In his interview with the Banker magazine, Andriy Pyshnyy talks about the results of his first year as NBU Governor, the NBU’s success in maintaining macrofinancial stability, new areas of the central bank’s work, and preparations for Ukraine’s post-war recovery.
The interview has been published in the magazine’s October issue
The last time we met with Andriy Pyshnyy was in 2020. He had stepped down as Chairperson of Oschadbank’s Board, a job he took in 2014 during the Revolution of Dignity. Under Mr Pyshnyy’s leadership, the clumsy state-owned behemoth had turned into a modern commercial bank in a few years’ time and won a high-profile case in the Paris Court of Arbitration about the payment by russia of USD 1.3 billion in damages for annexing Crimea.
When russia had launched the full-scale invasion, Mr Pyshnyy joined the legal war effort to impose sanctions against the aggressor state as part of the Yermak-McFaul Expert Group. In October 2022, amid massive attacks on the Ukrainian energy infrastructure and ahead of historic negotiations with the IMF, Mr Pyshnyy took office as NBU Governor. In an exclusive interview with Banker.ua, Andriy Pyshnyy talks about his first year in this capacity.
ON KEY OBJECTIVES AS GOVERNOR
Mr Pyshnyy, what has the year been like for you as Governor? Has it met your expectations?
In a zoom meeting with staff at New Year’s Eve, we joked that every CEO starts their end-of-the-year speech by saying, “It was a difficult year, but...” However, the war made us realize what it’s really like to have a difficult year and face an existential challenge. I can’t say that my first year in office has been difficult. I was clearly aware that with the full-scale war raging on, I was tasked with running one of the country’s key institutions with a mission to ensure price and financial stability under any circumstance, be it blackouts, shelling, large-scale cyber attacks, or smear campaigns. Essentially, this boiled down to strengthening the economic frontline to support the heroic fight of the Armed Forces of Ukraine.
This goal was what dictated the objectives I set for myself and the NBU team. A significant number of those have definitely been met, but important work is still ahead.
What were those tasks?
I will name the primary ones. The first task was to ensure macrofinancial stability under the conditions of a full-scale war. To our partners abroad, this still sounds absolutely unreal, considering the number and scale of the challenges. But when you have no choice but to do the impossible, solutions present themselves.
Consider this: ours is an open economy that relies on exports for a significant part of GDP and has a modest level of GDP per capita. As if that wasn’t enough, we were still feeling the shock of the pandemic. Against this backdrop, the aggressor state seizes almost one-third of Ukraine’s territory and inflicts massive blows on our energy and transport infrastructure. As a result, we have to operate with disrupted supply chains, manmade and natural disasters, and an overwhelming wave of migration, with people moving across and out of the country. A terrible combination. A “perfect storm.”
But against all odds, we managed to keep things under control and ensure macrofinancial stability. The NBU’s proactive monetary policy brought tangible results. Specifically, inflation in Ukraine fell sharply to 8.6% in August, down from 26.6% at the beginning of this year.
Thanks to this, we can press forward with the gradual easing of the FX restrictions imposed at the outbreak of the war. We are also setting the stage for a transition to managed flexibility of the exchange rate and a gradual return to market-driven business-as-usual operation, which plays an important role in supporting the economic recovery and sustainability.
The second task was the uninterrupted operation of the banking system. An effective solution came in the form of POWER BANKING, a joint network of bank branches that we quickly put together at the onset of massive missile attacks against Ukraine’s energy infrastructure, when the arrival of a total blackout seemed only a matter of time. POWER BANKING has been a unique project that combines the efforts of all Ukrainian banks. It already spans more than 2,300 branches, in 382 localities, that are equipped to work even during a long-term power outage. Preparations are underway to shield the banking sector against potential new terrorist attacks on the energy infrastructure. The banks are testing and updating their business continuity plans. These efforts will enable people to retain access to their funds and banking services under any conditions.
The third task was to ensure that public expenditures in 2023 were funded without relying on NBU financing. By reaching a new level of cooperation with the Ministry of Finance, we have already managed to revive the domestic debt market. The result speaks for itself: between the start of the year and early October, the Ministry of Finance raised the equivalent of UAH 398 billion by auctioning off domestic government debt securities, up from just UAH 269 billion in 2022. Rollover for these securities has been 130% since the beginning of the year. This enabled us to abandon the monetary financing effort, which had by the end of 2022 soared to UAH 400 billion.
The fourth task was rather ambitious: to reach a cooperation agreement with the IMF and boost Ukraine’s chances of receiving sustainable international financial assistance. The country’s needs as the war grinds on are enormous. This is why the NBU, the government, and the president have been doing their best to make Ukraine the world’s first country to be granted a full-fledged IMF program under high uncertainty, as well as an unprecedented package of financial aid from partner countries. Now it is important to execute the program.
