UKRAINE: PROMINVESTBANK FAILURE TEST CASE FOR NBU

C O N F I D E N T I A L KYIV 002207

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E.O. 12958: DECL: 11/06/2018
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE: PROMINVESTBANK FAILURE TEST CASE FOR NBU

REF: A. KYIV 2142

B. KYIV 2105

Classified By: Edward Kaska for reasons 1.4 (b) and (d)


1. (C) Summary and comment: Liquidity problems, a run on
deposits, and a possible corporate hijacking at
Prominvestbank, Ukraine's sixth largest bank, last month
contributed to the run on other Ukrainian banks, which were
already jittery due to the world financial crisis (refs).
The Acting Chairman of the Security Service of Ukraine has
blamed an unnamed criminal organization based in Donetsk
oblast for the corporate hijacking. Nationalizing
Prominvestbank appears unlikely, given that the anti-crisis
legislation recently approved by the Rada (parliament) and
signed by the President does not provide the necessary
funding. Ukrainian Finance Minister Viktor Pynzenyk on
November 5 told U.S. Treasury officials that a decision had
been made to sell Prominvestbank to an unnamed strategic
investor. Rumors abound as to the identity of the buyer,
with many media outlets claiming the Party of Regions
deputies and siblings Andrei and Sergei Kluyev are behind the
deal.


2. (C) The NBU has a choice with Prominvestbank: it can try
to sell it to a strong, financially sound bank with the
management know-how needed to turn the institution around.
Alternatively, it can give it to other business interests
with little or no experience in modern banking, but which
have the wherewithal to pay or otherwise secure themselves a
sweetheart deal. The NBU's decision will shed light on
whether it wants to use Prominvestbank as a showcase example
of how best to deal with troubled banks in Ukraine. End
summary.

Corporate Hijacking at Prominvestbank?
--------------


3. (U) Volodymyr Matviyenko, Prominvestbank's main
shareholder, publicly said in September that the bank had
been subject to a "raider attack," or corporate hijacking,
aimed at lowering Prominvestbank's capitalization before
takeover talks. Matviyenko and his family members who own an
unknown percentage of Prominvestbank's equity, have attempted
to find a buyer for more than two months (Note: Before he
founded Prominvestbank in 1992, Matviyenko from 1987 to 1991
was the chairman of the board of the Ukrainian SSR's branch
of Promstroybank. He also was briefly chairman of the NBU in

1991. Before the financial crisis, Matviyenko reportedly was
worth almost $1 billion. End note.)


4. (C) Corporate hijackings are commonly called "raider
attacks" in Ukraine, but their perpetrators have nothing in
common with corporate raiders launching unfriendly takeover
attempts in more developed equity markets. Business
syndicates in Ukraine usually carry out corporate hijackings
by bribing courts and law enforcement officials to wrest
control of a company from legitimate owners. They often use
obscure regional courts because they are cheaper to bribe and
faster than other courts. According to the Ukrainian
Entrepreneurs' Anti-Raider Union, about 2,500 corporate
hijackings have occurred in Ukraine over the last four and a
half years. The GOU recently announced plans to take
vigorous action against corporate hijackers, and even
resuscitated a long-dormant government/private sector working
group tasked to deal with the problem.

SBU Chief Blames Criminal Conspiracy
--------------


5. (SBU) The Acting Chairman of the Security Service of
Ukraine (SBU),Valentyn Nalyvaychenko, in mid October told
reporters that a criminal group in Donetsk was behind
Prominvestbank's problems and had attempted to embezzle UAH
400 million ($80 million). The group reportedly stole the
money from funds that Prominvestbank used to pay pensions and
salaries in the Donetsk region. According to Nalyvaychenko,
the conspirators tried to cover up the embezzlement by
undermining the bank's financial stability. In addition,
they allegedly called Prominvestbank customers and sent text
messages to their mobile phones, encouraging them to withdraw
their money from the bank. The group also placed
infomercials in newspapers and minibuses that reportedly
attempted to blacken Prominvestbank's reputation. All of
these activities reportedly were financed with a portion of
the money that was embezzled. Nalyvaychenko added that the
group used Donetsk-based bank Unikom, which he said is owned
by Bloc Yuliya Tymoshenko Rada (parliament) deputy Oleksandr
Shepelev. For his part, Shepelev publicly denied the
allegations and said he would sue Nalyvaychenko for
tarnishing his reputation.

