Economist John Mills Analyzes Ukrainian PrivatBank Nationalization Scandal
LONDON, July 11, 2017 /PRNewswire-USNewswire/ -- In a column and analysis featured this week in the Mises Institute FedWatch, John Mills, the entrepreneur, political commentator and Chairman of JML, the consumer goods company, analyzed an emerging scandal in the Ukrainian banking sector.
In late 2016, the National Bank of Ukraine (NBU) nationalized Ukraine's largest private bank, PrivatBank, for reasons regarding its related party loans. The numbers the NBU cited as reasons to nationalize PrivatBank are now being disputed. Mr. Mills writes that while it remains uncertain who benefited from this government seizure, the result is that the decisions made by the Ukrainian authorities are now surrounded by an air of doubt.
The decision doesn't appear to be a simple misunderstanding. Rather, the nationalization of PrivatBank was the result of the NBU's rejection of the financial reality of the situation.
Mr. Mills points out that the government takeover of Ukraine's largest private bank has made the banking and overall economic situation much worse, what he calls a classic example of government overreach.
The NBU's actions have damaged the Ukrainian economy, appropriated millions from PrivatBank's owners, and forced Ukraine's taxpayers to bear a substantial additional burden.
The main reason for the nationalization, according to the NBU, was due to what it deemed were an unacceptable level of related-party loans: a number they stated was 90 percent or more.
But Ernst & Young, the global "Big Four" accounting firm the NBU itself hired to undertake an audit of PrivatBank at the end of 2016, said the actual level of related-party loans at PrivatBank was only 4.7 percent.
The 4.7 percent is also lower than the level of related-party loans reported a year earlier in a separate audit conducted by PwC, another Big Four firm.
Now the NBU is considering suspending PwC from auditing Ukrainian banks, has accused one of the most distinguished auditors of being "unprofessional," and has hinted that PwC's auditing led to the current economic malaise.
Since nationalization, the NBU has claimed that PrivatBank steered money from related party loans to the bank's own shareholders. Yet PrivatBank operating activities demonstrate that in 2016 there was no issuance of loans to related parties, rather 21 billion hryvnia to client funds.
Mr. Mills writes that the NBU made a haphazard decision to classify PrivatBank's collateral as unacceptable even though a significant amount of the loans that were classified as "impaired," as is acceptable under IFRS standards.
The NBU's actions after the nationalization of PrivatBank are now also being called into question. The capitalization of PrivatBank was issued as a transfer of government bonds, instead of cash. Government bonds, given Ukraine's precarious economic situation, are not valuable currency.
Mr. Mills wonders why the nationalization of Ukraine's largest private bank ever took place as PrivatBank enjoyed strong market share with support of the Ukrainian people. 40 percent of the country's private deposits and 44% of corporate clients were operated by PrivatBank. The bank also had a reputation for investing in local communities, creating jobs, and supporting the Ukrainian economy. According to the report by E&Y (the auditors chosen by the NBU), PrivatBank's financial position was far stronger than what the NBU was claiming.
Mr. Mills concludes that the NBU nationalization of PrivatBank was an excessive government seizure which has irreparably damaged the Ukrainian economy.
To read the column, visit www.mises.org
The Mises Institute is a non-political, non-partisan body that promotes teaching and research in the Austrian school of economics, and individual freedom, honest history, and international peace.
SOURCE PrivatBank Bondholders
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