In May 2020 three years have passed1 since Ukraine received the last funding of nearly USD 1 billion from the International Monetary Fund (the “IMF”). The funding that the IMF allocated to Ukraine was nearly four times larger than previous funding. However, the actual disbursement was subject to the satisfaction of certain key requirements relating to reforming and consolidating key economic sectors (energy, banking) and public administration (anti-corruption reforms, tax and customs administration). While Ukraine met some of these conditions, political changes in the country’s governance did not allow the key requirement relating to resolving the legacy of the banking crisis in 2014/2015 to be satisfied.

On 13 May 2020, the Ukrainian Parliament adopted the Law of Ukraine “On Introduction of the Amendments to Legislative Acts of Ukraine in relation to the Improvement of Certain Instruments of Banking Activity Regulation”, which is popularly known as “Anti-Kolomoyskiy Law” (the “Banking Law”). The adoption of this law is perceived as the principal hurdle to the provision of further financial support from the IMF. The voting procedure for the Banking Law was conducted under a special procedure because several MPs attempted to sabotage its adoption by filing approximately 16,500 amendments immediately after its first reading.
Given that the previous program of cooperation between the IMF and Ukraine has already expired, the IMF announced a switch from a three-year Extended Fund Facility (EFF) program to an 18-month Stand-By Arrangement in early May. Further IMF financial support is necessary to support the Ukrainian economy after it has been hit by lockdown and to mitigate the effects of the global economic crisis.

Why does the IMF insist on the Banking Law?

The main purpose of the Banking Law is to prevent insolvent banks from being brought back to the market and to avoid the restitution of such “zombie” banks to their former shareholders. The Banking Law is perceived to be particularly aimed at forbidding the reassertion of control over JSC PrivatBank by its former owners, including by Ukrainian businessman Mr. Ihor Kolomoyskiy and his partners.

The Banking Law includes comprehensive amendments to banking and other specialised legislation aimed at improving the procedure of removing insolvent banks from the market, dispute resolution and banking supervision matters. The following is a summary of the most significant changes to be brought about by the Banking Law if and when it becomes effective.
 

Dealing with the Legacy of the Banking Crisis

The Ukrainian banking crisis in 2014 – 2015 resulted in the insolvency of around 100 banks in Ukraine. The former shareholders of many such insolvent banks have challenged or are in the process of challenging the decisions of the NBU to declare their banks insolvent in Ukrainian courts. Several court judgements ruled that the NBU must restore the activities of certain insolvent banks and re-issue the banking licences to those insolvent banks, i.e. the courts ordered that insolvent banks must be restored to the market. However, the mechanism of such restoration is not available in Ukraine and, in fact, does not exist in any jurisdiction.

No Restitution of Insolvent Banks

To resolve the absurd situation with the court judgements aimed at restoring insolvent banks, the Banking Law provides that any court proceedings and rulings relating to the illegality of an individual decision of the NBU, the DGF and other authorities (as applicable) regarding the insolvency or withdrawal of an insolvent bank from the market, cannot suspend or terminate ongoing legal proceedings relating to the declaration of that bank’s insolvency.

In practice, this new rule should eliminate the possibility of reversing the process aimed at restoring the solvency of an insolvent bank, which is impossible to achieve in practice. In addition, court judgments would not be able to suspend, terminate or cancel the sales of insolvent bank’s assets or other settlements with the bank’s creditors and depositors.
Compensation of Damages

The Banking Law introduces a significant novelty: if the illegality of the NBU’s decision is proved in court, the only available type of compensation that former shareholder will be able to claim is financial compensation for damages. The burden of proof regarding the damages and compensation amount is with the respective shareholder. It is worth mentioning that the Banking Law provides for mechanisms to calculate these damages. Ideally, when a claim for compensation is made, the amount of actual damages should have been calculated in the business evaluation report made by a reputable international auditor firm hired by the NBU for assessing the value of the shares in an insolvent bank.

A court ruling on the illegality of the NBU’s decision on a bank’s insolvency and compensation of the damages does not release the shareholders of the insolvent bank from administrative, civil or criminal liability.

Professional Judgement of the NBU

The Banking Law introduces the concept of professional judgement. Many elements of professional judgment would make the decision-making process of the NBU officers much more structured. This would also help the court to properly evaluate legality or illegality of the particular decision of the NBU including decisions on the declaration of a bank’s insolvency.

Additionally, the criteria under which the NBU can claim a bank is problematic or insolvent, will become stricter. For example, the period during which a problematic bank must comply with the banking legislation before the NBU declares it insolvent is shortened from 180 to 120 days. The NBU expects that these and other amendments should increase the effectiveness of its supervision of the Ukrainian banking sector and will help to identify problematic banks at the earliest stages.

Mechanism for Bank’s Insolvency

The Banking Law includes numerous technical and procedural developments. It significantly restates the provisions of the Savings Guarantee Law by virtue of providing the DGF with more effective mechanisms for managing insolvent banks. The quality of regulation and the effectiveness of procedures play a significant role in banking insolvencies because these instruments save precious time and the quality of insolvent bank’s assets to be used to repay its obligations to its creditors and depositors.

IMF Remedies for Ukraine’s Economy

The Banking Law is a positive development that should increase the efficiency and quality of regulation and supervision of the banking sector. The implementation of new rules for insolvent banks should increase the assets available for distribution to the creditors of such banks. Importantly, the Banking Law resolves the uncertainty relating to the potential restitution of shares of JSC PrivatBank to its former shareholders as a result of court procedures that could favour the shareholders.

The Banking Law is a significant achievement for the stability of the Ukrainian economy by obtaining access to financing from the IMF. Once the IMF funding is released, many investors will be likely to view Ukraine’s prospects as having improved significantly.
Finally, the opponents of the Banking Law have already claimed the Banking Law is unconstitutional and have declared their intention to submit a motion to the Constitutional Court of Ukraine.

For more information on the Banking Law, the expansion of Ukraine’s economy and banking insolvencies, please contact your CMS local experts:

Ihor Olekhov
Partner, Head of Banking and Finance
T +38 044 391 3377
E ihor.olekhov@cms-cmno.com

Glib Bukharin
Associate, Banking and Finance
T +38 044 391 3377
E glib.bukharin@cms-cmno.com