What are your thoughts about the reforms of the banking system that have been going on the last three years?
My opinion is probably not unique among those of us working in the banking sector. Most of us agree that reforms have been large-scale and effective. Some even refer to it as a cleaning up of the sector: more than 80 banks were shut down and each one of them was a separate story. The experts I’ve been talking to say that this has been one of the most difficult tasks facing or potentially facing the country in the last 25 years. It was handled professionally, and thanks to that, the banking sector has become more reliable and has better prospects for financing the country, preserving people’s deposits, and so on. This last year has seen a tectonic shift in a much better direction.
In fact, there were many substantive changes that most people who don’t deal with banks regularly would barely notice. First of all, inflation was 43% and has fallen to 12%—in just one year. This is a heroic result that’s barely believable.
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Secondly, relations between the NBU and the country’s banks are no longer based on hand-management and preferential treatment. The market has begun to self-regulate. We can predict how things will evolve, we can trust forecasts, and we can pay less attention to the influence of the NBU Governor, the President or the PM. Before, a call from any of them could have affected the exchange rate or interest rates to stay put or to move in a particular direction. The market now determines the value of money and that’s an enormous shift over the last 12 months. We have become stronger institutionally and Ukraine now truly has a market economy in the financial sector.
So, everything’s hunky-dory? Not at all. What was the price Ukraine paid for this? How many companies suffered from having their banks shut down? How many companies and banks suffered a major blow because of the devaluation of the hryvnia? How many Ukrainians lost sleep watching their deposits shrink? How many Ukrainians and how much Ukrainian capital left the country because of the cataclysms in the financial sector? Clearly, the price was extremely high. But we don’t see an alternative and don’t believe that the financial sector could grow in any other way. The move was justified and unavoidable, so we have nothing but support for this reform policy and have been offering practical assistance in carrying it out, wherever necessary.
So, although the way the banking sector was reformed was very painful, but the path was the right one and the results speak for themselves.
How does the scale of reforms in the Ukrainian banking sector compare with similar reforms in other countries where Raiffeisen operates?
The Raiffeisen Group operates in 14 countries in Central and Eastern Europe and the Balkans. In terms of how complicated such reforms can be, I doubt that any of these countries will beat Ukraine.
You can say that the Ukrainian economy is very small, very poor relative to the size of the country. Political instability has had a huge impact on Ukraine’s growth: The Revolution of Dignity roused considerable sympathy, but in the eyes of investors, its consequences—aggression in the country’s east, Crimea and Donbas—have been unprecedented. You won’t find any territories like that anywhere in Europe today. And so there are no inflows of capital. At the same time, domestic investment has been fleeing because of the harsh socio-political battle. All told, this makes the reform process that much more difficult.
Today, Ukraine is an agglomeration of the most difficult objectives, although we aren’t necessarily very aware of that. I remember the first few weeks after the Revolution ended. Many people were communicating open-heartedly about how to form a new government. I personally know all, or nearly all of those who joined the first post-revolutionary Cabinet—they were among some of the best professionals. And now people say that there aren’t any reforms? I think our complaints are unfair. If distant and enormously powerful countries are interested in us, even though they have more than enough of their own problems to deal with, this suggests that our problems matter. The concentration, scale and complexity simply don’t allow for easy solutions and short timeframes.
So I personally am very impressed by what’s been done and what’s being done today. This is not just about the NBU but in the rest of the country as well. The existing problems require highly qualified, experienced and skilled professionals with character and endurance who are able to go the distance. Because the tasks aren’t getting any fewer.
So, given the scale of the problems that faced Ukraine, you would say that the professionals available here to tackle these problems have done their utmost.
That’s hard to measure. I think that a lot is going on and the people doing it are solid specialists. Of course, you can always find something to complain about, that everything’s not done or that it’s not being done right. OK, so how should it be done?
Populism is on the rise again today. The media, especially television, keep broadcasting talking heads who make categorical statements about how it’s all very simple and what needs to be done, one, two and that’s that. OK, then go ahead and do it yourselves! In reality, everything isn’t that simple. Complaining about how professionals are doing their job tend to encourage populism. Its level in Ukraine and the number of statements about what should be done different and how much simpler everything really is, is still at a relatively safe level. This process is fortunately not dominating so far and there are plenty of constructive forces around: teams, associations and clubs, both formal and informal, with or without programs, who are developing their own positions and promoting reform in the country. I think that the steps taken and the direction of the changes are right. Everything is going forward as planned. That the price is high and the changes are not easy is a different issue.
