How Honest?

KIEV, Ukraine -- A non-transparent National Bank of Ukraine and a wildly fluctuating currency draw allegations of insider profiting and corruption.

The fate of Ukraine’s hryvnia is influenced by President Victor Yushchenko (Rear). As president, he appointed Volodymyr Stelmakh (Front) as chief of the National Bank of Ukraine.

As Ukraine’s battered hryvnia fluctuated wildly in the last month – plunging, then recovering and lately hovering around Hr 8.50/$1 – the National Bank of Ukraine was busy. But critics say it wasn’t busy trying to stabilize the hryvnia or get the economy back on track.

Instead, central bank leaders find themselves accused of profiting, along with allies at commercial banks, from the turmoil. They did so, critics said, by manipulating the exchange rate with insider information about the size and timing of hard-currency interventions that are designed to stabilize a wobbly currency. Such information, denied the public, could be very profitable to those in the know – allowing them to securely predict which direction the currency is heading before everyone else.

“It’s impermissible that our legislation keeps information on National Bank activities secret. The whole country, not only a small inner circle, should know the state and main tendencies of NBU activities,” said Volodymyr Lanoviy, a former economy minister. “People … are creating wealth for those who control information, documents and money. They are growing rich at the expense of all of society.”

More than a dozen calls the Kyiv Post made to various central bankers went unreturned for this story. A supervisory board member Boris Kolesnikov, a confidant of billionaire Rinat Akhmetov, declined comment.

After the hryvnia dropped to almost 9 to the dollar at the end of August, politicians stepped up their accusations.

Interior Minister Yuriy Lutsenko, an ally of Prime Minister Yulia Tymoshenko, on Sept. 10 announced an investigation into the “plundering” of millions of dollars by the central bank’s leadership. He also told President Victor Yushchenko, who appoints and dismisses the head of the NBU, to “prepare his subordinates for jail.” Lutsenko summoned Anatoliy Shapovalov, deputy chairman of the NBU board, for questioning.

The following day, on Sept. 11, Oleksandr Savchenko, a deputy chairman of the NBU board seen as close to Tymoshenko, resigned. He accused his former colleagues of conspiring with certain commercial banks in “currency speculation” by using refinancing funds provided by the NBU. “The NBU is not an independent body. Unfortunately, it is involved in politics and sometimes, through certain schemes, in commerce,” he added.

The attacks by Lutsenko and Savchenko – quick to join Tymoshenko’s government on Sept. 16 as deputy finance minister – were seen as a pre-election assault on an institution controlled by the president. In turn, Yushchenko has accused the prime minister of pressuring the NBU to print money to cover the budget deficit, an action that could spur hyper-inflation.

Ukraine’s central bank is headed by Volodymyr Stelmakh, a Yushchenko appointee. The president used to head the NBU. It is run on a day-to-day basis by the five-member executive board that Stelmakh heads as chief and is influenced by a 15-member supervisory council, which is itself controlled by politicians and business men.

The executive board controls decision-making and is seen as close to Yushchenko. The supervisory council is populated by at least three close allies of Ukraine's richest man, Rinat Akhmetov, and one Tymoshenko ally. The council is responsible for approving the NBU’s budget and the currency rate, but is forbidden from interfering in the board’s daily activities.

However, sources said supervisory council members use their access to gain privileged information, which on Ukraine’s see-saw currency market is sufficient to turn millions of dollars into tens of millions of dollars overnight.

“The Party of Regions and its wealthy backers have the strongest representation on the supervisory board,” said Kostyantyn Kuznetsov, an expert.

Bankers and experts said blame for the lack of transparency lies with both the executive and supervisory bodies at the NBU, and the politicians and businessmen who control them. “They are among the first who receive macroeconomic forecasting information and statistics,” said Victor Marchenko, supervisory board chief at Kyiv Bank, which was hit hard by recession.

Vasyl Horbal, who along with Akhmetov is a member of the Regions Party led by ex-premier Victor Yanukovych, sits on the NBU supervisory council as an adviser, despite that fact that a large Ukrainian bank he owned nearly collapsed this year. His Ukrgazbank was nationalized by the state last summer as part of a bailout package. Horbal downplayed the level of corruption at the supervisory council level, saying it receives less information than the government itself.

However, in an interview with Kommersant-Ukraine on Sept. 17, Lutsenko described the three cases that “could qualify as the greatest financial fraud in the history of Ukraine’s independence.” The first is a scheme whereby multiple loans were issued on the same land plots as collateral. When the refinancing process begins, “a legendary land plot, multiplied into 16 mortgage contracts, becomes collateral for receiving two billion hryvnias from the National Bank.”

The second case involves “irregularities” in decisions by the NBU on refinancing commercial banks. The third was “non-transparent” currency auctions, which triggered speculation and hryvnia devaluation. In short, large funds gained through refinancing operations were allegedly used by commercial banks to speculate on the money market by buying up dollars, causing the hryvnia to fall.

Lutsenko promises arrests. “If we don’t put a single banker in jail, then violations will continue for a long time,” he said. But even if the promised arrests take place, it’s unclear when and how the NBU can be made independent of the political and business ties that make such schemes possible.

The International Monetary Fund, which has given Ukraine nearly $11 billion from a $16.4 billion aid package granted last fall, has called for Kyiv to strengthen the independence of the NBU. It has stopped short of sounding the corruption alarm bell, including possibly misuse of IMF aid that went into central bank coffers.

Western banks, which have a 40 percent market share in Ukraine, repeatedly complain, saying unclear NBU policy is putting more pressure on institutions that are already struggling.

Lanoviy said that the structure of the National Bank needs to be changed so that the supervisory council and board are not controlled by businessmen, or their representatives.

“In France’s National Bank, for example, the supervisory board consists of people who work at scientific or educational institutions,” he said. “When bankers, members of parliament or government are appointed, it opens the door to abuse and lobbying of business interests.”

Source: Kyiv Post