Good morning, dear colleagues,
I am here to inform you that after almost three years of my service as a governor, I have decided to resign and leave the central bank.
I have handed my letter of resignation over to the President of Ukraine, asking him to accept my resignation from 10 May this year.
As promised, I inform you about it in advance, a month before. It is a common practice already at the NBU to announce any changes in the Board a month before the effective date.
Of course, if the Parliament votes for my resignation before that date, I will leave earlier. I am ready to present my report on the results of my work as the NBU governor at a plenary session of the Ukrainian Parliament.
I want to stress that there will be no other changes in the Board composition anytime soon.
The same goes for the policy of the National Bank of Ukraine. Floating hryvnia exchange rate, inflation targeting, modern central bank - all those goals me and my team (present here today) worked so hard to achieve, will not change.
Firmness and irreversibility of our course is a key to success of our country and support of our international partners. The NBU will pursue the same policy that you evidenced during my tenure as a governor.
As to my decision.
As you know, I always said that I came to the NBU for reforms.
I initially planned to be the NBU governor for even a shorter term. But I could not leave the banking system reform at the critical moment.
The main thing is what has been done.
First of all, we ensured the macrofinancial stability.
Our country has shifted to the flexible exchange rate and started a new monetary policy of inflation targeting. Our successful cooperation with the IMF and other international creditor allowed to increase reserves to USD 16.7 billion.
Secondly, we cleaned the banking system from the insolvent banks and increased its soundness for the future.
The banks are healthy, transparent and ready to resume crediting.
Thirdly, we have transformed the NBU completely, rebuilt all the processes and turned it into a powerful modern institution.
Therefore, I consider my job here to be done - the reforms have been completed.
Hopefully, the President will accept my resignation in the nearest future and will submit the respective petition to the Parliament.
For the first time in the history of our country the resignation of the NBU governor is not a political decision.
I believe that my successor will be a person independent of any political affiliation.
I am sure that this person will steer the NBU in the direction of further development of the banking system and will not swerve from this path even under a possible political pressure. Any person in this position will most certainly be under the political pressure. That’s why my message to the Board is “Stay strong!”
And now a few words about the reforms.
When I joined the NBU in 2014, the economy and the banking system were in a terrible state.
What me and my team had to deal with?
Huge macroeconomic imbalances, hryvnia exchange rate pegged to US dollar, significant fiscal dominance, unhealthy banking system, almost nonexistent banking supervision, high level of related parties lending, nontransparent ownership structure, ineffective AML procedures etc.
For 20 years these problems have been ignored by the politicians, ministers and central bank governors.
The country itself was in a very difficult economic situation. It was hit simultaneously by three crises: macroeconomic, foreign exchange and banking. At the same time the country was in a state of war, together with a part of our territory we have lost almost 20% of our GDP and 30% of FX earnings. It was the perfect storm indeed.
Our economy was expected to collapse and our country was predicted to fall into pieces. My colleagues, a well-known central bankers and financial experts, told me that it was a “mission impossible”.
In my opinion, even such a severe crisis shall not be the reason to abstain from reforms.
The NBU team took the responsibility and now we have what to be proud of and what to report to you.
All the decisions made by the NBU were aimed to stabilize the Ukrainian financial system, to stop unlawful acts in the banking system and to build a foundation for a healthy banking sector of the future.
We managed to do everything that had to be done during these three years of my governance.
Let’s see what have we done in particular.
First of all, we ensured the macrofinancial stability.
Our first step was to shift to a flexible exchange rate.
The wish of politicians to maintain the hryvnia exchange rate in their own interests and at any cost was adversely affecting all the other macroeconomic indicators. We have finally got rid of the anchor that was dragging us down.
Now the exchange rate fluctuations are not perceived as “the end of the world” and do not cause panic. You can see for yourself what was in the foreign exchange market three years ago and how it looks now.
In 2016, after two years of anticrisis management, we have fully reloaded the monetary policy and build the new effective one - the policy of inflation targeting. I point your attention to the fact that at the moment there is no alternative for our country. The NBU mandate is to ensure price stability in the country and we are fulfilling it decently due to the implementation of the monetary policy we’ve chosen.
