Who is to take over state-owned Ukreximbank?
On Friday, January 21, the deadline for applications to participate in the competition of a new head of the board of Ukreximbank expired. What is happening with the bank? How lies, nepotism and intrigue are ruining Ukreximbank?
Last year CASE Ukraine held a round table discussion titled "State banks: a suitcase without a handle", where it presented a study on the efficiency of state banks.
In brief, the CASE Ukraine experts concluded that not all state banks operate efficiently.
Oliana Hordiienko, head of the Ukreximbank’s Supervisory Board, presented the opposite thesis at the round table. Hordiienko takes credit for her bank’s corporate administration reform, even though practice shows it has failed.
This becomes apparent considering the bank's substantial reputational damage due to the scandal associated with issuing a loan to Serhii Briukhovetskyi and the attack on the Schemes TV show.
One shall be reminded that the bank managed to issue a loan to businessman Serhii Briukhovetskyi to purchase the troubled SkyMall shopping centre in Kyiv. Subsequently, it turned out that Briukhovetskyi was also doing business in the DPR.
This loan was the subject of a journalistic investigation by the Schemes TV show. And during an interview with the now-former chairman of the board, Yevhen Metsher, journalists were searched and illegally detained by the bank’s security service on the latter’s instructions.
The scandal caused enormous damage to the bank’s reputation and raised the question of the effectiveness of the supervisory board.
The Supervisory Board (SB) tried to justify Yevhen Metsher when the scandal broke out. Member of the Supervisory Board Viktoriia Strakhova even said the investigation conducted by journalists was a provocation.
Later, due to public pressure, the position of the Supervisory Board changed. They decided to absolve themselves and fire Metzger.
A member of Ukreximbank's Supervisory Board, Yurii Terentiev, claims the Supervisory Board did not approve the loan to Serhii Briukhovetskyi but was only informed that such an agreement had been put to the credit committee.
But this does not absolve the Supervisory Board of responsibility. On the contrary. The SB is a critical element in the bank’s risk management system and is directly responsible, among other things, for approving and implementing the credit policy.
"The amount of the loan is about UAH 1.5 billion in equivalent. Let’s look at the borrowing companies and their financial status. Net income, annual revenue is UAH 324 million. This is five times less than the amount of the loan. There is no net profit, and there is a net loss of UAH 109 million. The borrowers’ capital is negative – minus UAH 155 million," Yevhen Dubohryz, CASE-Ukraine analyst, writes in his column on Liga.net. "I can’t tell if the company has a positive cash flow from operating activities, whether it lives off loans or financial assistance from shareholders. But even if it is positive, the question arises, how can a company whose total revenue, turnover, even before expenses, is five times less than the loan amount, a loss-making company, be able to service and repay the loan?"
According to Dubohryz, the loan, if issued, will immediately be recognised as non-performing or default, according to paragraph 164.2 of NBU Resolution No. 351, "the inability of the borrower to fulfil contractual obligations without foreclosing the security".
State banks should not issue non-performing loans. Unlike private banks, they risk taxpayers’ money, all Ukrainians’. Not just the capital of one or several private shareholders.
LegalHub confirmed this information. According to an informer from Ukreximbank, when the scandalous loan to Serhii Bryukhovetskyi was considered, it was assigned by the bank’s credit committee to 9 out of 10 possible categories. "That is, at the time of the decision, the loan was deemed default. This did not prevent Bank’s CRO and other members of the Board from voting for the loan," the person said.
Dmytro Kapliuk, the bank’s Chief Risk Officer (CRO), is Yevhen Metsher’s man, who worked with him at Ukrgasbank and then on Ukreximbank's supervisory board. Metsher first initiated his appointment to the bank’s supervisory board and then to the board.
Legal aspect
The Law "On Banks and Banking Activities" and the National Bank’s "Regulation on the organisation of the risk management system in banks and banking groups in Ukraine" (Regulation 64 of June 2018) oblige the SB to ensure the functioning and control the "effectiveness of a comprehensive and adequate internal control system of the bank, including the risk management system".
Annexe 2 to NBU Regulation No. 64 provides that it is the supervisory board that approves the credit policy, which, among other things, must contain:
- general lending eligibility criteria;
- procedures for lending decisions;
- procedures for delegating authority to make lending decisions.
The bank must use clear lending eligibility criteria that define who is eligible for a loan and how much, what types of credit are available and for how long, and under what conditions such loans are granted.
