IMF ready to support Ukraine, reportedly has Privatbank concerns

Ukrainian President Petro Poroshenko had a telephone call
with IMF Managing Director Christine Lagarde on May 3, both sides reported the
same day. “We agreed that it is crucial to safeguard the important progress
made during the president’s tenure in advancing key reforms, and especially to
ensure the independence of the central bank and maintain the stability of the
banking system,” Lagarde commented after the call. “The Fund stands ready to
continue to support Ukraine in these efforts,” she said.

Meanwhile, the president’s press service reported that
Lagarde “called for continuing the process of reforms based on the
achievements of the last five years.” During the call, “concerns were
expressed about the situation of legal proceedings in Ukraine aiming to
denationalize Privatbank, which could threaten the state’s financial
stability.” Recall, in late April, a Ukrainian court ruled to recognize as
unlawful the nationalization of Privatbank (PRBANK), completed in late
2016.

Alexander Paraschiy: Interestingly,
Poroshenko’s statement stressed the risks for Ukraine from the attempts to
denationalize Privatbank, while Lagarde in her press release did not mention
the bank at all, only mentioning “the stability of the banking system” and “the
rule of law.” Despite Legarde’s silence at this point, the IMF – which played
an active role in Privatbank’s rescue – must be deeply concerned about attempts
to recognize the nationalization unlawful. It is very likely that the
nationalization had procedural mistakes, and we do not rule out that such
mistakes at the formal level may lead to higher court rulings that recognize
the process occurred illegally.

Therefore, Ukrainian courts that consider the
Privatbank case will have to not only study the formalities, but also consider
the deep – and potentially disastrous – consequences if they rule against the
government. But if they determine the violations were too serious to overlook,
the IMF is unlikely to play a role in reversing the nationalization process.
Regardless of what happens, this latest turn in the Privatbank story is already
a problem for Ukraine’s image and a potential impediment for smooth cooperation
in securing the next IMF programs.

The positive news is that the IMF has expressed its
explicit commitment to support Ukraine, so we see the chance for the Ukrainian
government to receive the next tranche under the stand-by program this summer
as very high.