Last year was the first year when the NBU undertook to achieve certain inflation targets and achieved them.
We have reached our first target of 12% inflation that was set by the NBU under the inflation targeting regime.
The goals of the central bank are defined. This year we are planning to reach a one-digit inflation level and keep it low. All these goals are approved by the NBU Council and Board decisions.
You know that our mid-term target is 5%. I am confident that it will be achieved in 2019 and we will be able to show to the country what the inflation targeting and our new monetary policy mean.
Secondly, we reformed the banking sector.
We started with the large-scale diagnostic study of the banking system that included asset quality check and banks’ stress-testing.
The study allowed us finally to see the real situation in the banking system. We were also able to clearly identify the systemic risks to the banking sector of Ukraine.
Since 2015 the banks together with the regulator have developed the binding capital increase programs.
From the very beginning, these programs were a compromise: we gave banks four years to increase their capital and three years to recover the loans granted to the related parties.
The banks that failed to fulfil their program were declared insolvent and removed from the market.
As of today, the banks have increased their capital by UAH 108 billion. It is a huge step in the direction of their future financial stability and recovery of the trust.
Simultaneously, the NBU started to clean the banking system from the shell banks and laundering banks, those that were not in banking business.
From 180 banks at the beginning of 2014 only 91 banks remained in the market.
We have inspected 60 banks that comprise 97% of our banking system. All the owners of the banks have been identified and the system is completely transparent.
The Ukrainian banks have the financial resources necessary to resume crediting. It is more than UAH 100 billion and USD 5 billion of liquidity.
The trend that is worth mentioning and that is a sign of systemic problems of the past to have been solved. This is the trend of repaying debt to the NBU by the banks.
You must remember the allegations about some unbelievably huge refinancing loans granted. I will give you the figures that speak for themselves.
In June 2014, at the beginning of my work at the NBU, the outstanding debt under refinancing loans was UAH 111.7 billion.
At the moment, the figure for the solvent banks is UAH 15.2 billion, including UAH 14.4 granted to PrivatBank and UAH 0.5 billion to Ukrgazbank. The amount of outstanding debts of insolvent banks due to the regulator currently stands at UAH 45.2 billion. All the rest has been paid back.
Let’s look closer at the outstanding UAH 45.2 billion. I think that our country deserves to know its “heroes” by their names. That is why I will tell you the names of the insolvent banks that have the largest debts under refinancing loans and the names of their ex-owners because they are very famous businessmen and oligarchs in our country.
For more than two years the NBU participated in all the court proceedings, reported the crimes, sent its motions to the Prosecutor’s Office, 44 times addressed the courts... I will name those “heroes” for you:
- Nadra Bank PJSC, Dmytro Firtash owes UAH 9.8 billion to the NBU;
- Oleh Bakhmatiuk owes more that UAH 10 billion to the NBU for the loans granted to his two banks Financial Initiative VABank;
- Mykola Lahun owes UAH 8 billion of Delta bank’s loans;
- Kostiantyn Zhevago and his bank, Finance and Credit PJSC, owes UAH 6.3 billion to the NBU;
- Leonid Klimov, who is still a member of the Parliament and even a member of the Parliamentary Committee for Financial Policy and Banking, owes UAH 3.4 billion of loans granted to Imexbank JSC.
I stress that the bankruptcy of the bank does not meant that these crooked owners are free from their banks’ debt. You shall pay the state back, full stop.
It was my team that stopped the banks engaging in unlawful transactions including moving money from Ukraine.
In 2014, we were able to uncover a series of illegal operations carried out by some domestic banks on transferring funds using correspondent accounts of certain European banks. Let’s recall that after the beginning of my tenure, we convened all the banks in this room to warn them against conducting any capital withdrawal transactions through banks that were engaged in money-laundering activity in the European territory. And in September 2014, I met the Governor of Austria’s central bank to tell him about the banks that were believed to be involved in such an activity.
As many as 17 Ukrainian banks were engaged in money-laundering transactions with European banks worth some $2 billion. We put a halt to this activity by banks not only because they used those accounts for siphoning off money, but also because some banks used such illegal practices to boost their capital.
