What Ukraine's "Anti-Kolomoisky" Law Is and What It Does
14 May, 2020
Danylo Hetmantsev, Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy, speaks at the plenary session on May 13, 2020 Andrey Krymsky / UNIAN

The Ukrainian parliament passed the so-called "anti-Kolomoisky" bill, a banking law that forbids the return of insolvent and nationalized banks to their former owners, on May 13. There are dozens of banks that the National Bank of Ukraine (NBU) has declared insolvent since 2014. It was nicknamed "anti-Kolomoisky" bill because it is also designed to not allow returning the biggest Ukrainian bank, PrivatBank, to its former owners – one of whom is the oligarch Ihor Kolomoisky. This law is a key requirement of the International Monetary Fund (IMF). Many economists have commented on the need for the new IMF loan to survive economic losses incurred by the coronavirus crisis.

READ MORE: Ukrainian Parliament Passes "Anti-Kolomoisky" Bill

Why the Law Is Needed

At the end of 2016, Ukraine nationalized PrivatBank, the largest bank in the country in terms of number of depositors, and the most profitable. Its former owners, Ihor Kolomoisky and Gennadiy Bogolyubov, have launched hundreds of lawsuits appealing this decision in courts in Ukraine and abroad. If they succeed, PrivatBank may be declared bankrupt again.

"Then (in case of a final cancellation of the decision on nationalization – ed.) the bank will be left without capital. We, as the regulator of the financial sector, will make a choice in accordance with the law. The law says that we must declare such a bank insolvent,” stated Kateryna Rozhkova, the deputy head of the NBU, commenting on the lawsuits against the nationalization of PrivatBank.

Such developments could hurt Ukraine's economy, which is facing an economic crisis caused by the coronavirus pandemic.

What Kolomoisky Thinks About the "Anti-Kolomoisky" Bill

"For a while, this will delay my struggle for the return of PrivatBank, which I don’t need. I just want to be given a verdict that it was taken from me incorrectly. You probably know that if they give it back to me, it will not operate. Western partners will say: 'We do not want to deal', they will close the accounts. They won’t consider me as the owner, and therefore there will be difficulties in work, at least for international contracts and under the current leadership of the National Bank. But I do not agree with the 'If I can't have you, no one can!' principle – there are still 30 thousand people working there. This is as if your child grew up and became independent, but your attitude does not change," said Kolomoisky to hromadske.

Other Banks

"Apart from PrivatBank, up to 80 banking institutions have been declared insolvent. It's just that the size of the largest bank in the country is huge, and often, when talking about this law, they only mention it,” said Mykhailo Demkiv, a financial analyst at Investment Capital Ukraine, an asset management company. 

The National Bank notes that the law will make the NBU's decision to declare banks insolvent irrevocable and put an end to attempts by banks’ ex-owners to bring them back to market through the courts – namely, meaning Kolomoisky’s. 

From now on, if a court overturns an NBU decision to withdraw the bank from the market, [that means] the insolvency or liquidation of the bank is not terminated, and that the sale of assets and settlements with creditors of the bank continues," said NBU.

The Law and the IMF

The law is also a key requirement of the IMF to start a new program of cooperation with Ukraine. The size of the new IMF loan should be about $5 billion. By the end of 2020, the government plans to receive about $3.5 billion from the IMF. A significant part of this amount can be included in the budget, which will partially close the 298 billion hryvnia ($11,2 billion) budget deficit.

The IMF program will also allow Ukraine to receive money from other partners, including the World Bank, the European Commission, and the governments of Canada and Japan. All this money will go to the budget and will help Ukraine to survive 2020, as well as finance all the expenditures incurred due to the coronavirus pandemic: from small business support programs to pension increases.

"Without the IMF program, there will be nothing to cover the budget deficit. We should get $7 billion from the IMF. This program will also allow the government to enter international capital markets and borrow $ 2–3 billion there,” said Oleksandr Parashchiy, head of research at Concorde Capital.

The IMF has been waiting for the law to be passed for about six months since it gave its preliminary consent to sign a long-term EFF (Extended Fund Facility) program with Ukraine. However, in early May 2020, the fund partially abandoned its intentions saying about a short-term stand-by program for 1.5 years instead of a 3-year and $8 billion program. The planned funding for these 1.5 years is $5 billion.

Compensations for the Banks

The bank law, prohibiting the court from revoking a decision to declare a bank insolvent, will not prohibit former owners from declaring the decision illegal and demanding compensation.

It will, however, work like this:

- The ex-owners argue in court that the NBU's decision on the bank's bankruptcy is illegal and appeal for compensation. This compensation includes both the loss of the bank's shares and the loss of probable profit that the owner of the bank could have received if it had not been withdrawn from the market;

- Then the court chooses an audit firm to determine losses and prepare a report stating the value of the bank's shares on the date of its withdrawal from the market. According to the bill, that value is what a potential buyer could pay on the date when the bank was declared insolvent, given the financial condition, future prospects, business model, structure of the bank, as well as market conditions and macroeconomic situation.

