The loan book of PrivatBank which has been leaked to bne IntelliNews shows that Ukraine’s largest commercial bank is acting as a “vacuum cleaner” for the local population’s savings, hoovering up a growing amount and sending it on to obscure shell firms, many owned by related parties or unknown foreign entities. Our investigation reveals that in fact almost all the bank’s largest loans are to such borrowers – some of which are currently being investigated by Ukrainian prosecutors for tax evasion and fraud.

The depth of the problems in PrivatBank’s lending practices will be cause for considerable concern to the Ukrainian authorities and the country’s Western donors. Kyiv is desperately trying to contain a financial crisis as the country’s fragile economy – battered by war, decades of misrule and revolution – struggles to stabilise after contracting about 10% last year.

Over the past two and a half years, the country’s regulator, the National Bank of Ukraine (NBU), has attempted a radical overhaul of the banking system, removing the licences of more than 80 lenders, often due to their involvement in money laundering or for not having a transparent ownership structure. Now attention is falling on the country’s biggest banks like PrivatBank, which require further capitalisation and a reduction in the level of related-party lending – a structural weakness that rating agencies warn is indicative of poor corporate governance and lax lending standards.

Unsurprisingly, the NBU and its determined governor, Valeria Gontareva, are coming under increasingly pressure from a large segment of the old elite, who behind the scenes are trying to undermine the bank’s reformist policies and its independence. On October 10 a number of MPs from four parties submitted a draft law to parliament calling for amendments to the law on the central bank to deprive it of its independence as well as the ouster of Gontareva and her deputies. “As is often the case in Ukraine, it is unclear who is really behind this draft law. It is presented as a populist act, but appears to be initiated by parts of the old elite. They want to return to a weak central bank that happily gives ample refinancing to close friends at the expense of the Ukrainian people,” notes Anders Aslund, a senior fellow at the Atlantic Council.

Encouragingly, the heads of 12 of Ukraine’s biggest commercial banks have signed a joint letter in support of NBU’s independence and Gontareva, while foreign institutions like the International Monetary Fund (IMF), the EU and the European Bank for Reconstruction and Development are also standing behind the bank. The IMF in October called for the government to take measures to resolve the problems at the systemic banks like PrivatBank, including possible nationalisation. But another bailout of Privatbank, which already owes $1.2bn worth of refinancing loans from the central bank, could blow a hole in the country’s budget and its international loan programme.

Privat lessons for the public

PrivatBank is present on every high street across Ukraine, with its branches outnumbering those of the state-owned savings bank Oschadbank. The central bank lists PrivatBank as one of three banks of systemic importance to the country, together with two state banks.

The bank is owned by oligarchs Ihor Kolomoisky and Hennady Boholyubov, who together control a sprawling unconsolidated industrial, financial and media empire referred to informally as ‘Privat Group’, while also financing political parties. Of the two longstanding partners, sources say the bank belongs to Kolomoisky’s respective sphere of influence, who according to the website is the largest shareholder with almost 50%.

In 2014 Kolomoisky earned international accolades when as governor of his native region of Dnipropetrovsk he rallied eastern Ukraine against the rising Russian-backed separatism, financing volunteer fighters out of his own pocket. But in 2015 he clashed with Ukraine’s new president, Petro Poroshenko, over control of large state energy companies. Poroshenko and Kolomoisky later buried the hatchet, with Kolomoisky’s 1+1 TV channel since then providing benign coverage of the president, who is himself the subject of mounting revelations about his murky business interests.

But the situation at PrivatBank poses a new challenge to Ukraine’s stability, as the country’s largest bank by assets has aggressively ratcheted up its share of Ukraine’s retail deposits past the 37% mark, with UAH148bn (€5.2bn) in individual deposits out of a total of UAH409bn in the system, according to central bank statistics in July.

Repaying depositors at PrivatBank in the case of an insolvency would very quickly exhaust the country’s deposit guarantee scheme. In Ukraine, the state insures retail deposits up to a sum of UAH200,000 (€7,041), incentivising depositors to prioritise high interest rates over concerns about stability when choosing banks. Thus the depositors continue to flock to PrivatBank, even after the collapse of fourth largest bank Delta Bank in 2015, which had also targeted the retail deposit market.

But depositors might stop rushing to PrivatBank if they had a chance to examine in detail the lender’s book of assets over UAH10mn (around €350,000) for July 2016, which has been shared with bne IntelliNews.

The €6bn question

According to the loan book leaked to bne IntelliNews, there is only a handful of identifiable large-scale borrowers in the bank’s roughly €6bn loan business, with the rest being no-name Ukrainian shell firms or offshores vehicles.

