Ukraine's NBU & IMF deliberately misled Eurobond holders, causing them to lose 100% of their investments

In December of 2016, the Ukrainian Cabinet ruled to nationalize PrivatBank, Ukraine’s largest privately owned commercial bank, causing the Bank’s Eurobond holders to lose 100% of the value of their investments.

The decision, however, was made back in 2015 between the National Bank of Ukraine (NBU) and the International Monetary Fund (IMF), who chose to place the lion’s share of the bailout burden on the Bank’s Eurobond holders to fill the capital gap in PrivatBank’s balance.

Due to that 2015 decision by the NBU and IMF, there was little to no chance of Eurobond holders to recover their bond’s value, as they were completely unable to reduce their exposure to the Bank’s bonds.

In the summer of 2015, the NBU forced the Bank to extend Eurobonds that were due in September 2015 and February 2016. These notes would have had the highest recovery rate, yet Eurobond holders agreed to the restructuring as they were mislead about the Bank’s current risks.

During this time, in July 2015, the legislative amendment that outlined the bail-in process of the Eurobond holders was approved to little concern of the public or the bondholders themselves.

The NBU then concealed vital information from the Eurobond holders about the Bank’s financial situation. In the NBU’s May 23 press release, when we now know that PrivatBank was not meeting its liquidity requirements, the NBU stated that the Bank’s position was “satisfactory” as to not raise any suspicion.

The NBU also failed to mention that the Bank had delayed fulfilling the recapitalization program, leaving a 46% capital gap on the Bank’s balance sheet.

Unbelievably, during the week in December when PrivatBank was nationalized, the NBU did not even contact the Eurobond holders to explain what was going to happen to their investments.

These actions by the NBU and IMF reveal deliberate withholding of information from the Eurobond holders, who should demand satisfaction of their rights.

While Ukrainian law protects the Government, supported by the NBU and IMF, Eurobond holders have the right to appeal their case to the international investment community.

Bondholders should raise their case immediately, if they want to stand any chance of recovering their lost investments from the NBU.

Read the full financial report at Concorde Capital.

PrivatBank ex-chairman says bank’s nationalisation wasn’t justified

From The Financial Times:

In his first foreign media interview since he was removed as PrivatBank chairman in Sunday’s state takeover, Olexandr Dubilet told the FT that the Ukrainian government’s move to nationalise the country’s biggest lender this week was unfounded, and there was no $5.5bn hole in its accounts.

Mr Dubilet said that Ukraine’s central bank had used flawed methodology that fell short of international standards to assess the lender’s collateral and risk.

He claimed there was an alleged hole only because the National Bank of Ukraine refused to recognise many large assets, such as commercial property, as collateral.

Mr Dubilet also accused the NBU of exaggerating the bank’s related-party lending – which the regulator put at 97 per cent of its commercial loan book – by classifying many individuals or entities that had no connection to the lender as related parties.

“We are categorically not in agreement with the national bank’s assessment of risks and collateral,” Mr Dubilet said. “They were not using international standards. According to an audit by an independent auditor which was conducted last year, we had UAH150bn hryvnia ($5.7bn) as collateral, but the NBU didn’t recognise this amount as collateral.”

International financial institutions, rating agencies and many analysts have welcomed the Ukrainian authorities’ move as a long-overdue culmination of efforts to clean up the country’s banking sector. The IMF is understood to have made tackling balance-sheet issues at PrivatBank a condition of releasing the next tranche of a $17.5bn bailout programme.

Christine Lagarde, the IMF managing director, said the nationalisation was an “important step in [Ukrainian authorities’] efforts to safeguard financial stability”.

But the bank’s former management and its main shareholder, billionaire oligarch Igor Kolomoisky, on Friday launched a public relations offensive to insist nationalisation should not have been necessary.

Mr Kolomoisky said he agreed to the state takeover only to safeguard the bank after customers started withdrawing deposits following what PrivatBank has called “information attacks”. He hinted the central bank was behind these attacks.

“As a result of the latest wave of customer panic provoked, first of all, by the NBU’s actions, we were forced to turn to the Cabinet of Ministers with a proposal to hand over PrivatBank to the state,” the tycoon said in a statement.

Mr Dubilet also said the bank’s nationalisation was the result of “information attacks, and the fact that deposits and other funds were flowing out of accounts”.

Despite widespread international approval of the Ukrainian authorities’ move, claims by ex-management and shareholders may be seized on by holders of $595m of PrivatBank Eurobonds.

