This year the Association of Ukrainian Banks (AUB) will turn 20. It is a significant event, not only for country’s banking system and economy, but for independent Ukraine’s history as well. It is also a chance to think about how Ukrainian banks will develop in the future. This was a topic for our interview with the president of the AUB Oleksandr SUHONIAKO.
Few professional associations appeared before Ukraine gained independence. What was the role of the AUB in building and strengthening Ukrainian statehood?
“The foundation of the AUB is directly connected with opening of the first commercial banks in Ukraine. This process took place in late 1988 and early 1989, at the time of so-called perestroika, when state monopoly was gradually loosing its influence on the economy and social life of the country. At that time eleven commercial banks made the first step to professional consolidation. At the end of 1989 they announced their intention to create their own independent professional union.
On June 12, 1990, they registered the Association of Commercial and Cooperative Banks of USSR, which later was named Association of Ukrainian Banks.
“The first council head of the AUB from January 1990 through March 1992 was the head of the board of directors, Ukrbudmbank, Volodymyr Horbovsky. His successor was the head of the board of directors, Kyiv People’s Bank, today’s managing director of the Individual Deposit Guarantee Fund Valerii Ohienko. Since 1993 until present (with a break in 2003 through 2006) the head of the AUB council was the MP, first deputy head of the Verkhovna Rada Finances and Banking Committee Stanislav Arzhevitin. Fedir Shpyh, MP, member of National Bank Council and the Verkhovna Rada Finances and Banking Committee, president of APPB Aval, was elected for this position in 2003 through 2006. The first president of the Association was MP Borys Markov, who was at the same time elected to be the head of Subcomission of the Verkhovna Rada for Economic Reforms. In April 1992, he was appointed as the deputy head of board of directors of newly founded National Bank of Ukraine.
“Long before the Verkhovna Rada adopted the Act of Declaration of Independence of Ukraine we began working on building Ukraine’s economic independence and the creation of its own banking system. Cooperation between the Parliament and with the AUB began with adoption of Ukraine’s Law on Banks and Banking Activity in 1991. It laid the grounds for the creation of the National Bank of Ukraine. Already in October of that year the registration of Ukrainian commercial banks, previously registered by State Bank of USSR in Moscow, began.
“It was then that my cooperation with the first president of the AUB Borys Markov began (both of us were the members of the Verkhovna Rada Comission for Economic Reforms and were the heads of its subcomissions). Within the framework of subcomission on Monetary Reform, functioning in May 1992, I was in charge of organizing the committee of the First International Conference on Problems of Introducing National Currencies in Countries of Central and Eastern Europe. Then, for the first time on the international level, the exit of post-Soviet countries from the ruble zone and reorganization of their monetary systems was discussed. Despite opposition from Russia, the US, and IMF, the first suggestions to change kupons and introduce hryvnia in Ukraine were expressed.
“Soon, in November 1992, I had to head the official Ukrainian delegation to the newly independent Slovenia and Croatia in order to learn about their experience in introducing national currencies. The delegation included the following people: V. Stelmakh, V. Suslov, A. Lytvyn, Ya. Soltys, M. Savluk, M. Borysov, and A. Maliovany. In meetings with representatives of governments, parliaments, the central bank, and commercial banks we gathered a lot of important information, which we later used for the creation our own national monetary system and introducing the hryvnia.
“On April 6, 1993 the I Congress of the Association of Ukrainian Banks took place in Kyiv. Stanislav Arzhevitin was elected as head of the AUB Council and I was elected to be its president. I remember that year to be the turning point. In January the Verkhovna Rada appointed Viktor Yushchenko as the head of board of directors of the National Bank of Ukraine, and new strategic goals and tasks were set for the Association, corresponding to the challenges of that time.”
The time when you were elected president of the AUB was one of the toughest times in the history of independent Ukraine: there was hyperinflation, as well as a political and economic crisis. What was working under these conditions like?
“It wasn’t easy. Inflation in 1993 reached 10 000 percent per year. Citizens could easily become millionaires and the country grew poorer with every minute. Among the achievements of the AUB of that period, I can name cutting the bank taxation rate in half, canceling the NBU’s limitation on interbank loans, and banning credits by way of imposing credit caps. In the fall of 1994 the AUB contributed to the cancellation of decision to fix the karbovanets exchange rate [transitory coupon-currency used between 1992 and 1996. – Ed.] exchange rate. In 1995 managed to obtain the right for banks to operate freely on the interbank foreign currency market. We also managed to liberalize the procedure of forming required reserves. However, the most important was that in that period the NBU and the AUB began to cooperate as strategic partners, notably thanks to Yushchenko’s constructive position.