The largest borrower with an identifiable business is the Borivazh grain terminal in Odesa region, which holds just over UAH3.6bn in loans. The agricultural machinery distributor Novofarm holds UAH1.9bn. Optimus Plyus, part of the Optimus agricultural holding also has UAH1.9bn. Fuel concern Ukrtatnafta holds UAH550mn, TV channel 1+1 Production holds UAH626mn. Air carrier Dniproavia, chemicals firm Dniproazot and oil refiner Galichina have smaller loans. These are all businesses linked to the PrivatBank shareholders.

Some further entities are more obscure, but contain the “Privat” brand in the name, indicating they also belong to the group: Perspektiva Privat Development (UAH700mn) and Privat DPFG (UAH1.1bn), and Privatbud, Privatofis and Privatlizing with far smaller loans. 

Counter-intuitively, many of the well-known Privat Group corporate entities involved in the metallurgy, aviation and chemicals sectors do not feature on the PrivatBank book of loans worth over UAH10mn. The book contains only one major individual borrower, a Dnipropetrovsk businessman who is an ally of the PrivatBank shareholders. He holds a loan of UAH500,000.

This means that loans made to identifiable Privat Group entities totals around UAH10bn, which comprises just 5% of total gross loans worth UAH203.5bn, according to the NBU. This figure is not far off PrivatBank’s own calculation using what it says is the methodology provided by the NBU. “As of September 28, 2016, the related-party loans of the bank accounted for just 4.71% of the total loan portfolio," the bank said in a statement dated October 5.

In the same statement, the bank said under International Financial Reporting Standards (IFRS) the level of loans issued to related parties accounted for just 17.7% of the bank’s total loan portfolio at the end of 2015 – a calculation it claims is confirmed by a PwC audit. But the central bank puts PrivatBank related-party loans at 38.5%, acknowledges PrivatBank spokesperson Oleh Serga. “This is the result of a change in definition of related parties,” he explains.

The problem is that the documents leaked to bne IntelliNews show that apart from these identifiable Privat Group structures, hardly any other borrower on the loan book is a recognisable corporate brand, easily identifiable with a real business. For example, only 11 of the around 1,000 borrowers over UAH10mn are joint stock companies, even though most large businesses in Ukraine are incorporated as joint stock firms as a legacy of the post-Soviet voucher privatisation.

Of the 100 largest borrowers (see box below), accounting for UAH94.5bn or 46% of PrivatBank’s gross loans, all but one are limited liability firms. Most are registered in Kharkiv and Dnipropetrovsk, excluding the offshores, although PrivatBank has a dense national branch network. Hardly a single company has a recognisable brand name. Some of these are owned by Ukrainian individuals, but most are owned by offshore structures. Another 8% of lending, some UAH18bn, goes directly to offshore vehicles.

Hollow in Kharkiv

For example, a group of freshly incorporated Kharkiv-based companies in 2015 and 2016 hold almost $1bn in loans from PrivatBank, according to an analysis of the corporate structure of the borrowers. These loans comprise about 12% of the total PrivatBank loan book. 

The loans went to TOV Foburg, Adamant Oil, Alfa Treyd Oil, Avaris, Bryuk Oil, Kapital Oil, Fabricius, Kapital Treyd, Maksi V, Migora, Naftaenerdzhi, Natel, NK Franko, Olimp Oil, Palmira Treyding, Segment Oil, Tais River, Petroil, Taymar, Yuniks Grup, and Zebrina. All these firms were registered in February-May 2015 in residential buildings in the centre of Kharkiv. Amazingly, all have paid up share capital of only UAH1,000 ($40), according to the company register.

Some of the owners of these firms do have a public profile as managers of established companies. Volodymyr Golovko, for example, is the owner of Fabricius, Foburg and Kapital Treyd, according to Ukraine’s corporate register.  Golovko is listed in open sources as a former CEO of Zaporozhnefteprodukt and former chairman of Kremenchugnefteprodukt, both fuel trading firms. Serhii Kazarov, owner of Migora, NK Franko, and Yuniks Grup, is a former CEO of Kherson-based agribusiness Optima-Yug. Vyacheslav Plakasov, owner of Petroil, Segment Oil and Kapital Oil, is director of oil trading firm 770 Petroleum. Viktor Shkindel, owner of Zebrina and Naftaenerdzhi, is a former CEO of Dnipropetrovsk Airport.

It is notoriously difficult to pin down exactly what assets belong to the sprawling Privat Group. Ihor Kolomoisky has even denied the existence of any such group in interviews. However, local media reports list as members of the Privat Group these established companies, the former CEOs of which now feature as owners of the 2015-registered Kharkiv shell firms.

