Yakiv Smolii, the governor of the National Bank of Ukraine (NBU), has quit his job, citing pressure from a “systematic” campaign against him and the central bank by oligarch Ihor Kolomoisky.

“For a long time, systematic political pressure was applied to the central bank,” Smolii said July 1 in an emailed statement, as cited by Bloomberg. “This makes it impossible for me to efficiently fulfil my duty as governor and to co-operate with other government bodies.”

“I want my resignation to be a warning against further attempts to undermine institutional grounds of [the] central bank in Ukraine,” Smolii added.

 “Ensuring the central bank’s independence remains our priority,” Ukrainian President Volodymyr Zelenskiy’s office said in a brief statement after the news broke.

“The central bank together with the cabinet should continue balanced monetary and fiscal policies that will help macroeconomic and financial stability, boost economy and restore banking lending. Discussions about the central bank must be “professional”,” the president added.

The bank’s board said that it would continue to work and none of Smolii’s colleagues will quit in solidarity with their boss, which will reassure investors somewhat.

“Members of the Board of the National Bank of Ukraine respect the decision of the Governor of the National Bank to resign and share his warnings about systematic political pressure. The Board considers it its duty to continue working to maintain macro-financial stability and the institutional capacity of the National Bank. The Board calls on the President, the Government and politicians to cooperate effectively with the central bank and to enable the National Bank to perform the functions assigned to the central bank by the Constitution of Ukraine and the Law of Ukraine "On the National Bank of Ukraine", the board of directors of the NBU said in a statement posted on the bank’s website.

Smolii’s decision to go is a slap in the face for Zelenskiy and a vote of no confidence in his commitment to the reform agenda. Commentators on Ukraine were already speculating that  the new IMF deal has already been derailed by Smolii’s decision and the fund will watch carefully, but further disbursements of money under the SBA are now in doubt.  

Within less than a day of Smolii’s decision to go questions are being raised as if Ukraine’s plans to issue a new Eurobond will fail. On July 2 the NBU formally launched the Eurobond offering and intends to raise $1.75bn with a 12-year bond with a guided yield of 7.3%-7.4% on the Irish stock exchange. The settlement date is July 8, 2020 and the bond will be denominated in 1,000 bills of $200,000 each. The bookrunners are Goldman Sachs and JP Morgan.

Out of the blue

Smolii's resignation has come out of the blue, but at a time when many of the reformers that came into Zelenskiy's government have also left or are being pushed out in the last few months.

Zelenskiy shook up the government with a major reshuffle on March 3, that included the sacking of the technocratic Ukrainian Prime Minister Oleksiy Honcharuk and unsettled Ukraine’s donors. In general his commitment to the reform process is being increasingly questioned by supporters.

The NBU has been a bastion of reform and won international kudos from Ukraine’s international donors and investors as being one of the few competent and progressive organs in Ukraine.

Smolii joined the NBU in 2014 following the EuroMaidan revolution and took over as governor in 2018. Since then, Smolii has continued the banking sector clean-up work began by his predecessor former NBU governor Valeriya Gontareva, which has put the sector back into profit and seen a mountain of non-performing loans (NLPs) provisioned for and detoxified.

The NBU has also run a conservative and prudent monetary policy that has underpinned the strength of the hryvnia and last year the central bank did not just control inflation; it crushed it. In a few short years the NBU has brought inflation down from over 60% in 2016 to 1.7% in May. That has allowed the CBR to deliver a series of 100bp-200bp growth-boosting rate cuts to an all-time record of low of 6% on June 11.

But maybe the greatest testimony to the trust the people have in the central bank was in March, when the hryvnia began to devalue rapidly as the double whammy of an oil price shock and the coronacrisis lead to panic buying of dollars by the population. The NBU was able to calm nerves and end what could have been a financial system destroying run on both the currency and accounts. The NBU deployed $2bn of is scant hard currency reserves to meet demand, then rapidly and decisively issued rules to banks to keep accounts open but at the same time reassured the population their money was not in danger. The panic passed and since then the NBU has been able to start accumulating hard currency reserves from the market.

Indeed, the independence of the NBU is so important that the International Monetary Fund (IMF) explicitly mentioned the need to keep its independence several times in the memo that accompanies the new Standby Agreement (SBA) deal reached on June 9, as described in a bne IntelliNews op-ed “Here is the money but we don't trust you.”

Smolii was a boon for Ukraine in the protracted negotiations over the new SBA that dragged on for seven months between the IMF's decision to do a deal in December and the actual signing off on the document in June. The NBU is the guarantor of a well-functioning banking sector, a conservative and well run monetary policy and financial stability in the country.

