In Ukraine, the old guard comes with skeletons in the closet

The $5 billion IMF loan which Ukraine secured in June in order to help defray the substantial costs of the Covid-19 pandemic is understandably a sensitive subject for Ukrainian policymakers. Kyiv has long had a testy relationship with the IMF and the harsh conditions which accompany its financial assistance, but the funds are badly needed amidst the public health crisis which has pushed Kyiv into its worst recession in decades.

In recent weeks, however, the prospect that domestic politics might throw a wrench in the loan’s disbursement has been repeatedly bandied about—most prominently by Ukrainian President Volodymyr Zelensky, who has argued that controversial decisions by the country’s Constitutional Court could put the IMF funding at risk, but also from Dmytro Sologub, the deputy governor of the National Bank of Ukraine (NBU). Sologub lambasted the central bank’s mid-October decision to strip his colleague Kateryna Rozhkova of her post as the head of banking supervision, suggesting that Rozhkova’s ouster “might hamper IMF cooperation”. Rozhkova herself has complained that her sacking undermines the central bank’s independence, while analysts have touted her status as “a prominent reformer”.

One of the key sticking points between Ukraine and the IMF, however, has been the country’s deeply-embedded patronage networks and graft. It’s difficult to imagine how ardent a reformer Rozhkova could have been given that she herself has been intimately connected to a host of corrupt individuals and accused of wrongdoing from allowing banks to launder money and steal depositors’ cash to using state funds to prop up banks connected to her personal business interests—shady dealings which have now come to the fore yet again in a series of court challenges.

Secret recordings and murky refinancing

In fact, part of Rozhkova’s dubious reputation concerns the very “reforms” which she was supposed to be carrying out a few years ago. At that time, the NBU was charged with “cleaning up” the banking system and closed 83 out of 180 Ukrainian banks between 2014 and 2016. Kyiv was widely praised for the initiative itself, which international partners hoped would create larger yet more transparent financial institutions, but the precise way in which the banks, many of which were operating illegal schemes, were shut down—continuing to receive state refinancing long after failing stress tests— drew unwelcome scrutiny and thrust Rozhkova in the limelight.

Of particular interest were undated audio recordings leaked online in November 2016, which appeared to feature Rozhkova in conversation with Dmytro Zynkov, the head of failed financial institution Platinum Bank, discussing how to address the bank’s problematic status so that it would be able to continue accepting deposits. The person with a voice resembling Rozhkova’s also was caught on tape discussing how to hide Platinum Bank’s real ownership and explaining that the bank’s management would not have to pay market interest rates on insider loans, among other dubious claims. In other recordings, the voice appearing to be Rozhkova can be heard discussing with another central bank official how to falsify information from Ukrainian financial institutions destined for the IMF.

At the time, Rozhkova admitted that the recordings were authentic, but argued that speaking with bank managers was an integral part of her job at the central bank and that the recordings had been released in order to undermine the Ukrainian banking system.

The implosion of Platinum Bank

If dialoguing with bank managers was undoubtedly part of Rozhkova’s job description, the fact that she was apparently speaking to executives from Platinum Bank raised red flags—Rozhkova herself headed the bank in 2014-2015, directly before she took up work at the central bank, and remained a member of Platinum’s Supervisory Board.

Platinum was embroiled in a wide range of scandals before it finally went bankrupt in January 2017, many of Rozhkova appeared to be intimately involved in. Lawmakers and financial analysts alike speculated that Platinum Bank was allowed to continue to operate for a long time, despite being insolvent and violating the standards set out by the central bank, because of the “interesting coincidence” that Rozhkova had worked for both institutions.

Now, even the bankruptcy itself has put Rozhkova in fresh hot water. After Ukraine’s Deposit Guarantee Fund (DGF) gained control over the defunct bank, it began investigating widespread irregularities—an investigation which has prompted the Fund to open litigation against the bank’s former management, including Rozhkova, to demand that they pay compensation for an alleged scheme in which UAH 1.5 billion of depositors’ money—a scheme which led directly to the bank’s insolvency.

According to court documents put forward by the Fund, Rozhkova, at the head of Platinum’s Credit Committee, regularly granted expansive credit lines to companies owned by the bank’s shareholders—UAH 257.63 million to LLC Stratagema-Invest, for example, with another UAH 187.37 going to a legal entity entitled PE Logistic Trans—without these firms having to put up anywhere near sufficient collateral to anchor the funding they were receiving. As per the DGF’s investigations, these risky loans were part of a concerted scheme to smuggle out depositors’ money to firms associated with Platinum Bank’s owners.

Genuine reform starts at the human level

With her involvement with Platinum Bank again under the microscope as the Deposit Guarantee Fund continues to file legal appeals to try and recoup some of the funds allegedly stolen from the defunct bank’s depositors, Rozhkova may desperately want to hold onto her position, but may struggle to portray herself as a reformer who was unjustly sacked from the NBU—much less one whose departure could call into question the latest tranche of aid from the IMF.

Instead, her case highlights one of the fundamental reasons why previous Ukrainian administrations failed to carry out the reforms which the IMF and other international partners have pushed for. Well-intentioned programmes, like the push to reduce the number of banks by closing down those which failed stress tests, were fatally flawed by the fact that the people in charge of implementing them, like Rozhkova, had personal and business attachments to the institutions they were tasked with overseeing. Indeed, a truly independent central bank is not one where officials accused of financial wrongdoing are left in place indefinitely to avoid any accusations of political meddling, but rather one of scrupulous impartiality. Kyiv’s strategic relationship with the IMF and other international partners is too vital to risk on corrupt managers from the past.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes​