Ukraine: Largest Ailing Bank Nadra Remains in Limbo

The National Bank of Ukraine (NBU) has rejected the government plan to liquidate Nadra, the largest among Ukraine’s ailing banks. The only potential investor interested in Nadra, energy and chemical tycoon Dmytro Firtash, failed to persuade the NBU to sell Nadra. Nadra remains in limbo more than one year after it ground to a halt as a credit institution since the cabinet of Prime Minister Yulia Tymoshenko and the NBU could not agree on its future. While the deposits of hundreds of thousands of Ukrainians remain stuck in Nadra, the whole banking system continues to suffer from a lack of trust.

Nadra was the largest among the five banks which the government decided to bail out early last year. It had been Ukraine’s seventh largest bank, before the financial crisis hit the country’s banking sector in the fall of 2008. The International Monetary Fund, which pledged $16.4 billion in assistance to Ukraine in November 2008, agreed that around $6 billion could be spent to bail out the ailing banks. Three out of the five were bailed out last summer, and another will soon be liquidated. As for Nadra, the cabinet and the NBU pledged to bail it out after it has restructured foreign debts exceeding $800 million. In October 2009, Tymoshenko forecast that this would occur by the end of the year, but only a narrow majority of Nadra’s creditors agreed to restructure its obligations (Delo, December 16, 2009).

Recognizing that Nadra’s debt restructuring would take more time than expected, Tymoshenko decided to address the problem by liquidating the bank at the expense of taxpayers. She announced in early December 2009 that Rodovid, a bank previously bailed out by the state, would be authorized to deal with household deposits in Nadra. If the NBU agreed, substantial sums of taxpayers’ money would need to be invested in Rodovid, as Nadra is unable to repay more than $1 billion owed to its depositors, let alone meet its foreign obligations. On December 23, 2009, Tymoshenko asked the NBU to authorize Rodovid to repay Nadra’s deposits. This was interpreted by observers as a sign that Nadra would be liquidated, and it was a political decision ahead of the presidential election. Tymoshenko announced that after her victory in the election “all the deposits which people lost in bankrupt banks will be returned” (Segodnya, December 14, 2009).

The NBU did not rush to approve Tymoshenko’s plan for Nadra. Ekonomicheskie Izvestiya, a business daily, reported that the NBU agreed with Tymoshenko only on February 10, three days after she lost the presidential election runoff to Viktor Yanukovych. The daily said, quoting NBU sources, that Rodovid would receive only Nadra’s liabilities and least lucrative assets. The daily’s tongue-in-cheek comment suggested this meant the “privatization of profits and nationalization of liabilities,” so Nadra’s depositors might be reimbursed at the expense of the state while Nadra’s best assets (such as its nationwide network) were sold to an investor.

The decision publicized by Ekonomicheskie Izvestiya was later abandoned. The NBU changed its mind at the eleventh hour, as Firtash offered to buy Nadra (Kommersant-Ukraine, February 10). Tymoshenko thwarted Firtash’s intention to purchase Nadra in late 2008, claiming that his deal with the NBU would not be transparent. Firtash is the co-owner of RosUkrEnergo, an intermediary which was banished from the gas trade between Ukraine and Russia by Tymoshenko in January 2009. Tymoshenko’s opponents said she opposed Firtash’s plan on Nadra because he was a supporter of her political rival Yanukovych.

After three days of deliberations, the NBU rejected Firtash’s bid. He failed to convince the NBU that he has enough cash to recapitalize Nadra in order that the bank can meet its obligations. Similarly, Firtash’s intervention prevented Nadra’s nationalization (Delo, February 15). The NBU extended the term of its temporary administration of Nadra by another year, until February 11, 2011.

On the positive side, by refusing to liquidate Nadra, the NBU removed the need for recapitalizing Rodovid from the state budget. Even without that, the state treasury is almost empty. According to a recent report by the accounts chamber, there was little more than $300 million on the treasury’s accounts in early February while its obligations exceeded $4 billion (RBK-Ukraine, February 12).

Nevertheless, the failure to solve the problem of Nadra raises concerns among the current and potential clients of other banks. The public, distrusting Ukrainian banks, continues to withdraw money from the banking system. A poll conducted by the Kyiv-based Razumkov think-tank last October showed that 80 percent of Ukrainians did not trust banks. In January 2009, the total volume of deposits in banks declined by 4 percent year-on-year, according to the NBU. Consequently, banks have no funds to resume crediting the economy as the crisis continues in Ukraine and money is in short supply. Crediting by banks was down 2.6 percent year on year in January. This was worse than a 2.2 percent year-on-year decline in December (www.bank.gov.ua, February 4).