Earlier on, we implemented a large number of projects and initiatives that, though uncharacteristic for the central bank, were no less important.
Efforts that are not typical for the NBU include most noticeably the work on sanctions against banks that operate in russia, correct? Is that the project you are referring to? Or do you mean other unconventional initiatives?
Yes, the sanctions track stands out as a major line of activity in this regard. The sanctions applied by the National Security and Defense Council of Ukraine include seizing assets or imposing other restrictions on the movement of funds. This requires the NBU to develop holistic approaches, update regulations, and analyze international best practices. Sector-specific sanctions against the russian financial sector that Ukraine has imposed are a clear signal that we intend to sever any and all ties between Ukraine and the aggressor state’s banking system and shut down its access to Ukrainian markets.
The NBU has also initiated the application of personal sanctions to the heads of top russian state-owned and private banks for their individual contributions to keeping the russian financial sector afloat.
What measures do you consider the most effective?
All measures are effective, and the potential for placing the russian financial system under more sanctions is still significant. One of the global solutions may be to put russia on the FATF Blacklist. The NBU has been keeping in active contact with foreign regulators in this regard. An issue I constantly raise in my bilateral international meetings is how to encourage multinational banks to consider specific options and calculations for getting out of russia.
ABOUT THE TEAM AND STAFF CHANGES
You mentioned that the list of unconventional projects is wider than just sanctions initiatives. What exactly did the war add to the central bank’s operational activities?
It increased my responsibility for the lives of NBU employees. The priority is to provide safe and comfortable working conditions. Specifically, our building now has a children’s room and places for the relatives to rest. The shelter is now furnished with beds. If necessary, we have to be ready to stay at work after business hours.
Also noteworthy is the task of restoring the operation of banks in the areas liberated from the enemy. A functioning bank branch is not only about the basic availability of financial services, payments, and access to one’s own funds. The presence of an operational bank branch is a signal that things are going back to normal. Such signals should be broadcast if we want to bring back internally displaced persons and forced migrants.
In addition, we began to pay more attention to inclusiveness. Our country and society must make a huge leap forward in terms of barrier-free accessibility, so that hundreds of servicepersons and civilians who suffered in the war can adjust to life after having sustained injuries. Ukraine aspires to have the world’s most inclusive banking system.
And, of course, we’re helping the Armed Forces of Ukraine. The NBU has set up and popularized abroad a special account to support our soldiers. Since the beginning of the war, almost 30 billion hryvnias from this account has gone to meet the needs of the Defense Forces. Our work to issue commemorative coins and medals is mainly focused on the Armed Forces. We strive to support them and immortalize their feat. They are the real Heroes of our time.
You have overseen a number of staff reshuffles at the NBU. How effective have these changes been? Have you finished building your team yet?
A team is a living organism. Yes, I believe that currently all management positions are held by professional and experienced people. When I took over the NBU, I met many experts who were well-trained and dedicated to their lines of work. Perhaps that is why I often say, “Believe in the Armed Forces and the NBU.”
I was well aware that my task was to maximize the team’s potential and reinforce it in certain areas. So, for example, I established a completely new line of reporting, called Financial Stability, and redistributed responsibilities between some of the Board members. I also invited Dmytro Oliinyk to join the team. He overhauled the banking supervision function significantly.
In addition, members of the Board and I did a good job of developing the NBU’s departments. We created the Integrated Banking Supervision Department. The sanctions function was fortified by setting up a relevant office within the Financial Monitoring Department. The International Cooperation Department has recently been created on the basis of a former office. This was extremely necessary, taking into account Ukraine’s EU candidacy and overall level of representation on the global arena.
ON MONETARY POLICY AND FINANCIAL SECTOR CONDITIONS
Let's move on to monetary policy: during the year, the regulator kept the key policy rate at 25% for a long time. But in July the NBU decided to lower it. What were the reasons for both of these decisions? How have they affected the economy, prices, and the banks’ interest rates?
The key point here is the hryvnia’s attractiveness. We managed to make Ukrainians, at least a significant number of them, believe in the domestic currency amid a full-scale war. This is confirmed by a 25.6% increase in the volume of hryvnia retail term deposits between January and August 2023, a reversal from 2022, when it declined in a downtrend that started long before the full-scale invasion. More proof of confidence in the hryvnia is the decrease in the dollarization rate of client deposits by 1.8 pp, to 33.2%, in January–August 2023, due to the growth in hryvnia deposits and a drop in the popularity of FX deposits.