The owners could not be contacted for comment on their connections to Privat Group. On paper these men own the borrowers outright as final beneficiaries.

“This information simply does not correspond to reality,” spokesperson Serga says. “The bank’s corporate borrowers have good credit histories, and loans are secured by highly liquid collateral. International surveyors and international auditors regularly appraise the value of our collateral.”

Kolomoisky did not answer his phone when contacted by bne IntelliNews.

Under investigation

Court records show that Ukrainian law enforcement are already scrutinising some of the Kharkiv borrowers’ dealings.  

According to a pre-trial police investigation, two of these new firms, Olimp Oil and Adamant Oil, which together hold more than UAH1.5bn (€54mn) in loans from PrivatBank, “belong to one financial-industrial group that sells fuel products via a chain of filling stations under one brand”, it said without naming the group.

The inspection of these two firms has allegedly established that, “the employees of the retail points and the companies systematically falsify financial-accounting documents, including the cash receipts and expenses, leading to large-scale loss of funds to the budget.” The investigation is ongoing.

The investigation also found that these and other Kharkiv-registered PrivatBank borrowers are “de facto headquartered in the Shevchenko district of Dnipro[petrovsk]”, where the PrivatBank headquarters also are located, making it likely that the “one financial-industrial group” referred to by the investigators is the Privat Group.

Another pre-trial investigation lists Kapital Treyd, registered in 2015 in Kharkiv and holding some UAH3bn (€108mn) in loans from PrivatBank, as allegedly connected to massive tax evasion during its sale of oil products to over a hundred different counterparties. NK Franko, Yukon and Segment Oil are also the subjects of pre-trial criminal investigations into tax evasion.

None of these investigations have resulted in any charges being brought yet.

Hoovered up and out

An examination of the bank’s loan books show that the bank lent about €1bn in 2014 to another group of obscure Ukrainian firms, which are now the subject of a criminal investigation into whether these funds were then illegally moved abroad. According to the investigation, these funds may have come from emergency state refinancing loans that were intended to shore up the bank.

According to the pre-trial criminal investigation, in 2014 the bank lent a total of UAH19bn to 42 Ukrainian firms. Control over the 2014 borrowers was exercised via a cluster of 50 offshore firms. PrivatBank lent each of the 42 Ukrainian firms $18mn-73mn, according to the details of the investigation.

The loan book leaked to bne IntelliNews confirms that this lending indeed took place. The 42 firms owe PrivatBank a total of about UAH29bn (13% of total gross loans). The discrepancy in hryvnia sums could be the result from the decline in the value of the hryvnia, since the loans were in dollars. According to the details of the criminal investigation, the loans were to be secured by oil products purchased with the funds.

The recipients of the loans in 2014 then moved the money in turn to six firms registered in the UK and British Virgin Islands, all with accounts at PrivatBank’s Cyprus subsidiary, according to the investigation. The payments comprised 100% advance payment for oil products. But the investigation claimed that no oil products were ever supplied by the non-resident firms to the PrivatBank borrowers, meaning the funds were effectively moved from the loans via the firms out of the country, to accounts at the PrivatBank Cyprus subsidiary.

The bank rejects all the allegations. “In the situation [in 2014] of political crisis and military action in East Ukraine, the bank’s liquidity deteriorated… so there were simply no funds left to ‘siphon off’,” the PrivatBank spokesman said. Regarding stability loans that the central bank provided to PrivatBank in 2014, he explained: “according to the demands of the NBU, these resources were used only to cover withdrawal of deposits by individuals.”

According to the criminal investigation, the 51 offshore vehicles and the 42 suspicious PrivatBank lenders from 2014 are “controlled by the PrivatBank shareholders”.

These 42 suspicious borrowers, however, are only a subset of over 100 Ukrainian shell firms holding large loans from PrivatBank, which are owned by an intertwining network of around 95 offshores, including the 51 named by investigators as controlled by PrivatBank shareholders. These obscure offshore-owned firms holding billions of dollars in loans are registered in Dnipropetrovsk and Kharkiv, and lack websites or any other public profiles.

The total loans held by all the offshore-owned Ukrainian shell firms comprises around 70% of the entire PrivatBank loan portfolio. With 12% held by the 2015 Kharkiv shell companies, and 8% directly by offshore companies, this means that a staggering 90% of PrivatBank loans over UAH10mn are held by local or offshore shell companies.