Smolii’s NBU also underpins the local debt market that was hooked up the international financial system last April and attracted some $5bn in fresh funds from international investors into its bonds – an important new source of funding for the now cash-strapped government.

The ink was barely dry on the new SBA deal when deputies from Zelenskiy own Servant of the People (SOTP) Party introduced a bill that would remove some of the NBU’s autonomy and undermine the local debt market, widely believed to be backed by Kolomoisky.

A former friend of Zelenskiy and business partner, Kolomoisky suffered a humiliating defeat when the Rada passed the so-called anti-Kolomoisky banking bill on May 13 that makes it impossible for the state to return a bank to its former owned if it has been nationalised. The law was a pre-requisite for agreeing an SBA with the IMF. Kolomoisky has launched a blizzard of legal cases to try to overturn the nationalisation of his PrivatBank in 2016 after it was found to have a $5.5bn hole in its balance sheet.

Fresh fears that the NBU’s independence is in danger will undermine the government funding plans this year. With more than $17bn worth of debt repayments to make this year, the government’s funding plans are tight.

Ukraine is planning to offer a new issue of 12-year dollar-denominated Eurobonds, a banking sector source told Interfax-Ukraine on June 30, that will be used to buy back $750mn of bonds maturing in 2021 and 2022 as part of the debt redemption programme. But those bonds will be harder to sell in the face of increased uncertainty over the NBU’s fate.

Foreign investors are already nervous thanks to the ongoing multiple crises and have reduced their exposure to the local OVDP bonds despite the promise of a new IMF deal.

The OVDP bond market hit its peak on St Valentine’s Day with a total of UAH809.4bn ($30bn) worth of bonds outstanding, of which foreign investors owned 15.7% – both all-time high figures. But it has been an uncomfortable few months since then. As of May 28, the total outstanding amount of Ukraine’s local bonds was UAH883bn, but the foreign share of that has fallen to 11.9%.

And at the most recent auction bond traders were underwhelmed the yields on offer, and the Ministry of Finance only sold UAH1.3bn ($48.5mn) worth of new bonds on June 30. The local bond market is going to be a crucial tool for funding the budget this year and the government is banking on raising another $4bn-$5bn as it did last year.

Perhaps it is not surprising that Smolii is giving up. In the last two years the NBU staff – present and previous – have suffered a sustained campaign organised by Ukraine’s oligarchs and bankers to remove the bank’s independence and make it beholden to the venally corrupt government.

Zelenskiy has been caught between the rock that is the NBU and a hard place that is Kolomoisky. The president was forced to choose sides during the passage of the anti-Kolomoisky bank bill as Ukraine was facing almost certain default and disaster if new IMF deal could not be secured and he came down on the side of the country.

But the president has been remarkably reluctant to act against his old mentor.

Kolomoisky has mounted a series of attacks against Gontareva, who was the one that pulled the trigger on the PrivatBank privatisation. She quit her job as governor of the NBU and moved to London after a coffin containing a mannequin with her likeness was delivered to the doors of the central bank.

“I was afraid for my life and my family told me: enough of this,” Gontareva told bne IntelliNews in an exclusive interview.

But that was not the end of her troubles. In London she was knocked down by a car under what the police called “suspicious circumstance” and hospitalised. Gontareva’s house was also burnt down in an arson attack on September 16 and shortly thereafter the car of her daughter in law was doused in petrol and set ablaze.

Likewise, other staff at NBU have harassed and paid-for demonstrators have picketed the NBU's office in central Kyiv, broken into the foyer and threatened the employees, while the police stood by and did nothing.

The NBU has branded attacks on its staff and Gontareva as a “terror” campaign and named Kolomoisky as being responsible.

PrivatBank has continued its campaign to try to recover some of the $5.5bn stolen from the bank under Kolomoisky and his partner Gennady Bogolyubov's management. It has launched cases in London and more recently in Cyprus, claiming billions of dollars. The London court has already frozen $2bn of Kolomoisky assets and is expected to hold a trial in the next year. The Cyprus case has only just started, but the management of PrivatBank told bne IntelliNews that it believes its chances of recovering some of the money are good.

One insider close to the story told bne IntelliNews that Kolomoisky is desperate to regain control of PrivatBank, or destroy the independence of the NBU that owns PrivatBank, in order to kill off all these cases.

With Smolii's departure the resolve of the NBU to continue its fight is now in question.