These criteria must be clearly stated in the credit policy, and the rules for their application must be established.
In doing so, the bank must decide to grant credit, analyse the information, and carry out a comprehensive risk assessment.
Under Regulation 64, when approving a loan decision, the bank must consider factors such as the debtor's practical experience of economic activity and reputation, its ability/readiness to be legally responsible and cooperate with the bank on all issues that arise during the loan period.
Terentiev admits that just when analysing the loan application, there were negative conclusions because Briukhovetskyi’s Slavian has a little credit history, and its business reputation is difficult to assess, as well as due to the existence of criminal cases against it.
These factors alone may indicate that there may have been a breach of credit policy.
Banks are also required to establish and implement internal controls and other mechanisms to ensure that bank managers are informed promptly about deviations from policies, procedures, and breaches of the set risk limits so that timely and appropriate management decisions can be taken.
Such mechanisms are integral to the credit policy approved by the bank's supervisory board.
It turns out that if the credit decisions taken create risks for Ukreximbank, the reason is an imperfect credit policy, which did not meet the requirements of current legislation, did not consider the bank’s resources, and did not contain all the necessary elements.
Alternatively, the supervisory board did not establish an internal control system that provided timely and adequate management decision-making mechanisms for reporting deviations from policies and procedures.
Both the supervisory and management boards are responsible for all this.
According to Terentiev, security, risk management, and other departments gave negative opinions during the loan application review.
But then, during the review of the case by the credit committee, all these issues were dismissed. The SB's claims were ultimately not legally finalised as negative conclusions about the loan. Usually, such problems are related to the fact that the information was not fully provided.
It means there were no negative comments from the security at the time of the credit committee meeting.
In short, not only is the loan itself questionable in form.
But it’s not even the worst part. The worst part is that with Bryukhovetskyi’s loan, the Supervisory Board of Ukreximbank managed to avoid responsibility for the failed corporate reform of the bank. For them, there were no consequences for issuing the loan. All this looks like a fixed match, in which the Supervisory Board was the judge.
Background, or how Hordiienko got into Ukreximbank
First, we need to recall the story of how Olyana Hordiienko got on the Ukreximbank's supervisory board.
Hordiienko's career development began in 2016. As a lawyer at Baker McKenzie, she became a National Securities and Stock Market Commission member (NSSMC).
Oliana then, together with another lawyer, Serhii Piontkovskyi, signed a memorandum that justified the offshore transfers of Ukrainian assets by Petro Poroshenko. This was covered in detail in an investigative report by Hromadske TV.
Since 2019, Hordiienko began working for ICU. The relationship with ICU is also cemented because Oliana has an outstanding mortgage with Avangard Bank, which the company owns.
The loan was taken out to buy two flats in the luxury housing estate Tetris Hall. Each agreement is UAH 10 million worth, although the value of the apartments listed in Hordiienko’s declaration is much lower.
Later in her official biography, Hordiienko will stress that it was in June 2019 that she was appointed to the Ukreximbank's supervisory board. That is as if she had been appointed under the current president, Volodymyr Zelenskyi. But in fact, the appointment was approved back in the spring; only in June were the documents finally signed.
Oliana became head of the board in 2020, following the departure of the previous chief, Citibank's Steven Fisher. The latter embarrassed himself by trying to sneak two of his people into the competition to select members of the supervisory board. He has since been relieved of his post. The post of Ukrexim's SB chief is probably cursed, the bankers are joking.
It must be said that Ukreximbank has always had inadequate management. The chairman of the bank's board was once Oleksandr Hrytsenko. Ukreximbank continued to stagnate amid positive changes in other state-owned banks, which managed to show growth in profits and operational efficiency.
How exactly did Hordiienko become the bank's SB head? Her appointment as head of the SB was lobbied for by the then-head of Ukreximbank, Yevhen Metsher, and his wife Yuliia Metsher (a member of Privatbank's supervisory board), a friend of Oliana's.
Metzger staffed the supervisory board with loyal people and lobbied for at least two dedicated board members, Oleksandr Ihnatenko and Mykhailo Medko. Oliana Hordiienko, in turn, also appointed her man to the bank's board – Serhii Yermakov.
When Hordiienko took over the board, she was immediately embroiled in several scandals. It was she who allowed the bank's head of compliance control, Zhanna Yelahina, to get away with it.
Zhanna Yelahina was quietly dismissed even though she was under official investigation: she had been caught assisting in legalising criminal money for several companies. The bank's supervisory board members had the bank's internal investigation report on Yelahina in their hands but did nothing about it.
