European Pravda (EP) has interviewed one of the lead defendants in the scandalous “case of Bakhmatyuk’s bankers”. Read on to find out why Pysaruk believes the arguments of investigators to be baseless and what he thinks really happened.
The banking market was rocked by unexpected news in early November: the National Anti-Corruption Bureau of Ukraine arrested Raiffeisen Bank Aval Chairman Oleksandr Pysaruk.
It later transpired that the bank’s chief executive was arrested in a case relating to his stint as Deputy Governor of the National Bank in 2014-2015.
The reason was a UAH 1.2 billion stabilization loan extended by the National Bank to the infamous VAB Bank shortly before it was put in provisional administration. The bank belongs to Oleg Bakhmatyuk, owner of the Ukrlandfarming agricultural group.
Eight more people were arrested that same day. Among those arrested were former National Bank officers, namely the former Director of the NBU Banking Supervision Department Alla Shulha, VAB Bank executives, and executives of private companies linked to Bakhmatyuk.
Pysaruk was released almost immediately, on the following day. Several days later the court chose a measure of pretrial restraint for him in the form of bail of UAH 5 million, which was paid by his employer, Raiffeisen Bank Aval.
The so-called “case of Bakhmatyuk’s bankers” has been dormant ever since. Pysaruk himself has returned to his job at the bank and says that he hasn’t been summoned by anybody during this time.
Pysaruk’s career in banking began in 1992 at Ukrayina Bank. Six years later he landed a job with the Ukrainian subsidiary of the Dutch financial giant ING, where he met future NBU governor Valeriya Gontareva.
Once appointed as NBU governor, in the summer of 2015 Gontareva invited her former colleague to work as her deputy. Pysaruk had a lot on his plate. At the NBU, he was put in charge of the most problematic sector – banking supervision.
The “cleansing of the banking system” happened on his watch. While some people laud it as a great reform, others condemn it as the biggest redistribution of capital after the first privatization wave.
Reform proponents insist that the market was cleansed of “zombie banks” and became transparent.
Meanwhile, skeptics accuse the supervision team of the NBU of having neglected their immediate duties, claiming that banks ended up at the Deposit Guarantee Fund after getting “bled dry” through financial schemes of the owners and management of financial institutions.
Pysaruk discusses that period eagerly and has answers to the majority of EP questions.
But will he arguments satisfy the investigators?
EP recently met with Pysaruk at his Raiffeisen Bank office and listened to his end of the story of the events surrounding VAB Bank in the fall of 2014.
— What are the current developments in the “Bakhmatyuk case”?
— Nothing is happening officially after the court hearing on November 14-15.
— Are you saying that you didn’t get summoned by anybody else?
— Nobody summoned me to appear anywhere. In other words, perhaps something is happening there, but without our knowledge. What I mean is that no formal events have taken place.
— The response to your detention has been mixed. The majority of your colleagues in the financial market believe this to be some kind of misunderstanding, while average citizens leave comments along the lines of: “bring this case to its end; finally somebody has been caught and arrested.”
What are the accusations of the law enforcement agencies based on?
— I suggest answering this back to front. All accusations against me and all former National Bank employees are totally baseless. There are no facts to back up this suspicion.
If you watched the court hearing, which was aired live, you saw that they did not mention any real facts that would prove what the investigators called “criminal collusion” between VAB Bank shareholders and National Bank employees. That’s because there are none.
Moreover, nobody – neither the investigators, nor the National Anti-Corruption Bureau, nor the prosecutors – can explain the motives or illicit gain behind this. There was none, nor could there have been any. Even Mr. Sytnyk himself, director of the National Anti-Corruption Bureau, stressed it during various interviews that there is no evidence of any undue enrichment on my part or on the part of other NBU management board members.
In other words, there are no motives, much like there are no facts proving collusion itself.
— How was the stabilization loan extended to VAB Bank and how did this story begin?
— You have to understand the context in which all of this happened. It was October 2014, when the situation in the country was extremely difficult. The fall of 2014 was perhaps the worst period of the 2014-2015 crisis. The situation in the country was very difficult in the wake of the events in Ukraine’s east.
