In Spring 2010, the buzz first started that an unknown banker by the name of Serhiy Arbuzov was pegged to be appointed NBU Governor. At that point, the little-known financier was chair of the Supervisory Board at Ukreximbank. The rumors grew in volume after Mr. Arbuzov was appointed First Deputy Governor at the NBU in September, although he had no central bank experience. By the time veteran NBU Governor Volodymyr Stelmakh resigned in late December and the Donetsk man replaced him, no one was surprised.
When polled, Ukraine’s bankers have been surprisingly noncommittal about the President’s man, offering anodyne statements like “Arbuzov will make NBU policy more predictable,” “Banking regulation will get tougher,” “The NBU needs a strong hand,” “Arbuzov is an expert” and so on.
But the bankers were unwilling to go on the record with the main point: Serhiy Arbuzov is just a figurehead. The one-time manager of a small financial institution associated with the Yanukovych family is now at the wheel of a large-sized country’s central bank. The question is, whose strong hand is Ukraine looking at in its central bank? Maybe Mr. Arbuzov is a real pro—though nobody is quite sure in what so far. Some bankers who met the Donetsk financier over the summer and fall—only the chosen were apparently able to actually talk to him—say he is “OK.”
“[Ex-Governor] Stelmakh hasn’t talked to market participants for the past three years,” says the representative of one IFI. “His deputies did the negotiating. It turned out that Mr. Arbuzov was getting far more involved in the market situation than Mr. Stelmakh.” According to this man, another Deputy NBU Governor from Donetsk, Ihor Sorkin, has also been very actively engaged.
In fact, since Volodymyr Stelmakh resigned, NBU management has become more dependent not only on the President’s positions, but on Premier Mykola Azarov, as well, risking serious shifts in the financial market—the first one being a weaker hryvnia. A recently disclosed official document called “The Basis for NBU Monetary and Lending Policy in 2011” states that the highest priorities include stabilizing prices and keeping them that way. According to this document, inflation is to be brought down to 5% by 2014. This is simply the inflation targeting that Volodymyr Stelmakh was talking about back in late 2008.
There is nothing intrinsically wrong with easing exchange control and targeting inflation instead. The problem is that this policy will be implemented by people—the President’s main backers are big-time commodities exporters like Rinat Akhmetov and Dmytro Firtash—who want to see the national currency weaken. Meanwhile, under cover of inflation targeting, NBU officials can launch any devaluation, whether economically justified or artificial.
Appointing Mr. Arbuzov NBU Governor automatically solves another thorny problem: the budget deficit. Over the past few years, the Bank worked intensely to cover the deficit by transferring its own income—UAH 1bn in 2009 alone—and buying back government bonds. Volodymyr Stelmakh, however, was not too happy to be covering the deficit. According to some, this was why he resigned. Serhiy Arbuzov seems to be more compliant. Unsecured issues of hryvnia over 2011-2012 are unlikely be large enough to provoke hyperinflation, but they could well result in devaluation.
Meanwhile, the consolidation of the banking sector could now take mere months, not the five years Mr. Stelmakh had been planning. The Presidential Administration is actively promoting the idea of increasing the requirement for statutory capital from UAH 75mn to UAH 500mn. Mr. Arbuzov is unlikely to oppose this move and a bill to this effect has already been registered in the Verkhovna Rada. If it passes, Ukraine will end up with only 40-50 banks instead of the current 175 as the bigger ones gobble up the smaller ones.
Such a consolidation plays into the hands of the FIGs, including Rinat Akhmetov’s SCM, which is expanding into the market at this time. The latest news was the merger of PUMB or First Ukrainian International Bank, and Donhorbank: the combined bank will be among the top ten biggest in Ukraine. SCM has already announced the acquisition of another small retail bank, Renaissance Credit—and that’s just the beginning.
Bankers are looking forward to Serhiy Arbuzov’s first public speech as Governor. They expect it to help them understand what the NBU’s policy will be for the upcoming year. The Donetsk financier is very good at saying not much of anything, if the interviews published in the past six months are anything to go by. On the other hand, Premier Azarov has already clarified Mr. Arbuzov’s role and the likely policy of the central bank somewhat: “The hryvnia will be stable due to systematic and coordinated efforts by the Government and the NBU and moderate spending policy.” It’s pretty clear with whom the new NBU Governor will coordinate from now on.