“With the beginning of financial stabilization (1996) the national currency – the hryvnia – was introduced. The AUB contributed to that victory. Thanks to the joint efforts of the NBU and the AUB, changes were introduced to the law ‘On the Taxation of Corporate Income.’ As a result of that banks began to form reserves to compensate for possible loses from primecost (at first in the amount of 40 percent and later in the amount of 20 percent of advances portfolio). The AUB also took an active part in preparing banks for switching to international standards of accounting starting from January 1998.”
In 1998 there was a financial crisis in the country…
“The negative tendencies in country’s economy began already in late 1997. In 1998 the devaluation of hryvnia reached almost 80 percent a year. The efforts of the NBU, the AUB, and the system of commercial banks aimed at increasing banks’ capitalization were practically leveled. The rate of banks’ capital growth went down. They lost almost half of their overall capital (a billion US dollars), on the fall in the hryvnia’s exchange rate.
“Predicting the financial crisis in the country in the first half of 1998, before the serious crisis in Russia, the AUB urgently prepared and held, on July 14 and 15, the International Scientific and Practical Conference called the Economic and Legal Preconditions of Financial and Banking Crisis in Ukraine: Ways of Prevention and Experience of Other Countries. The Association also held a meeting of the directors of a group of Ukrainian banks with representatives of banking management in Russia. During that meeting bankers exchanged their experiences, analyzed the causes of financial crisis in Russia, its possible consequences for the banking system in Russia as well as for one in Ukraine, and the ways of overcoming it. Unfortunately, the recommendations of the conference and meetings of bankers were not fully taken into consideration by the state authorities, but in general the system received a warning. Thanks to that it was possible to prevent the kind of financial and banking crisis that happened in Russia in good time.
“During the crisis itself, in September 1998, we held a special congress of the AUB with representatives of the state executive bodies present there. At that congress we defined the directions of dealing with the crisis’ consequences. Thanks to the proposals suggested by the AUB and the NBU, the government took measures that considerably eased the crisis by containing its impact on the economy.
“Prevention of default of governmental obligations was the main task of the AUB in 1998, and it coped with it successfully. There are not many who know that, at that time, the government already passed a decision about announcing an inner default for OVDP and the NBU even endorsed that decree. Ukraine was about to face the Russian crisis scenario. Only thanks to the principled position and persistence of the AUB did the government make changes to that decree, and the banking system of Ukraine did not suffer such great loses as its Russia counterpart did.
“At that time on the Yushchenko’s initiative, and with active participation of the AUB, the Individual Deposit Guarantee Fund was created. It should be mentioned that an establishment of this kind was created in Russia only some five years ago.”
In December 2004, during the Orange Revolution, another banking crisis threatened Ukraine. How was it prevented?
“That’s right, in the heat of events of that time the politicians could destroy the national banking system. Even at the highest state level statements were made that the banking system would soon collapse like a house of cards. Panic and distrust of the population for the banks was stirred up by the mass media. However, thanks to the well-coordinated actions of the NBU, the AUB, and commercial banks we managed to reduce the threat of financial and banking market destabilization and at the same time prevent a dangerous deposits outflow. At that time the Association addressed the public through mass media and spoke about the absence of economic grounds for a crisis, it encouraged people to follow the example of those countries where citizens didn’t take their deposits away from the banks during the financial crisis, but instead saved even more.
“The AUB also actively supported the NBU’s decree, passed on November 30, 2004, ‘On Temporary Measures for Bank Activity,’ aimed at preserving the stability of the banking system and protecting investors’ and creditors’ interests. The decree, among other measures, introduced temporary limitations on some bank operations, like giving out loans and early deposit refund. Those coercive measures helped preserve the banking system and ensured its ability to carry out all the accounting and payments, both to enterprises and to individuals.
“I would like to stress that a great role in preventing the banking crisis was played by the coordinated position and close cooperation between the NBU, the AUB, commercial banks, and, without any doubt, brave and responsible decisions made by the NBU managers Arsenii Yatseniuk and Oleksandr Shlapak.”
What examples of successful legislative work of the AUB you could name?
“One of the most significant events was the organization of parliamentary hearings on ‘Finances and Banking Activity: Present Situation and Development Perspectives’ in 2003. The AUB initiated those hearings together with the Verkhovna Rada Finances and Banking Committee. In order to list all the bills that the AUB worked on one would have to write many volumes. That is why I would name at least the last ones passed during the present financial and economic crisis.
“Thanks to the efforts of the AUB, the Verkhovna Rada rejected a populist bill in June 2009, which would have provided preferences in granting loans for the bread making industry and threatened to destabilize the work of the banking sector. At the same time, in June 2009, on demand of the Association the parliament voted against the bill under which a person would be held criminally responsible for the violation of bank account agreement conditions. The AUB succeeded in persuading the President of Ukraine to veto the law passed by the Parliament ‘On Protecting the Property Rights of Citizens for the Period when the Economy of Ukraine Exits the Condition of Financial Crisis.’ In December 2009, the AUB succeeded in persuading the President of Ukraine to cancel the law ‘On Introducing Changes to the Law of Ukraine ‘On Preventing and Counteracting Legalization (Money Laundering)’ of Incomes Gained Illegally.’
