The National Bank of Ukraine (NBU) has declared the Ukrainian operations of Russia's state-owned VTB Bank insolvent following weeks of a snowballing liquidity crisis, the regulator said in a statement published on November 27.

"Due to VTB Bank owners' failure to take real steps to prevent insolvency, as well as due to a lack of adopted and realistic measures to improve liquidity, the NBU decided to recognise VTB Bank insolvent," the statement reads.

Over the past weeks, the Ukrainian operations of VTB Bank has introduced restrictions on withdrawal of cash in the national and foreign currencies due to a decrease in liquidity caused by September's ruling of the Kyiv court of appeals to freeze the lender's assets, which deprived the bank of the opportunity to replenish liquidity by selling mortgaged property and assets acquired in foreclosure.

The ruling to seize the shares of Ukrainian subsidiaries of Russian state-owned banks Sberbank, VTB and VEB followed a claim filed by 17 companies and one person, ex-chairman of the board of nationalised PrivatBank Oleksandr Dubilet, that lost their assets in Crimea as a result of its annexation by Russia in 2014.

Earlier, the Permanent Court of Arbitration in the Hague ruled that the Russian government must compensate almost two dozen Ukrainian companies associated with close confidantes of Ukrainian oligarch and ex-owner of PrivatBank Ihor Kolomoisky for their losses incurred from the illegal annexation of Crimea. 

On November 5, the National Bank of Ukraine (NBU) said in a statement that the regulator observed "a certain decrease in liquidity" at VTB Bank, "which has developed along the process of winding down the operation of VTB and intensified by the decision of the Kyiv court of appeal [...] on freezing of assets of the financial institution".

This decision effectively prohibits the unit’s parent VTB bank from replenishing the Ukrainian subsidiary’s liquidity via the disposal of assets that have been acquired through the recovery of pledged assets, the central bank added.

"The NBU intensively monitors the current situation and will, if necessary, take measures within its authority provided for by the current legislation," the statement reads. "The liquidity situation at VTB bank has no impact on stability of the banking sector in Ukraine, since the financial institution accounts for 0.6% of solvent banks’ net assets."

Poroshenko's ex-bank

Russia's state banking group VTB  created its Ukrainian operations on the basis of Mriya Bank, which was sold to the group by the incumbent Ukrainian President Petro Poroshenko in 2006. "VTB group reserves the right to appeal to an international court to claim the amount of funds spent on the purchase of the bank from Mr. Poroshenko," the banking group said in a statement on November 27.

Earlier, the group declared its intension to wind down its operations in Ukraine to a minimum amid failure to exit the market. VTB group's head Andrei Kostin said that the bank will be "downsizing" its business in Ukraine, selling assets, withdrawing loans and selling all kinds of collateral. Specifically, the bank is going to close all offices in Ukraine but one with the aim of reducing operational costs. In early 2017, the bank had 32 offices in Ukraine.

Until recently, VTB has operated in Ukraine with two banks: VTB Bank and BM Bank. However, in early March, BM Bank said that its banking operations will be stopped without being liquidated as a legal entity.

The Russian parent bank has been trying to sell its Ukrainian subsidiary, without success, after the NBU placed sanctions on the leading Russian state-owned banks in response to Russian aggression in the Donbas and the 2014 illegal annexation of the Crimea.