Clients were getting anxious and staged runs on banks. Banks were bleeding money and their liquidity suffered. The macroeconomic situation was very challenging: the budget deficit and balance of trade deficit indicators were extremely bad. National Bank reserves almost dried up.
We had no tool that could help keep this situation in check. The national currency was under a lot of devaluation pressure. The banking system was in a dire state: a group of banks blatantly engaged in money laundering, while another group of close to 50 banks simply did not have a transparent ownership structure and nobody knew who they belonged to. Banks were short on capital, and many of them simply began losing liquidity.
In other words, the situation was critical and threats to financial stability were very high. Why am I telling you all this? Here it is important to understand the function of the National Bank as a central bank. One of its key functions is ensuring financial stability in the country and protecting the interests of depositors and creditors of banks. All of this is stipulated in the Law on the National Bank of Ukraine.
In October 2014, VAB Bank was the biggest of the banks that lost their liquidity. There were reasonable fears that its liquidation, bankruptcy, and handover to the Deposit Guarantee Fund would have negative repercussions for the entire banking system.
At the time the government also had major fears that bankruptcy of VAB Bank, which was linked to the companies of its shareholder – Ukrlandfarming and Avangard, could force these companies into bankruptcy. Meanwhile, it is one of Ukraine’s largest agribusiness groups.
Bankruptcy of another major agricultural producer in Ukraine could put an end to international funding that the Ukrainian agricultural sector relied on. Many companies in this business are funded by foreign banks.
— In other words, the government also played a part in getting the loan extended to VAB Bank?
— Absolutely. A so-called Memorandum signed by the government, the National Bank, and Mr. Bakhmatyuk was one of the documents that served as a basis for extending the stabilization loan.
The government feared lest the agricultural companies of the owner should go bankrupt. It was also a major bank that was entitled to support under law. This memorandum was signed with all of this in mind. It stated that the government was prepared to consider providing additional recapitalization to the bank should such a need arise.
— Why should the government support a privately-owned agribusiness group? Not to mention supporting the bank...
— To support an agribusiness is the job the Cabinet of Ministers. When the bank effectively lost its liquidity, we had to choose between two courses of action: to recapitalize the bank or take it off the market by declaring it bankrupt and handing it over to the Deposit Guarantee Fund.
This really troubled the National Bank as one of the guarantors of financial stability. We believed that it was better to use the chance to bail out the bank through recapitalization, at the expense of the shareholder’s funds.
The bank owner promised to recapitalize it. He subscribed to this. And this is very important. If he hadn’t done that and hadn’t subscribed to this, nobody would be looking into this matter.
An NBU resolution stated that he was obligated to bring in at least 200 million dollars in capital by December 1. In other words, he subscribed to this, and I would like everybody to understand this. Bank shareholders requested some logistic time to mobilize the funds and pay them in. Hence the December 1 deadline.
The bank needed support until then, and the NBU provided it in the form of a purpose stabilization loan. This was not simply a stabilization loan to support liquidity. It was a purpose loan to cover guaranteed deposit withdrawals by the bank’s clients.
Ultimately, this loan went to all clients with guaranteed deposits. The National Bank recently published this information and confirmed that over the course of 18 days some 80,000 people received this UAH 1.2 billion. The National Bank monitored the payouts within the limits of its operational capabilities through supervisors and received daily reports.
— If I understand it correctly, because these funds ended up in the bank's correspondent account Bakhmatyuk was able to perform a transaction inside the bank, meeting obligations toward his own companies. Although this transaction did not require “live” money, assets were siphoned out of the bank as a result of this, which is the investigator’s allegation…
— If Bakhmatyuk or bank employees did something, go ahead. Investigators and prosecutors can ask those questions to them.
All that I can say is that a decision was made within the competences of the National Bank to extend a purpose loan of UAH 1.2 billion for payouts to clients with guaranteed deposits, and this money was paid out. There is proof of that. It’s a documented fact.
— Maybe the investigators understand it this way: by extending the loan the National Bank enabled Bakhmatyuk to release a portion of his assets from collateral pool, for example. Owing to the loan, he received funds in his correspondent account, which were later used to offset related-party loans and deposits of companies linked to the shareholder and to release assets from collateral.
