In 2016 the National Bank of Ukraine (NBU) nationalised PrivatBank, the largest privately owned bank in the country, after a $5.5bn hole was discovered in its balance sheet. Today it is one of the most profitable banks in Europe thanks to the restructuring its new management has put in place.

But the bank’s troubles are not over. The former owners of the bank, oligarch Ihor Kolomoisky and his partner Gennady Bogolyubov, have launched a Blitzkrieg of legal cases against the bank and the regulator to try to undo the nationalisation.

PrivatBank has responded by launching its own cases in London and Cyprus, and is fighting a running battle against cases brought in Ukraine by the two oligarchs and their proxies. In parallel, it was reported last month that the US Grand Jury has opened an investigation into Kolomoisky for laundering over $600mn through US property deals in a five-year-long spending spree and other scams.

The bank is so big, the amount of state money spent on it so large and its role in the economy so important that the International Monetary Fund (IMF) explicitly linked the $5bn Standby Agreement (SBA) agreed on June 9 to the passage of the so-called anti-Kolomoisky banking law that was signed on May 18 and which makes it impossible for the government to return a bank to its former owners if it has been nationalised. The fight the Zelenskiy government had to get the law passed nearly scuppered the SBA deal, without which Ukraine would have almost certainly faced default on its debt and an additional decade of economic misery.

The banking law passed. The crisis was averted. And PrivatBank is making slow progress in the legal battle with Kolomoisky. But the war is a long way from being over.

On the day of the interview with bne IntelliNews the General Prosecutor's office in Kyiv summoned PrivatBank's management to its offices and demanded to know why the bank has not repaid UAH1bn ($250mn) to Surkis brothers' offshore companies, following a court order demanding the bank reimburse the businessmen for deposits they lost during the nationalisation in 2016.

PrivatBank has argued that the two men, both business associates of Kolomoisky, were related parties and despite overwhelming evidence of business ties between Kolomoisky and the Surkis brothers, the courts ruled they were independent and innocent victims of the regulator’s decision to take the bank over and bail-in depositors’ money.

The General Prosecutor sent a summons to all members of the bank's board from the prosecutor of the Kyiv Office of the Prosecutor's Office, Andriy Stolyarchuk, on June 10.

“What we are constantly faced with, and it is an everyday battle, is attacks by [the former owners] which [are being] carried out through the ginormous and unprecedented number of legal cases – hundreds – which take the same claim and file it in various iterations and in various jurisdictions. It makes it very complicated to co-ordinate. It confuses the courts and confuses the judges. It makes it very difficult for us to respond effectively,” said Sharon Easky, an independent director on the board of PrivatBank in an exclusive interview with bne IntelliNews.

“This particular decision appears to be one that is being pushed by the former [owners] through a specific court. It is not the primary court. And we find this entire parallel process to be an intentional way to obstruct the primary litigation to the related party decision and the related parties,” Easky added.

She went on to say that the court ordered PrivatBank to pay out to the related parties but that the court's decisions are “questionable” and “not consistent” with “standards of law and is actually quite orchestrated.”

PrivatBank’s press service said the same day that the documents from the general prosecutor were drawn up with numerous procedural violations and dated "retroactively" on May 27 with a demand to appear at the prosecutor’s office on June 5, 2020.

"PrivatBank regards the interrogation of the management of PrivatBank on the facts of non-performance of dubious enforcement proceedings as another attempt to put pressure on the bank by persons associated with its former owners," the bank said in a press release.

At issue is a decision by the Kyiv Court of Appeal dated April 15, in case No. 757/7499/17-ts on recovering more than $250mn from PrivatBank in favour of offshore companies associated with the Surkis family, that decided in their favour.

PrivatBank complained that the claims are illegitimate, but these complaints were ignored by the Pechersky District Court of Kyiv, and the corresponding appeal to the Ministry of Justice remains unanswered, said the bank.

PrivatBank has also appealed to the state executive service requesting the return of executive documents on the applications of six companies associated with the Surkis brothers, while the bank claims there are circumstances suggesting that some of the documents used to bring the case were forged – a request that has not yet been satisfied.

