First, I don’t think that anyone with their ears close to the ground in Kyiv is really that surprised by the resignation of Smolii as central bank governor.

It has been well known that the National Bank of Ukraine (NBU) team has been coming under huge personal (including death threats) and professional pressure since Euromaidan and the bank set off with the task of cleaning up the banking system, which had been a money-making pit for oligarchs, criminals and money launderers.

It is testimony to how successful, Smolii, [former NBU governor Valeriya] Gontareva and their teams – mostly the same people – have been that the same enemies of Ukraine have been working overtime to get these reformers out.

I think it was assumed that Smolii had threatened to resign before, but something finally seemed to snap this time. Seemingly Smolii met with Ukrainian President Volodymyr Zelenskiy yesterday and something snapped.

There had been plenty of rumours that Zelenskiy had wanted to change Smolii for someone more loyal, who would also stem the constant carping from the Rada, and oligarchs, over the course of policy from the NBU. And herein it was not just banking sector reform that the enemies of the NBU used against Smolii, but the tight monetary and exchange rate policy – the strong UAH and the fact the NBU was relatively slow to cut policy rates.

Against this backdrop it is somewhat ironic that there is now general surprise by Smolii’s departure, even in circles around the NBU and amongst the reform team. This does suggest that it was only in the meeting yesterday between Smolii and Zelenskiy that something was said to push Smolii, or actually maybe Zelenskiy in accepting the resignation, over the line. Who knows what that was? Maybe Smolii just had had enough, and with the IMF SBA signed, and the ink almost dry on the Eurobond issue yesterday, he thought now was a good time to resign, and that if he played his cards well he could make sure that his replacement was suitably reform minded.

Second, and let’s not beat around the bush, Smolii’s resignation is a huge blow to Ukraine and a big risk to macro financial stability; plus it also threatens the future of banking sector reform in Ukraine – against people like Kolomoisky.

And herein huge thanks and appreciation to the work of Smolii. Let’s not forget that Smolii was second or even third choice to replace Gontareva as governor when he was appointed. But he proved to be a really excellent governor. He defended the reforms put in place by Gontareva. And importantly he defended with his life his reform team – not many politicians or policy makers in Ukraine have done that over the years. He, and Gontareva before him, built a management culture of “all for one, one for all” at the NBU, really strong team spirit and ethos, which I think was the secret of its success.

Now that was not appreciated by the Rada, the oligarchs and villains in Ukraine and perhaps also by some around Zelenskiy. But what it did is to ensure macro financial stability. And testimony to this is through one of the biggest crisis in Ukraine’s history, the currency has been stable, FX reserves stable, and the NBU has been able to crush inflation and cut policy rates to record lows, enabling the MOF to fund itself very cheaply from the market. With Smolii gone, and doubts about who will replace him, macro financial stability is under threat.

Foreign investors, I suspect the international financial institutions (IFIs), and I would bet reformers in Ukraine are now all worried.

But just to say this on record, huge thanks to Smolii. You have done Ukraine proud – Slava Ukrayini, Third, with two musketeers at the NBU gone/forced out, the question is who will assume the mantle of the third Musketeer.

The problem for Zelenskiy is that any appointment has to be approved by the Rada, as will the resignation of Smolii. And Zelenskiy at present lacks a reform majority in the Rada. Meanwhile, his efforts to lock up his predecessor, [former President Petro] Poroshenko, mean that he might struggle to get votes from Poroshenko’s faction in the Rada for a market-friendly replacement for Smolii.

The difficulty, though, for the forces of darkness in the Rada is that failing to back a new governor to replace Smolii means that the current first deputy governor of the NBU, Kataryna Rashkova, assumes the position of governor in an acting capacity. And while many in the Rada dislike Smolii and wanted him out, they truly despise Rashkova for leading the banking reform process.

So the question is: who will replace Smolii?

Not easy.

The current head of the NBU Council, Danilyshin, is being mentioned in dispatches. But given the NBU Council has been making life hell for the NBU board, I doubt that this would go down well in the NBU or the IMF. Indeed, the one positive so far has been that the existing NBU board has affirmed their intention to stay – and it has strong institutional strength, built by Gontareva and Smolii. If Danilyshin is hired, I think NBU board members will resign, and this risks becoming a disastrous scenario. The institutional strength of the NBU would then be gutted out.

Reformers mentioned in dispatches this morning are Rashkova, Solugub, Milovanov and Markarova but I am not sure any of these would win Rada approval. Maybe Solugub out of these could get in under the Radar in the Rada (apologies for the pun), rather as Smolii did. He is quiet, unassuming and technically extremely strong, albeit ultimately his Belarus heritage might count against him.

Yatsenyuk has also been mentioned, albeit his star has faded over the past six months. He obviously has a big profile, and was liked by some of Ukraine’s Western donors. But likely he has too much political baggage, and I think the NBU needs a capable technocrat at this stage to defend the institutional reforms delivered to date. It does not really need a politician at its head with political ambitions perhaps elsewhere.

Kiril Shevchenko, from Ukrgazbank, has also been mentioned, but I doubt he would cut it with reformers.

And then as an outside chance, given that Zelenskiy has now dug him into a crisis, is that a foreigner from outside is appointed. Someone with A* credentials and who could absolutely set a red line against pressure to undermine the independence of the NBU. Possible, but very unlikely given that Zelenskiy has railed against the appointment of foreigners on high salaries.

I would just add here that all this comes as the cap on management/board salaries at SOEs is coming up for renewal. This was an emergency measure imposed to show solidarity with coronavirus (COVID-19). Fine. But if this is extended, then the management and boards of SOEs, like Privatbank, will be cleared out of high calibre and clean professionals. And this would be a huge risk to the reforms already put in place. So we are at something of a turning point where we could see a more wholesale clearout of reformers and capable technocrats at the NBU, the Cabinet, SOEs and throughout government. This would be a huge blow to reform, and I think would put the existing IMF programme in doubt.

To summarise. Big thanks to Smolii. Now a big task for Zelenskiy to find someone capable, and clean, to fill Smolii’s shoes and convince the Rada, the IMF and markets that they are the right person for the job.

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Timothy Ash is the Senior Sovereign Strategist at BlueBay Asset Management in London. This comment first appeared as an email sent to clients

** Please note that any views expressed herein are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions. The views expressed do not reflect the opinions of all portfolio managers at BlueBay, or the views of the firm as a whole. In addition, these conclusions are speculative in nature, may not come to pass and are not intended to predict the future of any specific investment. No representation or warranty can be given with respect to the accuracy or completeness of the information. Charts and graphs provided herein are for illustrative purposes only.