NBU head Smoliy submits resignation, citing political pressure

National Bank of Ukraine (NBU) Governor Yakiv Smoliy submitted
a resignation request to President Zelensky the evening of July 1, the NBU
reported the same day. “For a long time, the National Bank of Ukraine has been
under systematic political pressure. This makes it impossible for me, as the
governor, to effectively carry out my duties as the head of the National Bank
of Ukraine and interact with other government agencies,” Smoliy said in a press
release. Responding to the event, the NBU Board of Directors issued a statement
that “it considers its responsibility to continue its work in order to preserve
the macrofinancial stability and institutional capacity of the NBU,” also
asking the president and other policy makers “to start an effective dialogue”
and “allow the NBU to perform its tasks.”

 

Commenting on the event, G7 country ambassadors to
Ukraine tweeted a collective statement that a possible undermining of the role
of the NBU “would be a big step back and jeopardize the credibility of and
support for Ukraine‘s reforms”.

 

In its turn, the office of President Zelensky issued a
vague statement in late July 1, assuring the public that “ensuring the
independence of the NBU remains our unconditional priority, as the President
has repeatedly stated.” It added that the NBU “together with the government
should continue to implement prudent monetary and fiscal policies, which will
serve as a guarantee of macroeconomic and financial stability.” It emphasized
that discussion on the NBU’s activity “should be free of political
connotations, which may have a negative impact on the institutional capacity of
the National Bank.”

 

The office confirmed that the morning of July 2,
President Zelensky accepted Smoliy’s request and directed it to parliament. By
law, to dismiss the NBU governor, parliament should approve his resignation
request with a simple majority (of 226 votes).

 

Smoliy’s resignation request followed a conflict
between the NBU Board and NBU Council, which refused to consider the
reappointment of Oleg Churiy, an NBU board member, for the next seven years. The
NBU board said on June 30 it views the refusal as groundless. The NBU Council
has been a fierce critic of the National Bank’s monetary policy for several
years.

 

Vadym Denysenko, a political observer and critic of
the NBU’s activity in the banking sector, wrote the same day that the conflict
around Churiy was among the reasons for Smoliy to decide to resign. He listed
three potential replacements: Bohdan Danylyshyn (head of the NBU Council, among
the biggest opponents of the NBU’s monetary policy and supporter of
quantitative easing), Kyrylo Shevchenko (CEO of state-run Ukrgazbank) and
Volodymyr Lavrenchuk (former CEO of Raiffeisen Bank Aval, mentioned several
times as a candidate for NBU head, including in 2017, when Smoliy was appointed
instead.)

 

Alexander Paraschiy: Smoliy’s
resignation request and his reasoning for it is an unexpected event that brings
additional risks for Ukraine’s investment case. It fulfills the warning by the
IMF head in early June that uncertainty about the direction of
economic policies in Ukraine “remains substantial.”

 

Ironically, the pressure on the NBU board intensified
after the IMF initiated its new stand by loan program and provided sizable
financial support of USD 2.1 bln for the government. Meanwhile, Ukraine’s
MinFin had just completed a book building for a USD 1.75 bln Eurobond some
minutes before the information surfaced about Smoliy’s resignation (the deal
was cancelled this morning).

 

We believe it’s very likely that parliament will
collect enough votes to approve Smoliy’s resignation. To replace him, we see
Lavrenchuk as the best option, from the standpoint of Ukraine’s image in the
West. Danylyshyn’s appointment could be a disaster for Ukraine. Meanwhile,
Shevchenko’s appointment could be a compromise, so his chances look the highest
now, though uncertainty about future monetary policy will persist.

 

At the same time, there is a likelihood that parliament
won’t be able to elect a new NBU head soon, meaning the NBU’s deputy governor
Kateryna Rozhkova will be acting governor for at least until the year end.
That’s not a disaster, but it won’t remove the uncertainty.

 

All in all, Ukraine is approaching a new period of
political turbulence and uncertainty on monetary policy, which resembles the
early March period when former PM Honcharuk’s government was dismissed.

 

Until there is more clarity on the NBU’s future,
Ukraine’s Eurobond market will be turbulent.