Therefore, we had developed a program and committed domestically operated banks to suspend any and all such correspondent accounts and international transactions with those banks before 1 April 2016.
For over a year now, none of the operating banks in Ukraine is said to be engaged in such transactions, nor maintain relevant accounts. We provided all the banks with a list of money-laundering financial institutions (unfortunately, I can not disclose it). Currently, any bank that will open an account with a financial institution from that list, and conduct a transaction involving it, will be subjected to 100% provisioning. Thus, you may well understand, no one will dare to be involved.
As regards to investigation into crime related to non-repayment of the NBU’s refinancing loans by insolvent banks, we have repeatedly addressed law enforcement authorities calling for a comprehensive and unbiased probe.
Let us not forget that we are talking about outstanding refinancing loans which were mainly granted by the NBU as early as in 2008. These loans were backed by inappropriate collateral, such as illiquid assets that were excessively overvalued. Such banks have either been liquidated or are currently under liquidation. Therefore, starting from mid-2014, the NBU’s team raised its requirements for an appraisal of collateral pledged against refinancing loans, committed banks’ shareholders to provide personal guarantees and deployed international independent appraisers to perform collateral appraisals. Loans were granted to banks to only cover household deposit outflows up to a guaranteed amount of UAH 200,000, with the NBU overseer monitoring all such payments.
This allows the central bank to provide detailed reports on refinancing issued over this period.
Any allegations of refinancing loans being siphoned off abroad during the service of the incumbent NBU management team are completely groundless.
We are now facing the future with optimism.
The banking system activity is back on track to be profitable, seeking to revive lending as the most severe steps are already a past experience.
But of course a full-scale banking system clean-up would have been impossible without solving problems that PrivatBank was confronted with.
As you know PrivatBank is a systemically important bank in Ukraine’s banking system. Over 20 million Ukrainian people are customers of this bank.
We have safeguarded all their funds and ensured continuity in banking services provisioning all thanks to timely and coordinated efforts of the National Bank of Ukraine, the Ministry of Finance and the Deposit Guarantee Fund.
Nationalization of the bank was the only right decision given a whopping UAH 146 billion in additional capital needs for the bank. When I mention this figure to my fellow colleagues from other central banks in the developed economies, they can hardly understand what $6 billion in the equivalent means for us. But when I say that it accounts for about 50% of our country’s monetary base and 33% of all household deposits, this fact does not surprise them, it shocks them.
You are aware of a recapitalization program having been developed, and 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.
PrivatBank has undergone a post-audit. As required by Article 41.1 of the Law of Ukraine On Households Deposit Guarantee System, in accordance with which PrivatBank nationalization was conducted, it was determined to carry out a post-audit. The figures I will provide now following the results of the audit will even be more staggering.
The magnitude of problems revealed has exceeded all our previous estimates. Related party loans accounted for the entire 100% of the corporate loan portfolio, not 97% as was previously assumed. So, the audit results expose even higher capitalization needs for the bank, which entails increased costs for the state to compensate for loss caused by mismanagement of a so-called oligarchic team and PrivatBank managers. More so, prior to the nationalization decision being announced, former management of the bank had committed fraudulent transactions worth over UAH 16 billion. I will refrain from disclosing all the figures now since soon you will be able to refer to the entire audit opinion document. In a Memorandum of cooperation with the IMF, which has been already published, you will learn about the specific measures Ukraine is set to undertake to recover stolen funds.
We believe that resolving of PrivatBank’s problems will become a case study being quite a unique undertaking to analyze.
PrivatBank’s future development strategy will be accommodated to an updated Strategy for development of state-owned banks. We have already communicated our version on this matter to the Finance Ministry. We are closely cooperating with the Ministry to see that this strategy is put into practice.
Thus, as a result of these changes, we have dramatically changed the banking system “portrait”.
In parallel with systemic changes in the market, the NBU reformed its own supervision function. We have radically changed the approaches to banking supervision, our methodology and evaluation system. We have developed the modern risk focused supervision. Our risk focused supervision function will show you this program. I believe we can be proud of the new supervision, which is already running.