Liquidity Woes Worsened Bank's Position
--------------


6. (U) Problems at Prominvestbank, which is heavily
invested in the metals sector, worsened following the drastic
drop in demand for Ukrainian steel products. The bank could
not refinance its debt and in September requested a $1
billion loan from the National Bank of Ukraine (NBU). The
NBU subsequently approved a UAH 5 billion ($833 million)
yearlong credit line at the end of September. However, due
to what it perceived as Prominvestbank's poor management of
the crisis, the NBU in early October announced that it would
manage the bank for up to one year and declared a six-month
moratorium on paying Prominvestbank's creditors.
Prominvestbank reportedly misrepresented short-term deposits
as periodic investment on its books and used those funds to
refinance long-term loans. The NBU appointed NBU Deputy Head
Volodymyr Krotyuk as interim manager of Prominvestbank.


7. (C) Widespread media coverage of the run on
Prominvestbank, combined with news about the world financial
crisis and failures of large western banks, caused a panic
among Ukrainian depositors. They began withdrawing their
deposits and cash, causing long lines at cash machines across
the country. In one week, over $3 billion worth of deposits,
or 4.3 percent of all deposits, were withdrawn from Ukrainian
banks. Seeking to calm investors and depositors, President
Yushchenko and Prime Minister Tymoshenko in October said that
Prominvestbank's problems are due to an isolated corporate
hijacking and not the result of the world financial crisis.

Prominvestbank Probably Won't be Nationalized
--------------


8. (C) Although some high-level Ukrainian politicians,
including Tymoshenko and Rada Speaker Arseniy Yatsenyuk, have
called for Prominvestbank to be nationalized, the anti-crisis
legislation that the Rada passed on October 31 and President
Yushchenko signed on November 3 does not contain any
provisions that would allocate budget funds to either
Ukreximbank or Oshchadbank, Ukraine's two largest state-owned
banks, to take over Prominvestbank. The first draft of the
anti-crisis package earmarked UAH 1 billion (about $167
billion) for Ukreximbank to buy Prominvestbank, but
Ukreximbank representative Viktor Kapustin told reporters
that he was against using Ukreximbank to help keep
Prominvestbank afloat because it would only hurt Ukreximbank.
Deputy Ukreximbank Chairman Mykola Oudevechenko told us on
October 31 that his bank stoutly refused to assume
responsibility for Prominvestbank. Ukreximbank's impeccable
credit standing would have suffered a steep discount to book
value because nobody knew the true extent of Prominvestbank's
problems, Oudevechenko told us. Moreover, NBU Governor
Volodymyr Stelmakh on October 22 publicly said that the NBU
does not intend to expand the loan facility already provided
to Prominvestbank and called for a strategic investor to be
brought in immediately to help resolve the bank's problems.
Finance Minister Viktor Pynzenyk told U.S. Treasury officials
that a decision had been taken to sell Prominvestbank, but
Pynzenyk refused to name the buyers.

Why Buy Prominvestbank?
--------------


9. (SBU) Stelmakh in early October said that Prominvestbank
has a sound loan portfolio. Before Ukraine's financial
crisis, the total volume of Prominvestbank's assets (UAH 27.5
billion, or $5.7 billion) placed sixth out of 178 Ukrainian
banks and represented almost 4 percent of the Ukrainian
banking system's assets, according to the NBU. Matviyenko
has said he thinks the bank is worth as much as $4 billion,
while experts expect Prominvestbank to sell for $1.2 billion.
The temporary NBU administration at Prominvestbank has noted
that the main shareholders (about eight to ten people) have
the option to sell about 80 percent of the bank's shares.