Bondholders have signalled they may take legal action after a “bail-in” that saw their bonds wiped out and converted into shares in the lender.

PrivatBank continues to innovate in Ukraine

PrivatBank, Ukraine’s largest commercial bank, has continued to innovate and deliver the most advanced services to the Ukrainian people.

In the last week, it was revealed that PrivatBank agreed to partnerships with international tech heavyweights Viber and Uber.

EmergingMarketBanking

Viber, one of the world’s most popular instant messengers, will work with PrivatBank to start reception of payments for their Viber Out service, which allows calls to mobile devices and landlines at a very low rate.

Head of Viber in Russia Evgeny Roshchupkin said, “We are pleased to provide Ukrainian Viber users for more services and we hope that through such partnerships with leading market players our audience in Ukraine – and now it is over 14 million people – will continue to grow.”

Deputy Chairman of PrivatBank Alexander Vityaz said, “"Localization of paid services popular messenger will allow Ukrainian users Viber to be in touch in any situation, both at home and abroad. Today you can directly refill your account in Privat24 Viber Out, and soon there will be more options in that direction.”

Viber provides services for more than 711 unique users in 193 countries all over the world.

EmergingMarketBanking

Uber, the world’s largest international taxi service, will partner with PrivatBank to integrate payment solutions to drivers, businessmen, and companies, regardless of which bank they are clients of.

The payments will be transferred through PrivatBank’s mobile payment system, Privat24.

A spokesman from PrivatBank said, “By late August clients of Privat24 mobile banking application would be able to order Uber taxi.”

The arrival of Uber in Ukraine means competition with taxi and private car services and will provide a necessary service to citizens in the large cities as well as jobs as drivers.

Kiev’s Mayor Vitali Klitschko said, “With the launch of Uber in Kyiv, those who are now familiar the company’s services in London, Paris and other cities will be able to move around our city in the same convenient way.”

PrivatBank’s partnerships with Viber and Uber, two tech titans, further demonstrate the Bank’s commitment to innovate and provide the Ukrainian people with the best technology and services available. 

The Dark Side of APIs in FinTech: Why Duplicates Slow Down Innovation

By Alexander Vityaz, CEO, Corezoid, Head of E-Business, PrivatBank

The growth of API usage in IT has been deservedly incredible, and I believe APIs are especially capable of providing value and utility in the FinTech sector. From the introduction of the API concept first described by Roy Fielding about sixteen years ago, to the millions of APIs that today grant easy access to the resources of the companies offering them, APIs have delivered nothing short of a true IT upheaval. The way that APIs enable businesses – FinTech or otherwise – to communicate with each other, build new services, and automate processes has been responsible for many of the technological achievements we all benefit from everyday, whether we realize it or not. 

But APIs are not without their issues. Getting momentarily more technical, an inherent trouble spot with APIs is that it is necessary to generate duplicate hard code for every language for which the API is available. The more clients a business has, the more multilingual copies of the same code need to be supported, all of which simply solve the same problems. APIs also have the major technical issue that different APIs work at different speeds. Maybe one API can withstand a load of 100 requests per second; another can only handle 30 requests. Because of this, developers are required to create “buffers” in addition to implementing the hardcoded logical binding for the APIs they use, to try and synchronize those APIs and resolve contention between communicating service components. Bottom line: APIs can still take a lot of time to make work, and they may not always play nice with one another. 

Given the technical challenges that remain, APIs – and the FinTech world’s necessary utilization of them – is due for a second revolution: a transition from APIs to API-based processes. 

An API is not a product. A process is a product. 

APIs are not the last stop in the evolution of how we achieve communication between different pieces of software. For the next step beyond APIs in our collective approach to software development, the ultimate dream is a solution that is independent of specific programming languages, and can be easily scaled, copied, and changed. We need to change our paradigm to distributing not APIs (which of course still require hardcoding and work on behalf of businesses to get the functionality required out of them), but ready-made processes themselves that can be fully integrated into a bank’s systems with plug-and-play ease. This is a vision shared by analysts at Gartner, who anticipate an economy of algorithms where processes (like a P2P payment service) are purchased as specific tools that enable certain actions and plug straight into the core of a bank’s platform. 

This future based on ready-made processes presents an interesting value in the FinTech space, where technology is paramount and API-based services have the potential to transform the industry. Bruce Wallace, COO of Silicon Valley Bank mused, “We view API banking services as a natural progression in how our tech-savvy clients want to work with their banking partners and service providers.” In much the same vein, Digital Bank author Chris Skinner has said that “putting everything into an [API] is how Facebook, PayPal and others are working today and, if they did not, they would be dead. It’s the functionality that is key, and letting API capabilities allow anyone to leverage that functionality is going to be the real way for banks to increase their economic value in any economy.” 