Thanks to this confidence, we were able to reduce the pressure on the FX market and contribute to the pullback in inflation. When people realize that by making hryvnia deposits or buying domestic government debt securities they can protect their money from losing value to inflation, they have fewer incentives to snap up foreign currency or durable goods. This relieves pressure on both the exchange rate and prices.
The logic of our monetary policy will continue to revolve around an attractive hryvnia. The NBU’s forecast does envisage cuts to the key policy rate, but such decisions should take into account that inflation will also gradually decelerate. Hryvnia savings will thus retain their capacity to protect people’s funds from inflation-driven loss of value.
Of course, we are well aware that risks remain significant, the worst one being the length and intensity of the war. This is why the NBU’s forecast does not envisage a rapid reduction of the key policy rate. Its dynamics will be shaped by the real-world situation and the balance of risks. This approach will allow us to maintain macrofinancial stability, which is the basis for revitalizing the economy.
Only by ensuring that the key objectives of price and financial stability are met can we further contribute to the implementation of the third task – the pursuit of a development policy that allocates an important role to lending.
How do you assess the current standing of the country's financial sector? What risks and crisis episodes have you been able to predict and overcome, and which ones will you have to continue to address?
As a primary result of the joint efforts of all financial market participants, Ukraine has retained financial stability despite the unprecedented test of war. The economy has learned to operate under difficult conditions, thanks largely to the continuous work of the financial sector. We have been able to correctly identify the sector’s key wartime problem – high credit risks and difficulty accessing credit.
On the one hand, the banks have accumulated a margin of safety that makes it possible to absorb a significant portion of credit risk. We are currently conducting a resilience assessment of the banks and already have its first results. These are close to what we expected, so there will be no bad surprises. Most banks will either not require a recapitalization or make up for losses of capital on their own.
On the other hand, we have preserved the banking segment’s core function – lending – by combining changes to government credit support programs with our regulatory forbearance measures so that full-fledged lending can recover more quickly if needed.
Although last year the economy shrank by almost one-third and was unable to generate strong demand for loans, today the situation has changed, in part due to the NBU’s efforts to ensure macrofinancial stability.
Our surveys show that the banks are optimistic. They are including a lending recovery in their business plans, are ready to expand their portfolios, and are expecting further growth in credit demand.
Are you seeing positive trends in the nonbank sector as well?
Unfortunately, unlike banks, this sector did not undergo the necessary transformations before the full-scale war, and so it is experiencing them now. The number of players in the market for nonbank financial services has declined, but their quality has noticeably risen. Specifically, the quality of regulatory reporting and compliance with prudential standards by nonbank financial institutions, as well as disclosure of the ownership structure, has been significantly improving and contributing to more market transparency. This means we are on the right track.
Although the sector is updating itself more slowly than the banking sector, we do see positive signs: in Q2, credit unions increased assets for the first time in two years, and the volume of gross premiums from nonlife insurance reached pre-war levels.
As a regulator, the NBU is striving to build a challenge-resistant, flexible, efficient architecture of the financial sector even as Europe’s biggest 21st-century war grinds on. All of this is envisaged by the new NBU Strategy and the Strategy of Financial Sector Development.
Without a doubt, the financial sector will play an important role in rebuilding Ukraine. On the one hand, it will provide opportunities and channels for investment inflows. On the other hand, it will become a source of credit support.
ON NBU SUPERVISORY FUNCTIONS
Let’s talk in detail about the NBU’s supervisory mandate. We often see news reports that the NBU has applied certain corrective actions to banks and NBFIs by fining and revoking the licenses of a whole group of market players. What are the reasons for this? How would you evaluate the regulator’s performance during the year in this area?
As I said, throughout the year we have carried out a certain overhaul of this function. In my estimation, this part of the NBU’s mandate is critically important. The NBU has conducted thorough inspections of banks and NBFIs that were providing money transfer services, including Internet acquiring services. As a result, we detected transactions that could be linked to illegal money-siphoning schemes by gambling businesses and to dubious “payroll projects.” The result of these measures was the increase in tax revenues from the mentioned segments of business, and the clearing of the market from the most unscrupulous financial institutions. Specifically, the NBU resolved IBOX BANK JSC and CONCORD JSC JSCB for systematic AML/CFT violations.
The overall effect of these decisions has quickly manifested itself in the form of significant increases in tax revenues and less pressure on Ukraine’s international reserves. In August 2023, gambling businesses paid UAH 2.28 billion in taxes, three times the level of 2022. In the first eight months of 2023, UAH 5.6 billion in taxes has already been collected from this segment.
The question is how to prevent the return of similar schemes and increase the effectiveness of supervision?