— The issuance of a stabilization loan does not help in offsetting between related-party loans and deposits or releasing assets from collateral. I don’t know what you are talking about. Let the investigators sort this out. If they have questions, I will say once again that they should pose them to the bank managers or the owner.
There are no questions for the National Bank. We extended these funds in the form of a purpose loan and monitored them to the best of our ability to make sure they went to depositors. The Deposit Guarantee Fund would have paid them off anyway. In other words, there would not have been any excessive spending of government funds even in the situation that arose.
If Bakhmatyuk had brought capital in and kept the bank alive, there would be nothing to talk about in the first place.
— This would have compromised the order of priority of payouts to creditors. In theory, the funds of related parties would have remained in accounts with the bank, and during the bank’s liquidation they would have been the last in the queue of accepted creditor claims.
In turn, assets would have remained on the bank’s balance sheet, in which case the Fund and the NBU would have stood a better chance of recovering their funds.
— I will say it again: nothing changed from the perspective of fiscal costs of the government.
— When extending refinancing loans, the National Bank always attempted to impose certain limitations on banks, which would make it impossible for shareholders to siphon off assets. Were any preventative measures applied to VAB Bank and other banks in Bakhmatyuk’s group?
— You can read about this in the National Bank resolution: the list of limitations for VAB Bank was the longest on my watch. There was an especially large number of limitations on transactions. I don’t remember them all, but you can read about them in the resolution.
In other words, the loan was structured as being intended exclusively for payouts to clients with guaranteed deposits, and the transactions were subject to numerous limitations. It was secured with collateralized assets that were subjected to appraisal by an independent expert and two peer reviews. Two. This does not happen often. I don’t recall the National Bank ever requesting two peer reviews.
I would like to stress additionally that for the first time in its history the National Bank accepted Mr. Bakhmatyuk’s personal guarantee in respect of all debts. This was an unprecedented case. In other words, the National Bank did everything in its power to secure this loan in the best way possible.
— One of the points that the NABU stressed is that, allegedly, the appraisal of the loan collateral was fabricated. Allegedly, there was negligence on your part.
— This is a manipulation and wishful thinking. In October 2014, the National Bank did not yet have an internal asset appraisal function. We put this function in place later, already in 2015, when we formed a professional asset appraisal service at the risk management department.
It was nonexistent prior to that, and we were forced to rely on paid external appraisals. Also, the two peer reviews that I already mentioned constitute external appraisal. We simply accepted the documents that we saw. If they contained abuse or manipulations, this is a question for the people who fabricated the documents or...
— Was the National Bank at all unable to verify it?
— Effectively, we were not. We relied on the package of documents that we received. We followed all technical procedures prescribed by regulations. Of course, we had some time, but it wasn’t unlimited. There’s never a lot of time in a crisis, but we still followed all procedures strictly and verified the documents to the best of our ability.
— Bakhmatyuk requested more money than UAH 1.2 billion.
— He requested close to 6 billion. But we said: we will consider this only on condition that you recapitalize the banks and bring in at least 200 million dollars by December 1. This is what he subscribed to, confirmed, and issued a financial guarantee. We wanted to see the money.
— How much recapitalization did they need overall?
— I think they requested 6 billion. We stated clearly that he had to bring in at least 200 million dollars in the [hryvnia] equivalent. We wanted to see him bring in that money.
If we had found that this money wasn’t enough, we would have signed a memorandum with the government that could have looked into the matter and recapitalized the bank, in theory. Only then would we have been able to consider anything. This is the first point.
The other reason is the collateral. According to the independent appraisal with two peer reviews, at the time the value of the collateral was UAH 1.85 billion with a [loan to value] ratio of 0.7. There was no more collateral.
— There was a letter mentioned in the court that had been written at night by two of your colleagues. The investigators believe that this letter was nothing short of a direct instruction and points to your vested interest.
— One claim is that there was no financial rehabilitation plan.
The other one is that there was correspondence that allegedly proves that I made the decision single-handedly. What you should understand is that any bank, be that a commercial bank or a central bank, has this kind of correspondence when a loan is being prepared for review by the management board.