Fuel for thought

Worries about how much of this lending to obscure shell companies is to related parties is centred on the fact that many of these Ukrainian borrowers play, or have played, a role in Privat Group’s opaque filling station and fuel trading business, according to court records ( list of fuel business firms 2015.pdf), which is also suggested by the frequent use of “Oil” or “Nafta” (Ukrainian for oil) in their names.

Others were listed in July 2015 by an MPs’ investigation into Privat Group’s fuel trading activities, according to an official appeal to the Prosecutor General submitted by the cross-party group of pro-reform MPs ( deputies letter.pdf). The Privat Group controls over 1,500 filling stations across Ukraine, estimates head of research Oleksandr Paraschiy at brokerage Concorde Capital.

According to the MPs’ investigation, the ownership vehicles for the Privat Group fuel business are switched roughly once every six months, from one set of Ukrainian shell firms to another newly created set. The MPs’ letter lists over 100 such firms used to run the filling stations in 2014. At the start of 2015, according to the letter, these firms were all switched and a new set of obscure firms took over the business, in a move they alleged was intended to hide traces.

Leading fuel market analyst Serhiy Kuyon of A95 Consulting agrees with the deputies’ assessment of the modus operandi of Privat Group’s fuel business.

According to Kuyon, the turnover of the business in 2015 was as much as $1.5-2.0bn and working capital was “probably financed” by PrivatBank. Other analysts put turnover lower. Roman Nitsovych, head of the Dixi Group energy consultancy, tips $1bn, while Olesandr Paraschiy, head of research at Concorde Capital, puts it at $0.65bn. The spread of estimates is itself a reflection of the opaque nature of the business.

Boris Timonkin, the former long-serving head of UniCredit’s former subsidiary Ukrsotsbank, who fled Ukraine in 2014 after criminal charges were brought against him, says all this leads him to conclude that PrivatBank does not fulfil the main function of a bank that is commonly understood by everyone: that it should enable the efficient allocation of capital to the parts of the economy in most need of it. Rather, he says, “it is simply a vacuum cleaner” for the population’s savings.

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Spot the recognisable company: PrivatBank’s top 100 borrowers account for UAH94.5bn (€3.3bn) in loans

TOV Borivazh; TOV Migora; TOV Naftaenerdzhi; TOV ZII Novofarm; TOV Oilstrim; TOV Zebrina; TOV Palmira Treyding; FRANSIANO INVESTMENTS LTD; TOV Petroil; FANDERO LTD; TOV Anabis; TOV Profit; TOV Betenkort; TOV Natel; TOV Optimus Plyus; TOV Tais River; TOV Maksi V; TOV Alfa Treyd Oil; TOV Tekhnispreyd; TOV Labi Treyd; TOV Kapital Treyd; TOV Yuniks Grup; TOV Retonga; TOV Elsis Taym; TOV Paradiz; TOV Impis; TOV Raneya; TOV Metrikom; TOV Elti Treyd; TOV Rapit; TOV Masben; TOV Floreks Industriz; TOV Adzhalik Treyd; TOV Favore; MERITENA INVESTMENTS LTD; TOV Dampir; TOV Adamant Oil; TOV Prado; TOV Taymar; ABENDALE MANAGEMENT CORP.; ROSSYN INVESTING CORP.; TOV Sigmatreyder; CORNESIA CONSULTING LIMITED; TOV Faboris; BILLINGHAM PARTNERS INC; TOV Solmbridzh; TOV Biloris; TOV Tseris; TOV Milorin Ltd; TOB NK Franko; TOV Mirigon; TOV Lansel; TOV Investgrup; TOV Olimp Oil; TOV Reform Plyus; TOV Perspektiva Development; TOV Stels; TOV Tekhservismontazh; TOV Diletra; TOV Transmoloko; TOV Reform Plyus; TOV Versaliya; TOV Viniburg; TOV Vialint; TOV Melitas; TOV Tekhspetsmontazh; TOV Adionis; TOV Megaprom Ltd; TOV Foburg; TOV Intersplav; TsOV Skorzonera; TOV Vesta Kompanii; TOV Polyaris; TOV Avaris; TOV Segment Oil; TOV Fabricius TOV Kartservis Plyus; TOV Tsum; TOV Orbela; TOV Veles Oil; TOV Investgrup; TOV Vialint; TOV Diletra;  TOV Maveks Petrol; TOV Donmas; TOV Bias Vektor; TOV Stal; TD KhZhK; Privat DGPG; TOV Mantas; TOV Vihnga; TOV Saltiz; TOV Shelta; TOV Kalari; TOV Mondoro; TOV Svarog Oil; TOV Melitas; TOV Rich Oil; TOV Real Standart.