What is still lacking for banking reforms to do their job? What still needs to be done?
Of course, it would be nice to be able to propose something different that isn’t being done now. I’m familiar with the program for Ukraine developed together with the IMF. Given how complex the objectives in it are, it’s hard to add anything. If we carry it out as planned, this will be a huge step forward for the entire banking system and for the country.
If the focus is shifted from basic macroeconomic theories to the day-to-day life of an organization or institution, the key item on the agenda has to be introducing digital technology. As someone from the banking sector, I can say that this is ongoing, the results will be in soon, and this will have a very big impact. I’m not just talking about electronic payments from a smartphone or tablet, but registering contracts, receiving documents and registers, electronic receipts at parking lots—in short, the e-society. When we can access documents and data and reports, and have the option of signing a contract through the right apps on our mobile phones. The digital world is very timely for us.
I know how it’s happened in other countries, and their e-society systems, and can say that financial institutions are already establishing the lion’s share of infrastructure needed for this. Right now, banks are concentrating on developing their payments systems so that customers can make payments, deposits and loans as quickly as possible. And Raiffeisen is no exception. I think that everyone will soon be competing in this segment. Every financial institution—at least it’s true of Raiffeisen Bank Aval—is already going through the digital transformation. We’ve been working on it for some time, but right now, expectations and the need for this transformation are growing considerably.
It’s a little like switching from a carriage to a Ferrari?
That’s a good comparison. I think that one of the qualitative changes that have taken place lately is that conspicuous consumption has become unfashionable and unpopular. Instead, smart spending is a sign of style—certainly in the business world. The person who knows how to spend economically is liked by others, both as an individual and professionally. So our society doesn’t need to get into a Ferrari but on a quality western car at a reasonable price. We need to become more mature in our spending habits.
Given their high rate of liquidity, why is it Ukraine’s banks aren’t lending but are putting their spare cash into CDs or government bonds?
That’s a long topic, because there are many reasons for this. But I’ll just emphasize a few of them, using Raiffeisen Bank Aval as an example. Our bank has a surplus of liquidity that amounts to a few billion hryvnia. We’re interested in placing this cash, to earn on it, to pay out our depositors, and grow the bank. But we’re currently putting most of this surplus into government or NBU bonds. Why not lend it out? First of all, because there’s a shortage of capital. Many companies lost capital severalfold as the hryvnia devalued, as they lost assets in Crimea or Donbas, and as shrinking household cash cut into demand for goods and services. Right now, the risks aren’t worth it for business owners.
How can we incentivize owners to invest capital? This is both a macroeconomic issue and a political one. And it’s affected by the investment climate. For investors to want to sell a building in Greece or Spain and put that money into their noodle factory, they need to have some guarantee that political stability rules the day where that factory is located. That no one will be prosecuted or anything.
Are we seeing any capital inflows? Yes, especially in the farm sector. We’re lending a lot there. And because capitalization is growing, investments are coming in: direct, via offshore zones and from within Ukraine. Investors bring in capital and then we offer them loans, not the other way around. A capital shortage can’t be substituted with loans. So the Government needs to think about how they might improve the investment climate, because that’s closely linked to lending.
Secondly, mortgages have been unreliable. The crisis of 2008-2009 showed the extent to which documents were deficient. When banks started going to court—our bank had 12,000 court cases involving collateral at the peak of the crisis—they saw enormous resistance and their own vulnerability. Documents were bad, registers were copied, and all kinds of phony and even criminal steps were taken that caused the mortgages to become worthless.
If property rights reforms are successful—e-registers are introduced and so on—, this pave the way to lending. Right now, they are only underway. We have to be convinced that a security on land, an office or something else is protected.