The correspondence suggested that the loan could be considered based on an adequate appraisal of assets with two peer reviews, including a BDO review, on condition that a memorandum was signed with the government to the effect that this loan would be considered additionally and exclusively for purposes of covering the payouts of guaranteed deposits.
This is what the correspondence was about. What does this prove? That there were essential conditions precedent for the loan that, if satisfied, would make the loan eligible for consideration. Approval of a stabilization loan is a collective decision of the NBU management board.
The third claim is that I met with Bakhmatyuk. I had hundreds of meetings not just with Bakhmatyuk but with many people. We tried to persuade them to rescue their banks. Does the fact that a meeting took place prove collusion? This is just nonsense.
“Bank owners made promises, signed documents, made guarantees, but did not follow through.”
— The National Bank extended tens of billions of hryvnias to insolvent banks, and shareholders siphoned off their assets instead. With hindsight, would you have acted in the same way?
— I would simply like to remind you that I was appointed in late July and Mrs. Valeriya Gontareva in June. The bulk of refinancing loans had been issued prior to that. We extended a very limited number of stabilization loans.
—Refinancing loans contributed to the siphoning of assets because shareholders did not make good on their promises in the majority of cases.
Don’t you think that the regulator had to adopt a tougher stance back then?
— I remember my last interview before my dismissal from the National Bank in December 2015. They also asked me back then what conclusions I’d drawn and what lessons I’d learned.
Unfortunately, one of them is a very sad lesson that I learned for myself: over a year and a half that I worked at the National Bank I did not see a single person, almost no single person, who made promises and followed through on them.
— Do you mean shareholders?
— Yes, I mean shareholders. They all made promises, signed documents, made guarantees, but did not follow through. Getting back to your question, there were two courses of action: to take them all off the market and create major risks to financial stability, especially at the height of the crisis, or try to bail out the bank with shareholders’ funds.
If they make promises, there is a chance to try and believe them, so they can bail themselves out after all and keep the government from spending funds, so that financial stability could be preserved. In other words, we had to believe them when the signed documents and issued guarantees.
— But it wasn’t to be - they promised to rescue their banks but instead siphoned off assets, and nobody stopped them from doing so.
— If they siphoned off those assets, they committed a crime. The question should be addressed to them. In March 2015, at the insistence of the IMF we made amendments to banking laws and certain other laws that tightened criminal liability for bank owners and managers.
— It was a serious issue for the country at the time. Effectively, they enacted the same article that existed before but applied to all legal entities and not to banks alone.
In reality, this article never worked in Ukraine, since it was very difficult to prove in court that bankruptcy was premeditated. Bankers were not intimidated by the new legislation. It is a poorly written law or just the absence of a political will to implement true change?
— I don’t recall all the particulars of the law, but it was fine. Lawyers of the National Bank, the IMF, and the Deposit Guarantee Fund worked on it. We worked together. However, there is alo secondary legislation, the code of criminal procedure. Maybe there were some flaws. I don’t know.
I think that this is sooner a question for the judicial system. We can speak about the liability of a specific person.
I am certain that the Deposit Guarantee Fund looked for proof that assets had been siphoned off. There is evidence of the fact that after the bank was taken off the market they (the owners, bank representatives – EP) did this. Is it a criminal act? It is. What else is needed to make such legislative amendments work? Why wasn’t it done?
— There was no political will.
— There you go. There was no political will.
— People made a lot of money off this.
— The National Bank had the political will to do hard work, and it was impossible not to do it. Why did others have no political will?
— If the regulator had the authority to take banks off the market immediately in order to prevent such crimes, the regulator had to keep an eye on these banks. The claim against the National Bank is that it did not act fast enough.
I am not saying that the regulator should be held accountable. However, would you admit now that the regulator still made certain mistakes?
— There are a few things to consider here. All of them could not be taken off the market at once. The risks for financial stability associated with the liquidation of banks are very high, especially at the height of the crisis. When a bank is liquidated, people become anxious, panic, and stage a run on the bank. That’s why an attempt to rescue the bank using the owner’s funds is important. This is the first point.
