EXTORTION, BRIBES, AND THREATS: A KYIV BANKER'S

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 001777

SENSITIVE
SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 10/14/2019
TAGS: EFIN EREL ETRD PGOV PREL UP XH
SUBJECT: EXTORTION, BRIBES, AND THREATS: A KYIV BANKER'S
LAMENTS

REF: KYIV 1760

Classified By: Acting Economic Counselor Kaye Lee for Reasons 1.4 (b) a
nd (d)


1. (C) Summary. Second-tier oligarchs and members of the
Ukrainian parliament are extorting from the country's banks
and threatening bankers, said a representative of
Austrian-owned Raiffeisen Aval. The powerful borrowers act
with impunity, having paid off the court system to evade
their debt obligations. Deliberate non-payment of loans has
risen to equal roughly one-third of Raiffeisen Aval's
non-performing assets, with most unpaid debts valued at
$10-25 million and thousands of cases under litigation. In
the view of Western banks, the public disclosure by Nadra of
its borrowers this week, a move likely backed by President
Yushchenko, was the first open display of intolerance toward
such delinquency and may lead toward further push back by
banks. End summary.

THE "SINGLE GREATEST RISK"
--------------


2. (C) A representative from Raiffeisen Aval, Ukraine's
largest foreign-owned bank and a subsidiary of Vienna-based
Raiffeisen Zentralbank, one the largest financial sector
investors in eastern Europe, described what he perceived as
the "single greatest risk" to Ukraine's banking system.
Acknowledging other major concerns for bankers, such as a
possible exchange rate overshoot scenario and "almost
predictable mismanagement" by the National Bank of Ukraine
(NBU),Raiffeisen Aval board member Artur Aliev told Econoff
on October 15 that loan defaults by mini-oligarchs and
well-known politicians were causing the biggest headaches in
the industry. The total volume of "deliberate" loan defaults
frequently fluctuated, but now stood at roughly one-third of
Raiffeisen Aval's non-performing loans. The individual
average amount of such loans was $10-25 million. (Note:
Deliberate loan defaults are non-payments of loan obligations
by choice, rather than financial necessity. They often occur
when banks lack access to collateral, credit bureaus, or
similar payment enforcement mechanisms. End note.)


3. (C) Aliev defined the caste of worst offenders as being
"one step below" the nation's richest businessmen. Tycoons
in major export-oriented industries had thus far remained
compliant, due to their interest in maintaining long-term
credit worthiness. However, members of the Rada (Ukraine's
parliament) and their close relatives, particularly those
with legally complex holding companies, had flatly refused to
pay debts since the beginning of Ukraine's economic crisis.
According to Raiffeisen Aval, such derelict clients were now
acting with greater impunity in the run-up to the
presidential election.


4. (C) One borrower dared Raiffeisen Aval on October 14 to
take him back to court, threatening to declare (an
artificial) bankruptcy if the bank pursued further legal
means. The borrower demanded that his loan be converted into
hryvnia at a rate of UAH 5.05/$1 (the current inter-bank
exchange rate is roughly UAH 8.25/$1),and he called for the
bank to offer a coupon discount. Now in the midst of the
"5th or 6th court case" with this client, Raiffeisen was
concerned to show that it would accept reasonable restructure
offers while not backing down in the face of threats. The
bank's leadership had taken a position that it would pay no
bribes to judges, even though the court system exuded "pure
corruption." Currently, Raiffesen Aval is litigating
"thousands" of court cases against its borrowers.


5. (C) To highlight one of the most blatant examples of
non-payment, Aliev disclosed the names of Anton Viktorovich
Shishkin and Mikhail Abramovich Golubitskiy, shareholders of
Ukrzernoprom, a Ukraine-based food product and bread making
company. Allegedly having strong ties to U.S. business
concerns, Shishkin and Golubitskiy -- both public figures in
Ukraine -- had refused to make payments on or even negotiate
with Raiffeisen on Ukrzernoprom's defaulted $14 million loan,
which had been extended for business investment and working
capital. Aliev speculated that Shishkin was "well-connected"
with Rada deputies, had been actively involved in Ukraine's
upcoming presidential election, and was a major supporter of
the candidacy of Arseniy Yatsenyuk.


6. (C) Raiffeisen Aval board members, having attempted to

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track down debts, were regularly receiving physical threats
"reminiscent of Russia in the 1990s." The bank also had been
the subject of numerous "black PR" attempts in recent days.
Raiffeisen Aval was putting in place new security policies
for employees, such as a prohibition against walking alone in
the dark in Kyiv, to preserve the physical safety of its
roughly 25 foreign managers and experts.

NADRA DISCLOSURE: A SIGN OF RESISTANCE
--------------


7. (C) The release this week by Nadra of the bank's 42,000
borrowers, who owe a collective UAH 8.5 billion (nearly $1
billion),was an "aggressive" move in the face of chronic
non-payment by borrowers (reftel). In the eyes of foreign
banks, President Yushchenko's apparent support for the Nadra
disclosure was a sign of "resistance," as well as a signal to
borrowers that they would face tough scrutiny when financial
markets opened up again after the crisis.


8. (C) Aliev lamented that bank secrecy laws had prevented
Raiffeisen Aval and other foreign-owned banks from developing
and sharing databases of delinquent clients, even though he
said such file sharing already occurred informally under the
veil of confidentiality. Aliev specifically mentioned
Raiffeisen Aval's information exchanges with BNP Paribas,
UniCredit, and OTP Bank, a practice that representatives from
these banks had acknowledged separately.

COMMENT
--------------


9. (C) Raiffeisen Aval's attempt to reach out to the
diplomatic community with direct allegations of criminal
extortion and bribery is a sure sign of waning confidence in
Ukraine's business climate among bankers. Having called on
us to discuss a triad of concerns -- the money supply (which
has contracted to dangerous levels) and NBU turmoil (with top
leadership paralyzed by Ministry of Interior investigations)
being the other two -- Aliev's descriptions of borrower
delinquency are an important warning about financial sector
instability in the run-up to Ukraine's presidential election.

PETTIT