and independent of any political influences.


Under his guidance the NBU will continue macroeconomic stabilization and the banking system development and will not swerve from this track even under an increasing political pressure.


We have already completed the most difficult part - we have shifted the river’s flow. Our ship with a team of professionals on board should continue to move forward pursuing a clearly defined route. Firmness and irreversibility of the chosen course is the guarantee of our country’s success and support from our international partners.


However, all our efforts will be in vain if we fail to maintain the NBU’s independence.


The National Bank of Ukraine is out of the politics. This is a standard for all developed countries where Ukraine is heading.


The central bank needs to remain independent!


Thank you for your attention!


Last modification   15.03.2018