Confidence in the Z-Dream of rapid, deep and far-reaching reforms by Ukrainian President Volodymyr Zelenskiy that will transform Ukraine have almost totally evaporated this week following the unexpected resignation of the governor of the National Bank of Ukraine (NBU), Yakiv Smolii. And now the bad news is quickly gathering momentum.

“News flow in Ukraine over the past 24h has turned decidedly negative. Indeed, I think it’s now fair to ask the question whether hopes of economic reform under President Zelenskiy are completely and utterly dead, as he seems to be setting a course in the opposite direction – towards and in favour of the forces of populism and state capture,” Tim Ash, senior sovereign strategist at BlueBay Asset Management, said in a note to clients.

Even Ukraine’s supporters have finally turned on Zelenskiy, after six years of blindly rebuffing any criticism of the leadership, playing up any reform initiative, but blatantly ignoring any corruption or negative news.

Smolii quit citing “systematic political pressure” but he later clarified in an interview that he didn’t jump; he was pushed. Smolii met with Ukrainian President Volodymyr Zelenskiy on June 30, when the president sacked him, Smolii told Sonya Koshkina and Oleg Bazar, the editors-in-chief of LB.ua in a long interview.

"The president did not say:” Enough! I'm tired of you, let's write a statement.” But I understood from the context [of the conversation at the June 30 meeting] that I had to leave. We are all adults. It was clear. So I asked him directly. He answered in the affirmative,” Smolii said.

First, the deputy governor of the NBU, Oleh Churiy, failed to secure the backing of the NBU Council and the President for a second term in office. This means two of the six-member board are being replaced now by Zelenskiy. He only needs to force one other board member out to have full control over policy, given the casting vote of the governor.

“Given the campaign of intimidation being waged against NBU board members it is easy to imagine that one or all of the remaining four NBU board members will eventually opt to resign,” says Ash.

And that campaign is already in full swing. Smolii has already been suffering from continuous harassment by “demonstrators” who were literally camping out in front of his house. This morning he woke up to find funeral wreaths propped against the fence around his garden. Former NBU governor Valeriya Gontareva finally quit after a coffin containing a mannequin made up to look like her was delieved to the front door of the NBU. She told bne IntelliNews in an exclusive interview that she feared for her life and explicitly blamed Kolomoisky for the intimidation.

The Ukrainian Security Service (SBU) opened a new front the day before posting a message on its Facebook page warning that any former NBU official found criticising policy could be charged with treason.

This appears aimed specifically at former governor Gontareva, who argued yesterday in an interview that the IMF should stop disbursements to Ukraine – and even get Ukraine to repay credits disbursed – as Zelenskiy has gone back on prior commitments to defend NBU independence, argues Ash.

“The IMF and the G7 countries have said lots of nice things about ‘respecting central bank independence’, but that has had no impact. When the central bank governor resigns, you can’t just issue these statements,” she says. “To defend the reforms we made, the IMF should announce that it is not making any further payments to Ukraine unless Zelenskiy appoints a governor who will safeguard reforms,” Gontareva told centralbanking.com in a polemical interview.

Ash believes that the SBU comments were also aimed at Smolii and Churiy as well as the rest of the board should they decide to quit in protest at the changes, to prevent them from criticising Zelenskiy and raising further red flags over the erosion of NBU independence.

Zelenskiy has sought to calm nerves and met with the leading state banks last week, saying that there was no reason to panic after the meeting.

“I had three big discussion meetings as part of a professional dialogue. I met with all the heads of state banks of Ukraine, I wanted to get a candidate [for the head of the NBU] from them. And their personal impression in connection with this situation. All quite calmly accept the dismissal of the head of the NBU. Everyone does not see the risks,” Zelenskiy said following the meeting.

However, tellingly Zelenskiy also openly criticised central bank monetary and exchange rate policy, saying the current exchange rate was too strong and that a level of UAH30 to the dollar was more appropriate. The value of the hryvnia promptly fell following his remarks and was trading at UAH30 to the dollar at the time of writing.

He has argued in favour of the oligarchs that the NBU has kept interest rates too high and the currency too strong at the expense of industry. The big business earners would like to see a devaluation, as that will increase their export earnings. And even if the hryvnia is worth less, as their earnings are in dollars they don't care.

Kolomoisky has said openly that Ukraine doesn't need an IMF deal at all, fully aware that without the deal the currency would sink, the people would be impoverished, but his profits would increase.

And in another attack on the NBU’s independence, the Constitutional Court will rule that the law setting up the Deposit Guarantee Fund (SDIF) is unconstitutional. If this decision goes through then it will mean in effect much of the banking clean-up process from 2015-17 was unlawful and that will give grounds for the owners of all the 100 banks closed in those years to sue the government, first and foremost PrivatBank that formerly belonged to Kolomoisky.

The NBU was one of the very few outstanding success stories in Ukraine in the last six years. The bank sector has been cleaned up and over 100 dodgy banks closed. The huge non-performing loan (NLP) problem – half the loans on bank’s books are bad – has been dealt with through provisions. The macro-fundamentals have stabilised thanks the central bank policies and both inflation (1.7%) and the prime rate (6%) are at post-Soviet all-time lows. And the NBU has even managed to start building up the country's hard currency reserves, which currently stand at $28.5bn, or a comfortable 4.5 months of import cover.

All this progress is now in danger, as Smolii’s departure itself undermines the independence of the regulator, sacrosanct to the International Monetary Fund (IMF). Analyst say that now the remaining $3bn from the $5bn Standby Agreement (SBA) agreed on June 9 is unlikely to be released. That in turn will prevent another $3bn-$4bn from being released by other international financial institutions (IFIs). And that in turn will probably cause, at the least, a deep devaluation of the currency, as the NBU will be forced to raid the international reserves to meet some $17bn in debt redemptions due this year.

“Net reform seems to be dead in Ukraine. The IMF programme will be frozen. I expect a weak candidate to be nominated to head the NBU and monetary policy to be loosened and the currency devalued. Ukraine still has very large budget financing needs to year end and it is hard to see how they can cover these without resort to NBU financing and depletion of FX reserves. Reserves are $29bn but these could be run down fairly fast with accelerated capital flight,” says Ash.