Party of Regions Deputies Get Sweetheart Deal?
-------------- -


10. (SBU) Although interest in acquiring Prominvestbank has
been robust, few concrete details about potential buyers and
the negotiating process are known. So far, a consortium
represented by Party of Regions deputies Andrei Kluyev,
Sergei Kluyev, and Valentyn Landyk appear to be the leading
contenders, according to media reports. Some media reports
also claim that former Prime Minister and Party of Regions
head Viktor Yanukovych and representatives in the General
Procurator's office support the Kluyevs' efforts to purchase
Prominvestbank. Press have reported that the Kluyev brothers
already acquired a 70 percent stake in Prominvestbank and
appointed Igor Frantskevich, former representative of Indeks
Bank and Raiffeisen Bank Ukraine, to take over NBU Deputy
Head Krotyuk's interim administration at Prominvestbank.
Frantskevich reportedly began work at Prominvestbank on
November 4. Moreover, some reports claim that the brothers
Kluyev received for free 50 percent of the 70 percent stake
they acquired.


11. (C) The Kluyevs months ago started taking steps to buy
Prominvestbank. They reportedly offered the Matviyenko
family $1 billion for their Prominvestbank shares and then
subsequently lowered their offer to $300 million. Some argue
that once financial markets recover the Kluyevs intend to
sell Prominvestbank at a steep mark-up, which could help beef
up the Party of Regions war chest as it prepares for the
presidential election in late 2009.

Kluyevs: A Front for More Well-Heeled Interests?
-------------- ---


12. (C) Some experts have questioned the Kluyevs' capability
to come up with the capital needed to conclude the deal,
given the recent liquidity crisis in world financial markets
and the Kluyevs' net worth, which amounts to only $600
million. According to some estimates, to buy Prominvestbank
an investor would need to provide $1 billion to resolve the
bank's liquidity problems, pay $400 million for the bank's
statutory capital, and return $1 billion to the NBU for loans
Prominvestbank received. The media has no shortage of
theories about who might be behind the Kluyevs.

Other Big Players Also Jockey for Prominvestbank
-------------- ---


13. (SBU) Another consortium consisting of Russia's Alfa
Bank and Mykola Lagun, co-owner of Delta Bank and
representative of a group of investors, also sought to
acquire Prominvestbank. According to media reporting, the
consortium of investors Lagun represented reportedly included
Ukrainian oligarchs Viktor Pinchuk, Dmitriy Firtash, and
Russian metals magnate Alisher Usmanov. Separately, Russian
bank Sberbank in October appeared poised to conclude a deal,
but no longer seems to be in the running.


14. (U) No matter who concludes a deal with Prominvestbank's
current shareholders, it must be approved by the NBU,
according to NBU Governor Stelmakh. The director of the
NBU's legal department, Vassiliy Pasechnik, would be
responsible for providing approval, but he reportedly is on
vacation. It is unclear whether his deputy, Vladimir
Novikov, is authorized to approve any deal to purchase
Prominvestbank.


15. (SBU) Comment. The deal to acquire Prominvestbank from
the Matviyenko family has been nontransparent and fraught
with shenanigans from the start. Given the fluidity and
opaqueness of the situation, a different consortium could
still emerge as the majority shareholder of Prominvestbank,
despite the flood of news about the Kluyev deal. It also
cannot be ruled out that the GOU may step in at the eleventh
hour to halt the deal with the Kluyevs. While a private bank
probably has the resources to better manage Prominvestbank
than the state, it's unclear whether selling the shares
instead of nationalizing them will reassure Ukrainian
depositors and restore confidence in the Ukrainian banking
system. The NBU's actions on Prominvestbank will shed light
on whether it wants to use Prominvestbank as a showcase
example of how best to deal with troubled banks in Ukraine.
End comment.
TAYLOR