The value of APIs in FinTech is undeniable, and the ability to deliver all they can offer through ready-to-work API-based processes should only multiply that value. Helping to lay the groundwork for this environment where any FinTech company might quickly add new functionality by way of an API-based process, Visa and MasterCard have each confirmed their commitment to pen APIs. In 2015, MasterCard announced its Open API Declaration, and Visa followed suit in February 2016, opening hundreds of APIs via developer.visa.com. Visa has made available APIs for working with exchange rates, web interfaces, card scanners, geo-location, and many more solutions. 

However, because banks are not naturally IT companies and because APIs are not finished products, open APIs still leave work to be done in order to implement these banking solutions – work that many banks are still not equipped to perform. And those banks that do perform this work do it expensively, and with each bank doing parallel work to create redundant solutions. But, as opportunities to instead use ready-made processes become more available, more banks and other FinTech entities will have better access to these solutions, and the savings and efficiencies that come with them. 

In the near future, don’t be surprised to see any bank in the world able to easily obtain “off the shelf” solutions for providing P2P payment services, online banking, a mobile banking application, and more that are based upon processes where, under the hood, thousands of FinTech APIs are furiously (but seamlessly) at work.

Read at the International Banker.

Q&A with Oleksandr Dubilet, Chairman of the Board of PrivatBank

PrivatBank is the largest commercial bank in Ukraine. The Q&A is focused on innovation strategy of the financial institution to provide steady development, regardless of the troubled economy and serious political instability in the country.

Q: Mr. Dubilet, we are pleased to talk you about PrivatBank. Could you please tell us about yourself and the part you play in PrivatBank?

I have been working at the bank since its foundation in 1992. In 1997, I became the Chairman of the Board. The bank was founded from the ground up; it is not the result of privatization or use of former state-owned property. PrivatBank is the only 100% domestic capital bank to lead the local market for more than 12 years. It also grows its business in the European Union and surprises with unique technologies. PrivatBank is the only Ukrainian bank placed in TOP-15 CEE banks according to The Banker of 2016 and its TOP-1000 World Banks. 

Q: Ukraine is experiencing one of the most difficult crises in its history. How does PrivatBank operate in order to survive in such a difficult situation? 

The bank has been on the frontline of attack, not only an information attack, but physical attacks by terrorist forces, extensive Internet attacks on our facilities, including the server attacks. It is difficult to schedule the ordinary operations of the bank due to military actions. Nevertheless, against all odds, it is important for us to continue the technological development. The advanced technology helps us reduce banking costs and provide the best support for customers. Currently, PrivatBank serves 1.6-2.5 million clients daily. The majority of these people come to us via Smartphone's, our ATMs, branches, and self-service terminals every day; it is a demonstration of our unique clients. The Bank managed to significantly reduce the cost of operations and increase the number of clients by transferring them to remote service or self-service facilities. Today, we can confidently say that PrivatBank is a technology company. Our team is not only financiers but also process managers in a wider extent. 

Q: Could you tell us a little bit more about your business model regarding management technology? 

On the one hand, our technological advances allows us to seriously change the management mechanism of the internal business processes, digitize it, and extend the rapid transformation of business processes using Corezoid cloud operating system, which we now publicly offer for use by colleagues around the world. Corezoid is a platform on the basis of which Western Union launched money transfers in Ukraine in cooperation with PrivatBank. Once created, the processes are now easily copied throughout the world, adding the necessary local settings. 

Today, the introduction of some new services from concept to practical implementation may take several days or weeks – a rapid pace for the banking industry.  On the other hand, we believe that the bank can give the consumer not only those services, which are used to give since the 18th century, but also a broader perspective of the processes. We do not spy on solutions from successful colleagues; we go in a creative mode instead, developing our own ideas. For example, there are opportunities to purchase tickets, clothes, food, order a taxi, in addition to traditional payments in Privat24 mobile bank. Our app is not just a digital bank; it is management for enterprises. We bring the client-company relationship to customer-consumer and any legal entity cooperating with us can use Privat24 for this purpose. Our bank ranks 9th, between Rozetka e-shop and Facebook, in the top-10 Ukrainian web resources according to TNS Ukraine. This is an accurate representation of the work that we do. We want to serve our clients every day, and not just for payments – but for transactions as well. 

Q: Could you give some examples of the latest technologies of your bank? 