“In June 2009, when the Verkhovna Rada passed the law ‘On Introducing Changes to Some Legal Acts of Ukraine Aimed at Overcoming Negative Consequences of the Financial Crisis,’ in which the numerous proposals from the AUB were taken into consideration, it was a great achievement for the banking community.
In September 2009, together with the Verkhovna Rada Finances and Banking Committee and organizations of professional actors on the capital market, the AUB signed the Memorandum for improving the legislation in order to stabilize the national capital market during the crisis. Even earlier, in Januray 2009 there was a Legislative Banking Initiatives Response Center attached to the AUB. The tasks of the Center were monitoring, analysis, and operational elaboration of remarks and recommendations to the bills that deal with banking operations, and regulatory legal acts of the NBU.”
Just as in early 1998, in late 2007 and early 2008, the AUB foresaw and tried to warn the public about a possible financial crisis in the country. However, this time no one lent an ear…
“Back in January 2008, at a meeting with NBU Head Volodymyr Stelmakh and other NBU officials, we tried to draw attention to the iminent problem of increasing consumer credits, foreign loans, the situation on international financial markets, and their possible influence on Ukraine’s banking system. At the time, the AUB succeeded in reaching an agreement that NBU management would participate in the next meeting of the Association, at which we planned to discuss the issue of raising commercial banks’ liquidity in the conditions of an escalating threat of an international financial crisis. Based on the results of the discussion, the AUB decided to call its 14th congress in March 2008. The Congress analyzed the trends on international financial markets, as well as problems in Ukraine’s economy, and financial and banking activity. A special emphasis was placed on dangerous challenges that could soon arise for Ukraine’s banking system, and the steps that the banks and government had to take. The Congress’ resolution said, in particular: ‘Today the country is realizing the policy of unchecked consumption, while it loses the position of an industrial country, a country with high scientific and human potential, capable of self-sufficiency. The uncontrolled increase of the corporate sector’s foreign debt means postponed demand for foreign currency that may spike at any moment. Both domestic and foreign factors (global financial crisis) may trigger this process. The rates at which crediting activity was growing and the structure of the credit portfolio were also troubling. Earlier crediting was the main lever of economic growth and was directed at the real sector of the economy, whereas now a large part of credit resources are being used for consumption. In these conditions the record credit growth rates are no longer perceived as a positive factor for the development of the national economy. The volume of issued credits as of early 2008 greatly exceeded the monetary mass (monetary aggregate M3), which shows that the economic base for their return may be lost.’
“At the time, the AUB sent warnings to both banks and the heads of all branches of Ukrainian power – the president, the parliament, and the government. Unfortunately, they did not heed them, so the authorities turned out completely unprepared for the crisis which overwhelmed Ukraine six months later – in September 2008.”
In your opinion, what are the causes behind the current financial crisis in Ukraine?
“It is a moral and political crisis of society which results in the absence of a national economic strategy. This is the root of the economic crisis. Furthermore, the inadequate management of societal processes, including economic ones, is another negative factor. More precisely, there is no management of these processes which would be focused on the interests of the people, the country, and the state, or even more, their management in the interests that are alien to Ukraine and its people.”
Is Ukraine facing the threat of the Argentina or Greece scenario?
“Politicians and experts try to draw certain parallels between the events in Ukraine and examples of crisis phenomena in other countries, including Greece and Argentina. However, to paraphrase a classic, all prosperous countries are alike, while all crisis-struck economies go through the crisis in their own ways. Of course, there are common characteristics. Comparing Ukraine to Argentina, one can point to such commonalities, as the rigid and extended tie of the national currency to the American dollar and the high foreign debt. What we share with Greece is the high foreign debt and the bloated budget sector. However, we have a deep, systemic crisis, and it is much deeper than the one Greece is experiencing. This is a universal crisis encompassing morality and worldview, rather than the economy only. And it will take a long while to exit it.”
What should be done to make Ukraine’s banking system healthy and help it ride out the crisis?
“These tasks are very complicated and demanding. Here are the main things. We need to ‘bury’ the ‘dead’ banks in a well thought-out and careful way in order not to cause a panic in society. At the moment, nearly 20 banks are either being closed down or have temporary management. A number of banks continue to be behind in payments and fail to meet their obligations. This casts a negative shadow on the entire banking system and undermines trust. Therefore, we need to take urgent measures to cleanse the banking system from unreliable banks. This is the task for the National Bank and the government.