Easky said that the bank remains in a “very difficult situation,” but that it is sticking to its guns and will not pay out until there are legitimate claims that are upheld by legitimate court rulings.

“We expect we will get through it. But the important part of this is: we know the Surkis claim is all related parties and that the initial bail-in by the bank was correct. We understand that these challenges in Ukraine were always going to be difficult to overcome because of the fact that the courts appear to be aligned against us on this matter, notwithstanding the facts. But that said, we are prepared to pay out as [and] when we feel it is a legitimate court and a legitimate process. Today we don't think this is what it is,” said Easky.

Another hearing on the case was scheduled for June 15 by the Grand Chamber of the Supreme Court. As bne IntelliNews went to press there were reports coming out that the Supreme Court had overturned the lower court's decision and annulled the order to repay the $250mn, which, if confirmed, would be another major victory for the bank in its fight against Kolomoisky. 

The oligarch run-around

Without saying so explicitly, the bind that PrivatBank finds itself in is that the oligarchs, with their billions of dollars of resources operating in a country with the second-lowest average income in Europe, have effectively captured the judicial system.

Efforts to root out corruption in the legal system have got nowhere and judges and judgements remain for sale. To highlight the issue, a few days after the interview the National Anti-Corruption Bureau of Ukraine (NABU) confiscated several plastic bags containing $6mn in cash that was meant as a bribe for senior offices of NABU and Specialised Anti-Corruption Prosecutor’s Office (SAPO) to bury once and for all an investigation into the embezzlement schemes of Viktor Yanukovych-era ecology minister Mykola Zlochevsky – the biggest bribe every recorded in Ukraine.

The money was supposed to wipe the slate of the founder of Burisma Holdings clean, the scandal-ridden company that briefly employed Hunter Biden, the son of the former US vice-president and US presidential election Democrat challenger Joe Biden.

The scandal highlights the widespread use of bribery to interfere with investigations and law enforcement in Ukraine.

The irony is that usually foreign companies are the victims of the venal state of the Ukrainian legal system, as they have to subscribe to nominal rule of law and pretend the rulings of the court are legitimate. The oligarchs face no such constraints and will only abide by legal decisions if they go in their favour. Judicial decisions can be weaponised in corporate disputes and they can keep running a case around the hundreds of regional courts until their opponent simply gets tired and gives up. 

However, the new public-appointed management of PrivatBank finds itself in the same position as foreign investors and also has to stick to the rules, as it is the embodiment of banking reform and representative of the clean-up of the banking sector.

And PrivatBank has few strings to pull. While it has enjoyed the full backing of the NBU, Ukrainian President Volodymyr Zelenskiy’s relationship with Kolomoisky, who sponsored his presidential campaign last year, remains opaque. The NBU has branded attacks on its staff and former NBU governor Valeriya Gontareva that ordered the nationalisation of PrivatBank as a “terror” campaign and called Kolomoisky out by name as orchestrating the attacks. But Kolomoisky continues to operate with impunity.

However, PrivatBank’s persistence in sticking to the letter of the law is part of the ongoing efforts to clean up the banking sector and fight corruption. It is forcing an accountability on the judicial system and its fight against Kolomoisky is in itself a fight against corruption. Moreover, despite the minefield that is its Ukrainian legal battle, the bank is making steady progress in its international court cases.

“Despite all these problems over the last years, every major decision has gone in our favour. We very often consider a postponement as a decision in our favour as no news is good news. The reality is: although we have these constant battles and constant attacks, we are holding our own. We are actually making progress,” said Easky.

IMF backing the bank

One of the bank’s biggest advantages in the fight with Kolomoisky is that it has enjoyed the ardent support of the IMF, which linked its crucial new SBA deal to protecting PrivatBank from attack. If the courts eventually rule the bank must be returned to Kolomoisky then it is clear that would spell the end of the IMF’s assistance to the country.