We have conducted a thorough internal analysis and consultations with IMF experts and made a decision to build an integrated supervision approach that would combine the expertise of many departments. Supervisory teams should be made up of not only banking supervision specialists, but also colleagues from the payment infrastructure, financial monitoring, legal, and security departments. The risk-based approach lays the groundwork for the use of deep analysis as a tool. As a result, the Integrated Banking Supervision Department has been created.
Such an approach will not only ensure the effectiveness of the supervisory function, but also the fulfillment of the NBU’s strategic goal of maintaining a stable, transparent, and profitable banking system.
Regarding the supervision of the nonbank sector, as I said, its reform is underway. One of the stages will be a transition to global standards of risk-based supervision for all segments of the sector.
THINGS TO WRITE A BOOK ABOUT FOR FUTURE GENERATIONS
— We had a conversation with you almost three years ago, when you stepped down as Chairman of the Management Board of Oschadbank. Back then, when asked where we would see you in the future and what your plans were, you said: "My plans include writing a book that, among other things, will tell the story of my Oschadbank, interesting cases, experiences, events, and people. Just our story about the struggle and victory over russia in international arbitration would be enough for a good thriller." You are now celebrating the anniversary of your chairmanship of the NBU and are also fighting against russia in your field. What would you write about now?
— Now, of course, I have slightly different priorities. Together with the team, we are focusing on the main thing – to ensure that Ukraine does not experience macrofinancial destabilization along with the Victory, like many other countries did. All our efforts are aimed at ensuring price, exchange rate, and financial stability.
We have already come a long way. This gives us confidence. Especially when you consider that each step was more like the work of a deminer. We had no manuals or textbooks on how to act in the face of a full-scale invasion and maximum uncertainty. The NBU has become a generator and tester of new nonstandard solutions, taking into account the fact that the cost of a mistake could be too high. And this is very motivating, believe me.
This is probably why Ukraine has even managed to somewhat change the global financial landscape. The program with the IMF is historic. The program with the IMF is historic. Before approving it, the IMF had to revise its own lending policy, which was unimaginable before.
So if we draw an analogy with a book, by our actions, we are actually writing a new textbook on how to save a country while an unprecedented large-scale war is being waged against it.
It is still impossible to fully assess our contribution to bringing the Victory closer. Understanding the transformation that the central bank, the financial system, and the entire country went through during this period, and whether we appropriately overcame the greatest challenge in the history of independent Ukraine, is a postwar perspective.
And then, I would probably like to conduct a kind of "debriefing" of the decisions we made to analyze the lessons learned. Perhaps, it could be summarized in new rules, principles, and concepts of a central bank’s actions amid great uncertainty. Although even then, we will face other, more important tasks.
We will need to rebuild Ukraine, make it more resilient to challenges, comfortable for living and doing business, and attractive to investors. Therefore, we have ambitious goals for the future: returning financial market conditions to a certain degree of normality, reducing the share of nonperforming loans, and intensifying lending to the private sector.
Another important area is the insurance of political and war risks. As realists, we understand that russian missiles can cross our skies even after the Victory. Investors are also well aware of this. So we need to move from visualizing the concepts toward implementing the mechanisms to cover political and war risks for foreign and domestic investors. This can be done by using the funds raised by the government from partner countries, international development agencies, and other international donors and by accumulating this money in a special trust fund. In the longer term, the NBU, jointly with the government, is committed to create a war insurance pool of Ukraine.
We also realize that the country is first and foremost about people. Unfortunately, there are terrible losses that we cannot bring back, but there are also those for whom we must fight. They include millions of citizens who have left the country. The NBU is actively studying the issue, analyzing international experience, and is ready to support the government in finding optimal solutions for the return of forced migrants.
Post-war recovery is a long process, and we are actually preparing for it already now. Discussions are ongoing, and potential models for post-war recovery and ensuring rapid and sustainable growth are being explored. The NBU has probably the most powerful analytical team in Ukraine, so we are working in this area and will definitely offer solutions.
We want to learn from countries that have survived wars. We strive to know everything about all of their mistakes and achievements. For example, slowdowns in recovery often coincided with delayed EU accession and paused structural reforms. I hope that Ukraine will be able to avoid making these mistakes, given unprecedented support from the world community and our steadfast progress towards the European Union.
The program with the IMF, which provides for a package of financial support, structural reforms, and mutual commitments, also adds to our confidence. This program has both baseline and pessimistic scenarios. Recently, we have been hearing quite often about the need to prepare for a war of attrition. I cannot predict the duration or ferocity of the war. Hardly anyone can do that. The only thing I can guarantee is that the NBU will fulfill its mission under any circumstances.