- If the bank's total liabilities at the date of its insolvency exceeded its total assets (i.e., if it owes more money than it has), it means that the bank could not have continued to operate, and its value is considered negative. In such a case, the state will not award compensation. And if the bank's assets on the date of its bankruptcy were greater than its liabilities, this is the basis for determining the amount of compensation to the former owners which can be granted – but only in cash.

"The main claim against the withdrawn banks was insolvency. In other words, the bank's capital was insufficient, usually negative, and the bank's assets were smaller than its liabilities. That is, the bank owed depositors more than it had. Naturally, under the new law, such an assessment can be made by qualified professionals from international audit firms who perform this in their professional activities, while the court gives a legal assessment of the actions of the parties. The law does not restrict the court, but requires that economic assessment of decisions worth hundreds of billions of hryvnias be made by professionals,” explained Mykhailo Demkiv.

If a bank became insolvent due to poor management on the part of management or owners, it will be impossible to obtain compensation from the NBU.

"What was the problem before? The depositors paid for the bank management's poor decisions. Even if management had made a number of mistakes and the depositors lost part of the money, the state tried to save the bank by spending taxpayers' money on it. The former head of the National Bank Valeria Gontareva violated this "rule": she punished mistakes by removing banks from the market, that is, she introduced liability for management mistakes," claims Dmytro Boyarchuk, executive director of the Center for Social and Economic Research in Ukraine, an economic research NGO.

According to him, the law will eliminate the impunity afforded to bank owners for mismanagement and increase their liability to depositors.

What Supporters and Opponents Say

One of the debatable points of the law is the introduction of the concept of "professional judgment" of the National Bank. It allows the NBU to make decisions, including those recognizing banks as insolvent, based on its own experience and assessment of the financial condition of the bank and the business reputation of its owners.

Opponents of the law among the MPs said that legalizing the NBU’s "professional judgments" will increase the powers of the regulator and allow it to refer to its own judgment, rather than laws, in lawsuits.

"The National Bank will get a number of rights that are much greater than all the rights of plaintiffs throughout the country," said Batkivshchyna MP Serhiy Vlasenko on May 13. The Batkivshchyna faction even stated that they plan to appeal the law to the Constitutional Court, as, in their opinion, it does not comply with the Constitution.

The NBU itself does not believe that this norm will expand their powers. "'Professional judgment' is not an extension of powers. This is a way to exercise existing powers. It provides the NBU for more effective protection of investors and the public interest. Any state institution is guided by professional judgment in its work. And the court, too, when making decisions, is guided by professional judgment. But no one says that judges have superpowers."

"Naturally, the regulator has much more information in this sphere. The court must make a decision based on this information and whether the National Bank has proved the correctness of its judgment", an MP from the Verkhovna Rada Committee on Finance, Tax and Customs Policy, Yaroslav Zheleznyak, told hromadske.

The use of professional judgment will allow the National Bank more freedom to make decisions in the future but could prove tricky if its independence is questionable.

"The independence of a central bank is an important institutional achievement. However, should it be implemented in this form? In my opinion, a political decision should be made here whether to give a specific person – the head of the National Bank – such powers. The decision must be made at the time the head is appointed," believes Dmytro Boyarchuk.

Some MPs say that they have introduced a number of safeguards to prevent abuse by the National Bank. In particular, they have taken into account proposals from representatives of the banking sector.

How the Bill Was Passed

The process of adopting the "anti-Kolomoisky" law began in late 2019. The authors of the bill said in an explanatory note that the requirement to adopt such a law was made by the IMF in 2018, during the conclusion of the preliminary program of cooperation. Ukraine did not meet the requirements at the time to continue cooperation, and the fund postponed starting a new loan program.

The bill was passed in its first reading on March 30, after the new international economic crisis began and the government had to urgently seek money to cover the budget deficit.

MPs reduced the deadline for submitting amendments to the bill to stave off opposition, but this did not help – a record 16,500 amendments were submitted, the majority of which came from just 7 MPs.

READ MORE: Most of the 16,335 Amendments to “Anti-Kolomoisky” Bill Filed by 7 MPs

In order not to consider over ten thousand amendments in the session hall, MPs passed another law that amended parliamentary procedure – the so-called anti-spam law.

READ MORE: Ukraine’s Parliament Approves Simplified Consideration of "Anti-Kolomoisky" Bill

Then, on May 13, 270 MPs voted for the "anti-Kolomoisky" bill in its second reading. The law will finally come into force after it is signed by the speaker of parliament and the president of Ukraine and later published in the official government publication.

/ by Yaroslav Vinokurov, translated by Vladyslav Kudryk