Thirdly, banks need to know their clients. Financial monitoring of the sources of money, not even in the case of borrowers but of any customer, is the highest it’s ever been, not only in Ukraine, but all over the world. According to these requirements, if the source of the money is not explained, no loan will be issued. Otherwise, the bank has to have 100% of the loan available in its reserves from Day One, which automatically cuts into its profits. Understandably, no financial institution can afford to do that. The path to lending lies through doing business openly and transparently.
I’m confident that orienting towards a transparent economy, secured documents and an open business will bring us profits a lot sooner than staying the way things are now. And if our agenda is a little more complicated here than in other countries, that’s just the historical place we’re at today. Maybe one day we’ll be able to tell our grandkids what heroes we were in our time…
Having nationalized PrivatBank, the government is now the owner of nearly half the country’s commercial banking system. How good is this for private banks?
Most experts will probably say that state management is a bad thing, and private is good, so extending the state segment is bad for the country. I don’t share that opinion. After all, all the banks that were closed down were privately owned and many of them were dirty.
At the same time, if the state’s influence is unchecked, then state-owned banks could pose a threat for the society and the financial system. From what I know about the reorganization of Oschadny Bank, UkrExImBank and now PrivatBank, new supervisory councils have been formed that are dominated by experienced, well-reputed individuals with international experience from solid institutions. I’m confident that this is the barrier that will make it possible to reduce the impact of direct interventions by Government officials in the day-to-day operations of those banks. And I think we’ll see that very soon, in about 18 months. So, the future competition should be interesting.
We’re seeing customer migrations before our very eyes. In my opinion, the nationalization of PrivatBank took place under the best possible scenario and they were able to avoid any kind of cataclysm. Right now, PrivatBank enjoys state guarantees, but it’s not clear how long that will continue.
I believe that competition will very soon affect banking services and the result of that will depend on how much the customer is at the heart of operations, how reliable the bank is, and how easily its prospects can be predicted from the technological, financial and pricing points-of-view.
How do you see 2017 going for the banking sector?
First of all, the number of banks will be almost stable by the end of the year and that’s what we will live with for some time to come. Whether they are 40, 60 or 70 will depend more on the behavior of their investors. All the owners who are willing to take money out of their own pockets and reinvest will hang on to their banks. But it’s not likely that all will. At the end of the year, we will be in a position to turn that page and say, “Mission accomplished.”
Secondly, the current monetary policy has already significantly reduced the cost of borrowing. We will eventually get to the point where the cost of hryvnia-based loans will be interesting to most counterparties. We predict that it will be 13-15% in hryvnias by the end of the year. This opens the gates to long-term financing and even to renewing mortgages.
Thirdly, the digital transformation is coming. It will be not only tied to payments but to documentation as well. I’m really counting on this being harmonized by the end of the year and changing our day-to-day operations dramatically.
Interestingly, you haven’t asked about the exchange rate. Well, we’ve changed our approach to using financial services considerably. This is not the first interview I’ve given this year and not one interviewer has asked about what’s going to happen to the exchange rate. This suggests that the hryvnia’s dependence on the dollar has gone down because when people depend on the exchange rate, then they only talk about that. Now that’s not the case. Why? Because NBU forecasts for the end of 2016 proved correct. It promised to reduce inflation, and did. It promised the hryvnia would fluctuate between 10 and 15%, and that’s what happened. This is a major qualitative change! We can now afford to make other forecasts as well.
If we look at the current situation from this angle, then we are overly critical of ourselves. Look at our farmers; 18 months ago, the main export market was Russia. Then the embargo was introduced and everything was shut down. Devaluation ate up 40% of their capital and many companies went into the red. Yet today, these same companies are making nice profits—in many cases, over 30%, which is terrific. Russia has been replaced by North Africa, Arab countries, and Latin America. Part even went to Europe, where the quotas may be small but they are completely filled. They’re opening plants abroad. And all this in only 18 months!
Volodymyr Lavrenchuk is chairman of the board of Raiffeisen Bank Aval, one of the best-known of Ukraine’s bankers. Born in 1957 in Kyiv, he graduated from the Kyiv Institute of National Economy as an economist. He has worked in the banking sector since 1982 and held managerial positions at Oschadny Bank and UkrInBank. Since 2005, he has been chairman of the board of Raiffeisen Bank Aval.
Translated by Lidia Wolanskyj