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Ukraine: Privatization Of Bank Runs Into Difficulties

Kyiv, 23 September 1998 (RFE/RL) -- Inspired by new World Bank loan, Ukraine's government has began moving to put its banking sector in order. The first item of business: rescuing the struggling, partially state-owned Bank Ukraina.

Half of the $600 million loan package the World Bank agreed to grant Ukraine last week is earmarked for the financial sector, with $100 million of that directly connected to government divestiture of partial ownership in Bank Ukraina, Ukrsotsbank and Prominvestbank.

However the odds appear against the government being able to unload the largest of the three, Bank Ukraina, which by most accounts has become a massive liability for the government. One of the oldest banks in Ukraine, Bank Ukraina's current capitalization is about $162 million, according to a July estimate by the Association of Ukrainian Banks (UAB).

Its debts, by comparison, are estimated at almost twice that. The bank's problem lies in that its core business is financing Ukraine's woefully inefficient and over-regulated agriculture sector. The Ukrainian government is saddled by an estimated 1,300 state-owned agricultural institutions, and for the last four years it has used Bank Ukraina as its main conduit of funding to keep unprofitable collective farms afloat.

Advancing cash to Ukrainian farmers has been, to put it mildly, a poor business. Yet Bank Ukraina and other banks as well have been forced to do just that by the state, which not only makes the rules in the banking sector but also happens to be most banks' biggest customer. "Bank Ukraina always was a half-government bank that serviced government programs, and it was forced to provide credits to agriculture," parliament deputy Viktor Suslov told the Den newspaper.

For Bank Ukraina, the price of doing business that way has been high. "The situation (in Bank Ukraina) is very serious," Prime Minister Valery Pustovoitenko told reporters on Sept. 14. He estimated Bank Ukraina's outstanding agricultural debt at about $330 million. According to some local media reports, the situation at the bank is grim. A Den newspaper report published last week ran that Bank Ukraina's rural customers are themselves deeply in debt.

Judging by the limited information available, the bank's profits are down significantly as well. In 1997, Bank Ukraina's annual profit was $38 million. For the first half of 1998, profit was only $520,000, according the AUB. And the bank has been silent about its profits of late. "They (Bank Ukraina) usually provide us information every month," AUB spokesman Vladimir Rubenko told the Post newspaper. "But for the last two months they haven't."

Meanwhile, the planned sale of a 12.7 percent stake in Bank Ukraina shares moves forward, albeit haphazardly. Early this month Pustovoitenko ordered the State Property Fund to set a date for the Bank Ukraina share auction. Last week, the State Tax Administration ordered the sale halted, charging that Bank Ukraina owes millions in back taxes and unpaid social benefits to employees.

None of the seemingly intractable problems with the Ukrainian banking industry prevented the World Bank from being ready to dole out the first 100 million dollar tranche of a $300 million loan to help Ukraine's financial sector. This may have been because the loan was based mainly on getting the laws passed to usher in that reform, which Ukraine did in fact do.

"In our opinion, they have met the conditions for the first tranche of the Financial Sector Adjustment Loan (FSAL)", Anzhela Prigozhina, the manager of the World Bank Ukraine's Financial Sector Reform Program, told the Post. "Whether they get the second tranche depends on what they do in the future."

What they must do is implement the laws they have passed -- not something the Ukrainian government has a particularly good track record at doing. The main task is finding a buyer for their share of the state banks.

"I cannot believe that there will be any interest at all in shares of Bank Ukraina," Wood & Company Kyiv Analyst Ivan Kompan said. "Besides the very difficult situation the bank is in...the law makes foreign ownership of a Ukrainian bank extremely complicated."

The World Bank says it is up to Ukraine. "They can do it (meet World Bank conditions) in three days, they can do it in years," Prigozhina said.

The World Bank has tentatively scheduled dissemination of the second tranche for December, 1998. Meanwhile, the State Property Fund has not set an auction date for the 12.7 percent stake in Bank Ukraina.