“We need to address the topic of toxic assets. This is the main headache for the majority of Ukrainian banks. Over 10 percent of credit debts, are toxic or hopeless, and they are on the rise. When they reach the 25 percent of total credit, the situation becomes catastrophic. Therefore, we need to find ways and mechanisms to cut these debts. Such measures include the sale and reorganization of unreliable banks, the sale of negative assets to specialized financial organizations, the creation of a reorganization bank, recapitalization of banks, etc.
“It is extremely important to develop a government strategy regarding state-owned banks and increase their role in the economy. It should be mentioned that today there are no strategic tasks set for the operation and development of state-owned banks — they work just like ordinary universal commercial banks. However, it is precisely through these state-owned banks that the government would have to carry out its economic policy aimed at restoring and developing Ukraine’s economy, all the more so that the state has invested over 45 billion hryvnias of budget money in these banks.
“It is of paramount importance to provide a secure foundation and guarantees of the protection of rights for creditors, investors, and owners. Their lack is one of the painful issues of our economy and society in general. This problem has an especially negative influence on the operation and stability of the banking system. This topic has been around since 1917, when ‘expropriators were expropriated,’ and is long overdue by now.
“At the same time, Ukraine would have to make up its mind about the presence of foreign capital in its banking system and set up proper oversight of foreign investments in Ukraine. The 2008 financial crisis showed how seriously threatened our economy and banking system can be by the chaotic and unchecked influx of foreign capital into the banking sector, as well as by the use of these resources to credit foreign economies by way of accumulating debts in Ukraine, which was one of the factors for the spread of the crisis. Therefore, an important task for the authorities is to determine the measure of presence of foreign capital in the country’s banking sector and channeling it into the development of the real economy.
“It is high time to revive the crediting. Failing this, it is impossible not only to make it develop again, but also to reorganize the banking system and its assets. How can this task be solved? First, conditions should be created to improve the financial situation of borrowers and to give them an opportunity to use the credits to develop production and thus return the debt. Second, we also need to set up reliable sources of credit. Both tasks should be carried out by the government, its economic department.
“Where are long-term national resources procured — deposits of individuals and legal entities and moneys from financial institutions, in particular private pension funds? In order to attract them for an extended period of time, the trust in government, its polities, and specific actions needs to be restored.
“In this connection, considerable tasks arise also before the banking system. Its national task is to cut expenses. Both banks and business entities should drastically cut expenses, especially non-productive ones. The improvement of corporate management also provides great opportunities. Bank management currently calls for radical changes, especially in what concerns counteracting risks. There is also a need to increase the responsibility of shareholders and bank owners for the results of their activities.
“However, all these measures would yield positive results only provided that Ukraine has real anti-crisis measures and anti-crisis programs demanding strict saving policies, in particular avoidance of unjustified social expenditures. At the same time, the government has to pursue real structural reforms and secured the stability of the national monetary unit – the hryvnia – and its dominance in Ukraine.”
What should the Ukrainian banking system be like after the crisis? What tasks will be set before it?
“A crisis not only brings problems. It also has positive features. It requires a considerable increase in improvinge banking management, especially in the sphere of risk management. The banks have to have a long-term strategy and strictly stick to it. They have to improve the analysis of soundness of a loan and the garantess of that they will be payed back, concentrate on crediting the real sector of economy and cut on consumer loans. It is extremely important to make morals the base of the banking operation. There will be neither trust for banks, nor stable, long-term development without them.”
Russia and other countries are actively studying the experience of Islamic banking, which is an alternative to European banking and has turned out to be better able to withstand the international financial crisis. In what way does it differ from its European counterpart? Can it be useful for Ukraine’s banking system?
“The essence of Islamic banking is that the system of relations between the client and the bank is built based on common spiritual values and moral norms. Therefore, the basic principles of interaction are determined not by human but by divine laws. The world financial systems internationalized the basic rules for banking operations, thus effectively removing the fuse which secured against overly aggressive forms of development. This fuse would have to take the form of a system of state regulation, but it misfired, unfortunately. Unlike the rest of the world, Islamic banks do not use the concept of interest on credits. The borrower has to pay his bank a part of his earnings. This way the client and the bank have share both income and losses according to a set proportion. This approach enabled the Islamic financial system to cut off insolvent borrowers who fail to prove their ability to receive income, thus limiting the operation expansion rate.
“The present crisis has largely confirmed the correctness of this approach. Aggressively swallowing up of all crediting market segments and crediting insolvent clients are the main causes behind the financial crisis in the world. To live according to one’s means rather than desires is the moral law not only in Islamic countries. It is also a biblical principle characteristic of our civilization. Putting all hope on the state as a universal regulator is a path that leads to recurrent financial crises. Standardization of bank-client relations is a natural and useful process that increases the productivity rate of the banking system as a whole. This is precisely the reason why we need to form the national banking system based on eternal, universal laws of human existence.”