In 2014, the bank introduced the world's first contactless "cloud" electronic purse, which is based on Privat24 electronic banking system and allows you to make payments via Smartphone's with the integrated NFC module without any additional cards, stickers, etc. Apple, then Samsung, adopted a similar technology a little later. More than 9.2 million clients use PrivatBank online banking and mobile, which is a significant result even for the European financial markets. According to the results of the recent study of Gfk, 87% of Ukrainians, who use smartphone payment applications, use our Privat24 application. 3.6 million people have downloaded our Android and IOS application. We use iPads in our branches instead of computers, not only for better quality, but also for the ability to easily learn how to do the same operations from the comfort of home.

In 2015, the bank initiated and became one of the first members of BankID national system, which allowed the verification of the users according to their payment cards for access to the new system of iGov (electronic public services). This was the first step to introduce a full-fledged e-government in Ukraine. In March 2016, PrivatBank launched a unique P2P lending service for Ukraine, Good Investment Service, with the help of which individuals can directly invest in loans of other individuals, with the Bank as the site organizer undertakes scoring and helps to insure investments. 

Corezoid is our cloud operating system. It has become the first start-up of the Eastern European Region in 2016 and is presented on Amazon Marketplace. In March 2016, the bank launched PrivatMarket – Ukraine's largest free trade area that allows companies and entrepreneurs to present their products and services, and directly participate in tenders, including public procurement. PrivatMarket obtained special accreditation of the Ministry of Economic Development to conduct public procurement. 

The technologies of PrivatBank have been repeatedly recognized as the winners in the Innovation in Banking Technology Awards of The Banker. Among the most memorable victories in this international competition of banking innovations were such bank projects as "Without coins" and "Online Collection”, being in advance of other competitors and having become the winners in Innovation in Banking Technology Awards in 2010 and 2011 as well as SMART ATM-VIDEO project which took 2nd place in 2013. We are proud of other innovations too: the E-antifraud electronic system, 24\7 corporate customer service technology, online practice for students, AirPay contactless payment, and scores of others. Due to the constant participation and a large number of interesting projects in 2013, The Banker’s panel recognized PrivatBank as one of the most impressive players in the international market of financial innovation, along with such banks as BNP Paribas and Citi. Twice we have won the title of Best of show at the Finovate conference. PrivatBank is the only bank in Ukraine, which has been recognized as the Bank of the Year in the ratings of the leading financial publication for more than 10 years in a row by The Banker and Global Finance. 

Q: You mentioned earlier about the trust of customers. What are the steps of your bank in this area? 

Studies have found that every third customer of the Ukrainian banking system is PrivatBank’s customer, and every 4th considers PrivatBank his/her principal bank. Our share of the plastic cards market is about 53%, the number of ATMs is more than 30%, and the number of POS-terminals is more than 60%. This is the result of confidence in the bank and the proper technologies. The proper technologies are, first of all, good service. Our large market share in Ukraine is mainly explained by the quality of service to our customers. 

Q: How has your business operated amid the crisis in Ukraine? 

We primarily focus on retail lending to entrepreneurs and micro lending for self-employment development. This is the business segment which does not require large capital expenditures, because today people becoming entrepreneurs use their existing premises, land plots and facilities. We have built a proper risk assessment system based on understanding the customer and their payment history. We know the customer’s credit standing in the past. We have accumulated a large enough amount of information to provide these loans. The reduction of the cost of borrowing for small businesses can be done with new lending formats. In April 2016, we launched the first KUB (Ukrainian Business Loans) service in Ukraine, which was called "Ukrainian Kickstarter". The service allows entrepreneurs to present their business and development projects, and directly receive investment from private clients. This is could be small amount of loans, up to UAH 300 thousand, but it is a very important tool for real economic growth. The programs of PrivatBank stimulate self-employment and family business development. According to our estimates, these programs are now able to give Ukraine one million jobs while investing about UAH 20 billion. PrivatBank acts as the operator for the KUB platform: we conduct scoring of loan applications and help investors to insure their investments in order to have this method of investment as safe one. 

Q: What can we expect from PrivatBank tomorrow? 