The subsequent scandal Hordiienko found herself in was related to paying salaries to the bank's supervisory board members. We shall remind you that in 2020, amid the COVID-19 epidemic, the maximum wage of CEOs, members of executive bodies and supervisory boards of state-owned companies was UAH 47,000.
The President's Office delayed the decision to cut the salaries of the members of supervisory boards until the last moment because it caused a storm of indignation, especially in the banking circles.
The final straw was the state-owned Ukreximbank, where the Head of the Supervisory Council Oliana Hordiienko received more than UAH 500 thousand per month during the conflict with the team.
At the same time, the Ukreximbank staff sent a letter in which they were outraged by the payment of UAH 47 million bonuses, 90% of which was given to the bank's management, and only 10% was given to the rest of the staff.
The ace up the sleeve: Hordiienko and Yermakov
When Oliana Hordiienko became head of the board, she did not change the bank's credit policy but appointed her people. However, she managed to bring in Alfa-Bank's Vadym Polishchuk, who stayed in office for less than a year. And most importantly, she appointed her prominent protégé, another Alfa-Bank graduate, Serhii Yermakov.
The fact that Oliana Hordiienko and Serhii Yermakov’s wife Kseniia Yermakova are best friends is obvious from Facebook. For example, Oliana writes directly, replying to Yuliia Kovalov, that she has been friends with Yermakova since the 7th grade. And on Instagram, Oliana is all over the place expressing her love and appreciation for her old friend. Moreover, according to LegalHub, Yermakov is a godfather to Oliana Hordiienko’s children.
Not surprisingly, after Metsher’s dismissal, Yermakov was appointed acting head of Ukreximbank's board. The Supervisory Board voted for this decision. And it was Hordiienko who initiated it.
All this would have been just a minor episode of personnel intrigue at the bank were it not for one "but". Serhii Yermakov is the leading contender to head the bank's board. And he and the other candidates will be assessed by the Supervisory Board, headed by Oliana Hordiienko.
In Western corporate jargon, such a scenario is simply a conflict of interests.
Ukreximbank often discusses who "set up" their former head Yevhen Metzger and who exactly leaked information about the ill-fated loan. It is always necessary to look for who benefited from what happened. And the winners, in this case, were Hordiienko and Yermakov.
"Everything that has happened recently at Ukreximbank is a big blow to the integrity and effectiveness of corporate reform as such. If on the back of all those scandals with Yevhen Metsher, a godfather or even just the husband of the childhood friend of the head of the board of directors would head the bank, this would ultimately discredit the corporate reform. And Ukrexim will forever remain an example of a state bank that will never change for the better," Valeriy Heiets, director of the Institute for Economics and Forecasting of the National Academy of Sciences of Ukraine, says.
Instead of an afterword. Commentary of the National Bank
According to the press service of the National Bank of Ukraine, according to Article 2 of the Law of Ukraine "On Banks and Banking Activity", a conflict of interest is an existing and potential contradiction between personal interests and a person's official or professional duties, which could affect the bona fide exercise of their powers, objectivity, and impartiality in decision-making.
"A situation in which a candidate for the position of the Chairman of the Bank's Management Board has connections with the Chairman of the Bank's Supervisory Board creates preconditions for a potential conflict of interest at the level of the Head of the Supervisory Board or its members. Under legislative requirements, the bank’s board of directors is obliged to take measures to prevent conflicts of interest at the bank and to facilitate their resolution," the NBU press service stressed.
The SB should promptly report the relevant circumstances should a potential conflict be identified. The SB should also avoid any influence and abstain from making decisions on the competitive selection and issues related to the appointment of a candidate to the post of a bank manager.
The National Bank also noted that the candidate must meet the business reputation and professional suitability requirements.
"The general requirement for the professional suitability of the bank manager is the absence of real or potential conflicts of interest, which could prevent the proper performance of duties of the bank manager," the NBU informed.
At the same time, the new chairman of the state-owned bank will be able to take office only after the National Bank of Ukraine approves his appointment.
The NBU also stressed that the regulator makes such a decision "considering information on actual or potential conflicts of interest and measures taken by the bank and the candidate to eliminate them".
So, the mechanism is precise. It remains to be seen what Ukreximbank's supervisory board will do with Oliana Hordiienko and Serhii Yermakov.
By Oleksandr Palahin, Volodymyr Rubtsov