Easky said that the existing laws on bank nationalisation were already enough to prevent a de-nationalisation of PrivatBank but she added that the “existing law was not strong enough or specific enough [for] the NBU to enforce it effectively.”

The new IMF-sponsored law has been dubbed the anti-Kolomoisky banking law, but both the old and new laws address a more general problem of shareholders raiding their own banks and stealing their own deposits for personal gain.

“The [passage of the new banking] is a great victory for banking reform in general,” said Easky.

The NBU has come out of the whole PrivatBank story looking professional and responsible – very different to the rest of the government.

“The NBU is the shining star of Ukraine’s reforms. It was the right people coming together at the right time. It was a small coalition at first, but a coalition of reformers and people that really want what is good for the future of Ukraine who became galvanised in that space,” said Easky.  

PrivatBank is under attack from Kolomoisky's legal onslaught, but PrivatBank is fighting back with its own sets of lawsuits. The two most important are taking place in London and Cyprus, mainly because money exiting PrivatBank travelled through those two jurisdictions.

The NBU has done its own internal investigation to track down where the money went. And the NBU also hired corporate investigators Kroll to carry out a forensic audit to find the missing money.

“The transactions are fundamentally considered to be fraudulent. The recovery will come from those locations, as that is where the transactions occurred,” said Easky.

Recovering the money will be difficult and time consuming, as everyone that has commented on the loan schemes says the same thing: the transactions were very complicated and unravelling them will be very difficult.

But PrivatBank is making progress. Kolomoisky challenged the legitimacy of the court in London to hear a case against him, but the court of appeal recently ruled that the case can be heard in London and that the case will move forward to trial and the schedule will be set in June. Easky said it will probably be 12-18 months before it starts.

More recently, a new lawsuit was brought in Cyprus to chase down the fraudulent loans that passed through that jurisdiction. In both the London and Cypriot cases PrivatBank is trying to recover about $1.9bn plus interest, which is being charged at Ukrainian rates: in London the bill is already up to $3bn and it will be even more by the time the case comes to trial. If Kolomoisky loses he faces being bankrupted, although it will take years to conclude the legal cases and years more to recover the funds, if ever.

In the meantime, the new management have a large and successful bank to run. Kolomoisky had already built PrivatBank up into a market leader and would be a wealthier man today had he simply concentrated on business.

The new management is building on the existing success. PrivatBank saw its profits jump by 2.5 times year on year to UAH32.6bn ($1.2bn) in 2019, which allowed the bank to channel 75%, or UAH24.457bn ($930mn), of those profits to the national budget as dividends by June 20, according to the bank's statement in the information disclosure system of the National Securities and Stock Market Commission of Ukraine.

As bne IntelliNews has reported, Ukraine’s banking sector returned to health last year and the sector’s profits expanded 1.4-fold over the first four months of this year to UAH25.2bn ($941mn), according to the NBU.

But clearly the coronacrisis is going to hurt the banking sector this year and knock its profits back; however, experts says a banking crisis is very unlikely.

“The NBU is managing the crisis well and has made good policy decisions, plus the banks are much stronger and so better able to withstand the shock,” said Easky, who added that according to PrivatBank’s own projections, while income and profits will be down the bank will still count on an “acceptable level of income and profit” this year.

“One of our advantages is we provide so many services and payment systems that our fee and transactions income is very stable. We have a very diversified income,” said Easky.

PrivatBank is doing its bit for the economy and developing plans and services to help small and medium-sized enterprises (SMEs) – a core customer demographic – overcome the coronacrisis.

“We want to make sure they survive and come out the other end,” says Easky. “We are mobilising resources and reaching out to clients. We are here to help and we have adjusted our pricing downwards. There was a spike in overdue payments of more than 30 days, but that is already down.”

In general, 2020 is not going to be a good year, said Easky, who predicted that the sector will already start to recover by 2021.

In the longer term, the board see its job as preparing the bank for privatisation. The government is committed to selling off some of its big assets and PrivatBank is definitely on the list, but those plans have obviously been delayed for now by the coronacrisis.