Our strategic goal is lending to small and medium-sized businesses and the diversification of the liabilities portfolio. We have a lot of ideas related to the improvement of interaction efficiency with customers, not only at the stage of effecting of payments, but also at purchasing. We are thinking of migration to Smartphone's, Web-based applications, as well as connecting these applications to not only banking services but also to the services that organically help customers solve their problems. In addition, we want to teach everyone to use electronic banking. The screen on the tablet in our branch is the same as your screen on your computer and Smartphone. And when the customer sees and understands how to conduct a transaction, the next time they won’t have to come all the way to the branch. All of the infrastructure, the branches and so on, are increasingly becoming necessary, only for the first time the person comes to the bank. You cannot open an account remotely; this is a worldwide practice and the nature of financial identification. When the financial identification is conducted, we have to make sure that you are able to obtain services through the Smartphone, and at the same time enjoy it. That's our job and that's where we see our contribution to the increase in labour productivity in the banking sector of Ukraine. 

Ten Reasons Why I’m Optimistic About Ukraine’s Economy in 2016

The Atlantic Council's Anders Aslund explains 10 reasons why he feels the Ukrainian economy is on the mend. Aslund is a senior fellow at the Atlantic Council and author of the book "Ukraine: What Went Wrong and How to Fix It." 

From the Atlantic Council blog: 

The outlook for the Ukrainian economy in 2016 is positive. Many important reforms were carried out in 2015. The necessary exchange rate adjustment has occurred and most required bank closures have taken place. The parliament has adopted tax changes and a decent budget for 2016. The debt restructuring deal has postponed foreign debt service. The current account is in approximate balance. Now is the time to move forward with more structural reforms.

1. The governing coalition needs to hang together, at least the Poroshenko Bloc and the People's Front. They can gather alternative support for various votes. Early parliamentary elections should be avoided in 2016, and those in power are presumably interested in doing so.

2. If the coalition is to survive, Ukraine's leaders need to put up a credible fight against corruption. That means that they have to sacrifice several top policymakers who are evidently guilty of corruption. The choice is theirs, but real culprits must be exposed, sacked, and punished.

3. To fight corruption, reform of the general prosecutor's office and the court system has to start. This will be a prolonged battle, but the government can no longer avoid it.

4. Energy reform has been one of the greatest achievements in 2015 and it needs to be completed. From April 1, 2016, all energy prices should be unified to avoid further privileged arbitrage for certain insiders. A real market for gas and electricity can and should be introduced and supervised by a truly independent regulator. The repression of independent gas producers through taxation, market regulation, and criminal prosecution needs to stop.

5. A mission from the International Monetary Fund is likely to come in mid-January and clear Ukraine for a major disbursement in early February. Yet it will be a challenge for the government to keep the IMF happy as populist pressures persist.

6. On the monetary side, everything looks promising. Most of the bank closures have been carried out, and the international reserves have risen from $5 billion in March to currently $13 billion, which is sufficient to keep the exchange rate stable. With the next IMF disbursement, reserves will rise so that the current draconian foreign exchange restrictions can be eased somewhat. In 2016, inflation will continue to fall, and with that the National Bank of Ukraine can cut the interest rate, and gradually a new credit expansion can start.

7. Privatization and management of state enterprises are becoming hotter issues because state enterprises are a major source of corruption, which is best ended through open and complete sales. Open, large-scale auctions of state assets of little value must start. The management of the big state enterprises will continue to improve, and some big state enterprises will finally be sold in open auctions.

8. Russia might actually return the occupied Donbas to Ukraine. The appointment of Boris Gryzlov as Russia's top negotiator in Minsk is an important positive signal because he settled the Orange Revolution in December 2004. Another important Russian personnel change is that Deputy Prime Minister Dmitri Kozak has replaced Vladislav Surkov as the Kremlin man dealing with the Donbas. While Surkov is a notorious troublemaker, Kozak is a manager of frozen conflicts. The Kremlin currently ignores Ukraine, while focusing on its war in Syria. These negotiations with Russia must be a top government priority. The mutual sanctions, however, are likely to last.

9. Ukraine's economy is set to grow more than Russia's in 2016. After two quarters of stabilizing output, 2016 is likely to see economic growth, and when growth starts it is usually higher than expected (currently 2-3 percent) because so many resources are underutilized after a big output fall.

10. The European Union cannot stay so passive any longer. The EU Association Agreement is now fully in force. That means that the EU is obliged to provide more effective assistance to Ukraine. What is most important is that the EU is likely to open up for visa-free travel for Ukrainians in the summer of 2016.

My outlook is quite optimistic because so many reforms have been implemented in 2015, and Ukrainian politics have hung together. Now the public concerns about corruption need to find constructive outlets so that corruption really declines. Yet, Ukraine remains sadly poor and will do so for years.

http://www.atlanticcouncil.org/blogs/new-atlanticist/ten-reasons-why-i-m-optimistic-about-ukraine-s-economy-in-2016