Next 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 truthful bank reports will help to avoid systemic crises in the future.
In the process of reforming, not only supervision undergone changes.
We have changed the whole National Bank of Ukraine.
I am proud that owing to the reform we have succeeded in building a modern, open and independent European central bank. To this effect, we have made it impossible to make decisions solely, created the modern central bank governance system, which is based on collegial decisions of the committees; we have centralized the functions and disposed of non-key assets.
I can tell you that “one man show” will no longer be in the NBU, because the team that today stands nigh me, stays behind. We have built not only the Board but the whole NBU team. This is a real developing of a new institution with reengineering of all the NBU processes.
The adoption in 2015 of the updated Law of Ukraine On the National Bank of Ukraine, which radically changed our mandate, has become a notable milestone in the banking system development.
Since then, we have had a truly independent central bank in terms of its policy implementation.
I believe, by strengthening the NBU’s independence, we have reached a point of no return.
Thus it became possible to carry out an effective monetary policy based on inflation targeting.
So we have reversed the stream course, and our ship with a team of professionals on the board continues to move forward according to a clearly defined route. This is about you, my team! (the address to the Board members)
Our road map viz. The Comprehensive Program of Ukrainian Financial Sector Development Until 2020 will help us en route. The Program, having become a strategic document to reform the whole financial sector, received a public support and was approved by the National Council of Reforms.
As a leader of this program I am proud of the fact that we have reached a significant progress in all our projects; further sustainable development is ahead. For this purpose, we have updated the program and continue to perform it successfully. The projects to restore lending, update and implement the strategy of state-owned banks development, liberalize FX regulation, develop the capital market infrastructure and cashless economy, introduce International Financial Reporting Standards (IFRS 9), etc. have already started.
Every project has a strong leader and highly efficient team. I believe these projects to be successfully implemented.
I would like to put a special focus on the FX liberalization project, because it will make it possible to remove the barriers to a free flow of capital, which were observed in our country.
As you know, I came to the NBU from the market and appreciated market relations. Unfortunately, economic risks, especially the war on our territory, did not allow us to begin liberalization in 2014-2015 and forced the NBU to impose unpopular administrative restrictions. The system was not restructured, control was impossible, there was lack of anti money laundering monitoring... We had to stop a panic and unproductive capital outflow due to unfair FX transactions. Thanks to these administrative measures, the NBU has stabilized the demand for foreign currency, ensured its regular inflow in the interbank FX market, and limit its unreasonable outflow from Ukraine. We have been gradually removing these constraints for over a year, based on the availability of appropriate preconditions.
The FX regulation model developed by us will be implemented via new laws. The new law will replace the old Cabinet of Ministers’ Decree On the System of Foreign Exchange Regulation and Control of 1993 and numerous regulations. Thus, FX regulation in Ukraine will become transparent, simple and clear to households, business and banks.
The new law will allow the NBU to react more promptly and effectively to changes in the balance of payment and market conditions.
However, to completely switch to more liberal FX regulation model, the efficient tax regulation shall replace the tight FX regulation.
In view of this, we have proposed implementing of five key and most urgent among 15 OECD recommendations on countering the tax base reduction and moving profits abroad (BEPS). This is the basis for significant FX liberalization. The BEPS concept has already been presented to the National Council of Reforms, and draft laws needed to implement it have been prepared for consideration in the Parliament. We expect that the Verkhovna Rada will support the fight against unproductive capital flight due to low-tax and other foreign jurisdictions.
Towards the end of my address, I would like to express my gratitude.
All these global changes and achievement would have been impossible without our strong team and constant support from international institutions.
The NBU has never failed to implement any of the reforms required by the international community that supported Ukraine.
The NBU undoubtedly deserves credit for renewing fruitful cooperation with the IMF.
It succeeded in entering into a new EFF agreement of USD 17.5 billion, and involving international organizations in efforts to help Ukraine.
It was the renewed cooperation with the IMF and the WB that kept the economy afloat under extremely difficult conditions.
