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    March 24, 2015

    Kolomoysky is holding Ukraine by its “Privat” parts


    By Anton Linnik

    Translated from Russian by J.Hawk

    Dnepropetrovsk Region governor Igor Kolomoisky does not wish to make concessions to the Ukrainian government and may pay for it with his business. The Rada introduced a bill that would nationalize one of his biggest assets, Privatbank. But experts believe the government will not go that far. The problem is that the problems in the country’s largest financial institution could destroy not only the entire financial system of Ukraine, but destroy its economy.

    There is a war on between Kolomoysky and Poroshenko. President demands that the security detail at Ukrnafta be disarmed and forbade private armies, while Minister of Energy Demchishin ordered all firms that are subordinate to the ministry to move money out of Privatbank into state banks. He said that Ukrtransnafta has several billion hryvnya in Privatbank. “I don’t know if we’ll gain access to that money,” Demchishin admitted.

    The minister’s sharp statement led to suppositions that the government might take the radical measure of nationalizing Privat.

    This is not the first time the idea has been mentioned. People’s Will deputy Aleksandr Onishchenko registered such a bill. “This is a provocation and an act of idiocy, which bears no relation to economic reality and the legislative process,” was Privatbank’s reaction.

    The Largest Bank

    Experts don’t believe the government will risk liquidating Privatbank. This is the country’s biggest financial institution which holds 26% of all personal savings and 15% of assets of the entire banking system. The bank’s assets as of early 2015 were 204.6 billion hryvnya, making it the leader on the Ukrainian market. The Privat network includes 2600 branch offices, 19,400 ATMs which service 16.3 million bank cards. That’s about half of Ukraine’s payment cards. According to Privatbank information, its main shareholders are Gennadiy Bogolyubov and Igor Kolomoysky, each of whom owns 36.98% of shares, and the Cyprus firm Triantal Investments Ltd, which owns 16.23%.

    This is a “sacred cow”, therefore should Privat experience problems, the entire banking system will collapse, according to the Chairman of the administration of the Investment-Trust Bank Aleksandr Podolyanko.

    Aleksandr Okhrimenko, the president of the Ukrainian Analytical Center, agrees with Podolyanko, saying that Privatbank could collapse the country’s economy.

    “It holds 169 billion hryvnya of individual deposits. Neither the government nor the banking deposit insurance could cover that amount,” he notes.

    Levers of Influence

    The nationalization of Privat would lead to its bankruptcy, Okhrimenko believes. He says that its effective work depends on its management, therefore major changes would lead to capital flight. Moreover, the owner’s representatives could themselves worsen its performance. This was evident in 2013 when after Yanukovych’s attempts to take away some of Kolomoysky’s business, the oligarch took the entire top management of the bank to London.

    The oligarch threatened that he can crash the hryvnya or paralyze the financial system by closing all of its branches and ATMs. He could do something similar right now.

    The National Bank understands this perfectly well, explains Aleksandr Zholud, an analyst at the International Center of Future Research. “Privatbank gets more refinancing than anyone else,” he notes. According to the NBU, in February Privatbank received 3.29 billion hryvnya out of the total of 4.8 billion hryvnya allotted for refinancing. The refinancing was provided against the collateral of property, transportation, and personal guarantees by Igor Kolomoysky.

    In March the NBU gave Privatbank a stabilization credit of 1.2 billion hryvnya to compensate for outflow of deposits. “A personal guarantee is normal practice, since NBU head Gontarenko pays great attention to the quality of the guarantees,” Podolyanko explains.

    Successful Business

    Kolomoysky himself has no incentives to hurt Privat. According to NBU, in 2014 it earned 749 million hryvnya of profits. Only Citibank earned more—1.38 billion. “There is no incentive for a stand-off here,” Podolyanko believes.
    Therefore it makes no sense to destroy a profitable business, and he has few prospects for selling it given the complex economic and political situation in the country.

    The Privat Group is aiming at expanding its assets, judging by the announcement that it plans to expand its base capital by 26% to 24.1 billion hryvnya through an issue of shares.

    Political analysts believe that Poroshenko and Kolomoysky will be forced to find a compromise. Both of them are known for their ability to find a common language even in most difficult situations. Kolomoysky is needed by Kiev to stabilize the situation in Dnepropetrovsk region, and the oligarch is not interested in losing his business.

    J.Hawk’s Comment: This is a case of mutually assured destruction in which each player has the ability to destroy the other. That’s most likely why Poroshenko has held back from removing Kolomoysky from his governorship or sending troops to Dnepropetrovsk or doing all manner of other things that are within Poroshenko’s legal ability to do. Also, it is notable that the armed guards at Ukrnafta were not ordered to leave, only to “lose” their Kalashnikovs. So it would seem Poroshenko is fine with Kolomoysky’s business grabs, as long as he does them a bit more discreetly. 

    The other lever of power that Kolomoysky has at his disposal is the possibility of declaring DPR/LPR-style autonomy using his own militias to defend against the UAF. This is a non-trivial threat. One has to even consider the possibility that many of the "volunteers" helping out the UAF with the barest necessities are in fact Kolomoysky's people whose purpose is to undermine Poroshenko's control over the armed forces. So, theoretically Poroshenko is very strong. In practice, however, Kolomoysky exercises a great deal of power behind the scenes. 
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