Ukraine cabinet submits to Rada IMF-required bill

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).