The second issue: Do you remember what the Deposit Guarantee Fund was like in 2014? Its operational capabilities were very limited. It was simply unable to process a large number of banks at the same time.
I think in 2014 or early 2015 there was a period when two or sometimes three banks were taken off the market every week. Back then the Deposit Guarantee Fund said: please, we can’t handle this, we don’t have the manpower, we can’t process this.
The Deposit Guarantee Fund worked on improving its operational capabilities and is now completely different from what it was back then. Experts of the US Department of Treasury and consultants have worked with the Deposit Guarantee Fund, and it is now much better than it was back then.
— Do you believe that the Ministry of Finance had no alternative? Let me give you an example: how is a Delta Bank depositor worse than a PrivatBank depositor? There were very many deposits, and 30,000 people were unable to recover their deposits.
— Delta was too big to fail. It was officially recognized as such, and we talked about this back then. You may still remember, if you followed those events, that in the case of Delta Bank the National Bank suggested that the bank be recapitalized by the government. We discussed this issue, but the government did not support this idea, and the National Bank as the regulator is unable to force the government’s hand.
— How did the government explain this?
— I would rather not comment on this now.
— But you are saying that both the National Bank and the government did everything right.
— I think that a systemic bank is worth bailing out. When somebody commits a crime, they should be held liable for this.
— By the way, a large amount of funds was siphoned off through correspondent accounts of foreign banks - Meinl, Frik. Why did the National Bank prohibit the use of such accounts only after the funds had been siphoned off?
— When we were appointed, all of the money had already been siphoned off. As for Meinl Bank, we saw accounts with no movement. We began asking questions, and it turned out that everything had been siphoned off already. We discussed the issue of the recovery of funds with all bank owners.
We also asked the leadership of Austrian regulators to do something in order to stop Meinl Bank from doing what it did. Recently it finally lost its banking license.
“I have no doubt that we are going to prove ourselves right.”
— Our sources at the NBU believe that Igor Kolomoisky is behind all cases relating to the National Bank. There is really no proof, but maybe the former owner of PrivatBank is getting back at you?
— I can’t say if this is happening or not. Did I meet with Mr. Kolomoisky? I met with him, just like with other bank owners, to discuss stress testing and recapitalization.
— We would not like to speculate on this subject. However, it is possible that the case is baseless. When a case is absolutely baseless, you begin to think how it come about in the first place?
— That there was a case is no secret. It is four years old.
Several years ago NABU interviewed me via Skype for two hours at my office at the International Monetary Fund in Washington. It was recorded. Back then I was neither a witness, nor a suspect, nor any other party. They wanted to learn my opinion regarding this case.
I spoke to NABU investigators for two hours. Specifically with the one who served the notice of suspicion on me. I explained everything to him, and my lawyer was present at the time. Everybody had proof that everything was understood. I said: guys, if you have any further questions, come to Washington. I will meet you at the embassy and we’ll have an official videotaped deposition.
— Maybe it’s this investigative machinery, and that’s how it's working.
— Maybe. I will not speculate. Perhaps there is something like that, and the investigators lack understanding, unfortunately. They lack understanding of how this works, the concepts of stability, a stabilization loan, why it is issued, what the function of the central bank is, what its powers are, what it can and can’t do. This is how I see it.
It’s just that they spent a long time on this and need to show results. Probably all of this is the case, but there is also a lack of understanding, I am sure.
— What is your prediction of how the situation will continue to evolve? What further steps will you be taking?
— I have no doubt that we are going to prove ourselves right. This simply takes some time because these are legal proceedings.
— Do you work as usual now?
— Absolutely. This hasn’t had any effect on my work except for that day that I spent in court. Moreover, I haven’t even felt any kind of adverse impact on my productivity.
— After all these events, the European Business Association announced that you got appointed to their management board. Is this an expression of support or has this been planned all along?
— We applied beforehand. This happened before all of this happened on the night of November 12 or 11. Also, I was a member of the management board of the European Business Association in 2007 until I left to work abroad.
— Do you communicate with Valeriya Gontareva?
— Very seldom now, but we used to communicate before, when I worked in Washington. I used to have more time back then. We communicated and kept in touch.