The IMF monitors Ukraine’s international reserves on a daily basis, and the audit firm Deloitte audits them on an annual basis. This makes any unauthorized use of international reserves impossible, and any allegations about that unreasonable.
Already today, Ukraine’s international reserves stand at USD 16.7 billion, and can pay for about 4 months of future imports.
The NBU expects that Ukraine will get three more tranches under the EFF totaling USD 4.5 billion in 2017, which will push up international reserves to USD 21 billion by late 2017.
It is strategically important for Ukraine that EFFs be extended. Precisely this facility is specifically important for delivering macroeconomic stability in Ukraine.
This is due to the fact that in the years to come Ukraine will have to repay government debt worth about USD 12.8 billion.
Under these conditions, cooperation with the IMF will guarantee Ukraine’s ability to repay its government debt in the next three years, without exerting undue pressure on the FX market and undermining financial stability.
It is not only about increasing international reserves - cooperation with the IMF gives international organizations, investors and businesses a sign that Ukraine continues reforms. Ukraine has a future. Investing in Ukraine is worthwhile since the country is undergoing change, which makes it attractive for investors.
I am very grateful to the IMF, the WB, the EBRD, the IFC and other central banks for their support - without their help no fundamental banking sector reforms would have been possible.
I am also very grateful to G7 and EU ambassadors. The support they provided to the NBU, enabling the central bank to carry out reforms, is beyond words.
I would also like to thank the government and all the ministers I had the honor to work with and to implement joint initiatives during my tenure.
It is no exaggeration to say that Ukraine has never had so many professional and energetic patriots in its government.
It is important that the NBU continue work in tandem with finance ministers, just as my team did when I was in office.
Especially I would like to thank the Ministry of Finance team. This includes Natalie Jaresko, Artem Shevalev, Oleksandr Danyliuk, Oksana Markarova and Yurii Butsa. I am proud to have worked with them. I hope that collaboration and cooperation between the NBU and the Ministry of Finance will increase in the future, since it is of critical importance for providing macrofinancial stability. The NBU would not have been able to adopt an inflation targeting regime, if Ukraine had not put an end to so-called fiscal domination. This in turn was possible due to budget revenues and expenditures being counterbalanced. There would have been no inflation targeting if there had been no energy sector reform and if the deficit of Naftogaz had not been addressed.Luckily, Ukraine was able to deal with all those issues, paving the way for inflation targeting.
The NBU, supported by a professional financial community, bankers and experts, has succeeded in enhancing the participation of stakeholders in decision-making. I would like to thank the Independed Association of Ukrainian Banks, and especially Roman Shpek and Olena Korobkova, for helping find solutions to improve the operation of the banking system.
I would like to thank my colleagues for professional dialogue and constructive criticism.
I am convinced that our followers will preserve the transparency in decision-making and the efficiency in communicating with the financial community that we achieved.
I am proud of having created, together with my team, a strong, modern and independent institution - the NBU.
Policy decisions are no longer taken by one person at the NBU as the institution has been cardinally changed. The NBU today is about both its highly professional board and its strong team.
I am grateful to this team for making all these changes and achievements possible.
I believe that the NBU’s legendary 500 Spartans will successfully maneuver their ship through the rough see.
I would also like to thank journalists for being professional and objective, and for contributing to establishing a transparent European authority.
And lastly, 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 which is indeed based on European principles.
The NBU has carried out banking sector reforms on an unprecedented scale. These reforms are already being adopted as global standards and incorporated in the best practices of central banks.
To wrap up, I would like to say that the NBU has succeeded in delivering macroeconomic stability and improving the health of the banking system.
If all government agencies implemented reforms just like the NBU has done, Ukraine would be at a very different stage of development.
However, I expect that resistance to changes and reforms will increase.
We’ll have to recognize that all of our efforts will be in vain if we fail to maintain the NBU’s independence.
I am convinced that the central bank’s consistent and unchanged policy is very important for ensuring further growth of the financial system.
The national bank shall be out of the politics. It’s a standard and common practice for all the advanced countries that Ukraine strives to join.
Central bank must stay independent.
Glory to Ukraine!