Ukraine cabinet submits to Rada IMF-required bill

25 March 2020

Ukraine's parliament, the Verkhovna Rada, registered on Mar. 24 an updated bill that makes it impossible to return failed banks to their former owners, or the so-called anti-Kolomoisky law. The bill's approval is the key precondition for the IMF to start a planned EFF loan program for Ukraine. The draft has been prepared by the cabinet and, according to local media, has been approved by IMF officials.

 

In particular, the key concern of the IMF is that there is a risk that Privatbank (PRBANK), which was declared insolvent and nationalized in 2016, will be returned to its former shareholders, including Ihor Kolomoisky, a powerful tycoon and among the biggest sponsors of President Zelensky’s election campaign. During the nationalization, the government might have made procedural mistakes and legal violations, which is widely feared to prompt a court to overturn the process that rescued the economy. Such a ruling is warned by experts to pose disastrous economic consequences.

 

This is not the first attempt to draft the anti-Kolomoisky bill, as the first one was made in December. However, top lawmakers asserted the bill violated the constitution and needed to be rewritten.

 

The new draft (as the previous one) clearly states that a court’s ruling about the unlawfulness of the recognition of a bank’s insolvency does not allow its return to its previous owners. It also repeats the clause that the only way for former bank owners to restore their rights, related to an unlawful decision of the government, is through compensation. However, the new draft imposes no limits on the compensation amount, unlike the first draft that limited such amount to the book value of a bank’s equity.

 

Instead, the new draft stipulates that the amount of compensation should be equal to the fair value of the bank’s equity at the date of insolvency recognition, less all the payments that former shareholders have received afterwards. The fair value of the bank is defined as the theoretical price that a buyer of such a bank could pay for that bank at the date of the insolvency recognition. Such a valuation should take into account the bank’s business model, the quality of its assets, market and macro conditions, and be based on a due diligence process.

 

If such bank had some liabilities under refinancing or state support, for valuation purposes it is assumed that the bank should repay them on a valuation date using cash or proceeds from the assets sale. If the fair value of the bank’s assets was below the fair value of liabilities at the valuation date, it is assumed that the fair value of the bank’s equity is zero. The valuation should be conducted by an internationally recognized audit firm that meets the criteria of the central bank. Such a firm should be appointed by the court.

 

Alexander Paraschiy: We expect the bill will be approved, taking into account the dire economic situation due to the coronavirus, as well as the current talks on a significant increase of IMF support for Ukraine. The key question is timing as the Rada has apparently postponed its special session from Thursday, Mar. 26 to Saturday. Meanwhile, it's being speculated that more lawmakers have been infected with the coronavirus than the four currently reported. Such rumors increase the risk that the Saturday session will not draw enough MPs to the session hall (at least 226 lawmakers are needed for a quorum).

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