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Friday, July 3

United Business Front Forms to Defend Central Bank Independence...Smoliy’s Resignation Forces Finance Ministry to Cancel $1.75 Billion Bond Offer...IMF, EU Watch to See If Ze Keeps Central Bank Independent...EIB Loans €50 million to Kyiv’s UNIT.City
James Brooke
by James Brooke
UBN Morning News is reported and written by James Brooke, a former New York Times foreign correspondent and Bloomberg Moscow Bureau Chief

Foreign investors, national investors and international financial institutions closed ranks yesterday to protest the resignation of Yakiv Smoliy, governor of the National Bank of Ukraine. The central bank chief told President Zelenskiy Wednesday evening that he was resigning in the face of “systematic political pressure.”

“The NBU is the most trusted institution among foreign institutional investors and the business community,” joint statement by five leading business groups, including the American and European Chambers and the Union of Ukrainian Entrepreneurs. “The resignation of Yakiv Smoliy due to political pressure sends the wrong message to the business and investment communities.”

As analysts worried that the resignation could derail the $5 billion IMF deal, the resignation claimed one concrete victim: the Finance Ministry’s placement of $1.75 billion of Eurobonds. Until the offering was scrapped yesterday morning, the bonds were four times oversubscribed and yields had dropped 50 basis points, to 7.3%.

    “This is an unprecedented event, and will impact Ukraine’s ability to access the market going forward and the price that it pays for this access,” the business group said of the aborted offering. In reaction to the resignation news, the yield on Ukraine government dollar bonds due 2028 jumped 33 basis points to 7.42%.

    Finance Minister Serhiy Marchenko told reporters yesterday that the government’s policy on future  Eurobond offerings is “to take a certain a pause, and then decide what and how we will do.” He called Smoliy’s resignation “absolutely extraordinary.” For the international bond launch “there could not be a worse moment” for the resignation news.

    Exchange markets reacted poorly to the surprise resignation of Smoliy, seen as a key to Ukraine’s macro-economic stability. The hryvnia fell 1.5%, to 27.18/dollar, its weakest level in three months. To stem the hryvnia’s slide, the central bank sold $150 million during the day, $100 million in the first hour. Naftogaz also entered the interbank market and sold $50-100 million, dealers told Interfax-Ukraine.

    Yesterday, President Zelenskiy accepted Smoliy’s resignation and the Rada Finance Committee approved it. This afternoon, the Rada is to debate the resignation. If a simple, 226-member majority of Rada votes to approve Smoliy’s resignation, the bank’s first deputy governor, Kateryna Rozhkova, will serve as acting governor. Winning consensus approval of a successor will be difficult as the government no longer has a working parliamentary majority. Concord Capital’s Alexander Paraschiy writes: “We believe it’s very likely that parliament will collect enough votes to approve Smoliy’s resignation.

    Rozhkova, who may take over the central bank as acting governor, is no friend to corrupt bank owners, writes Anders Aslund, the Atlantic Coucil economist. “[She] has a reputation as a true iron lady. It was Rozhkova who, together with [Valeria] Gontareva, closed down more than 100 of Ukraine’s 180 banks from 2014 to 2017….Prior to this industry clean-up, it was commonplace for banks in Ukraine to have banking capital equal to about eight percent of banking assets, with owners taking 80-90 percent of assets for themselves as “loans” never to be paid back. Since 2014, the NBU has put a stop to such practices, and the former beneficiaries are not happy about it.”

    An IMF spokesman reacted to the resignation, saying yesterday in Washington: “The independence of the NBU is at the center of Ukraine’s IMF-supported program, and why it must be maintained under his successor.” With an IMF team due to arrive here in coming weeks for a planned review of the June deal, analysts look for clues as to the future of $10 billion in international financial institution aid to Ukraine this year.

    The EU’s €1.2 billion macro-financial assistance program for Ukraine “could be jeopardized” if  the IMF considers its program with  Kyiv “off-track” because of Smoliy’s resignation, a European Commission spokesperson in Brussels tells EURACTIV.  “The existence of – and adherence to – an IMF program is an essential precondition for disbursements” under EU macro-financial aid programs, the Commission spokesperson said.

    Separately, Peter Spano, spokesman for EU foreign affairs, said Smoliy’s resignation “under the influence of likely political pressure sends a worrying signal.” Referring to Ukraine’s central bank, Spano, a Slovakian, said: “Undermining the activities of this important institution would jeopardize confidence in and support for the reform program of Ukraine.”

    In Kyiv, G7 ambassadors tweeted about the independence of the central bank: “To undermine this crucial institution would be a big step back and jeopardize the credibility of and support for Ukraine’s reforms.”

    Western analysts are caustic about the resignation.Bottom of Form

    Melinda Haring, deputy director of the Atlantic Council’s Eurasia Center wrote: “With the resignation of the supremely competent governor of the National Bank of Ukraine, the reform project in Ukraine is dead or on serious life support.

    Roman Waschuk, former Canadian Ambassador to Ukraine, wrote in the same Atlantic Council blog: “As foreshadowed in Zelenskiy’s hit TV series ‘Servant of the People,’ we are now witnessing mounting resentment at Western lecturing and financial strictures, which are derided as ‘external control.’ This has culminated in effectively telling the IMF and international investment community to go to hell, after having first pocketed an initial IMF tranche of USD 2.1 billion.”

    Andy Hunder, president of the American Chamber of Commerce in Ukraine, wrote: “Some investors have already put new investments on hold, as the decisions of the government do not correspond with their stated intentions to attract FDI. Businesses are now concerned about the future independence of the National Bank of Ukraine and the continuation of the country’s IMF program.”

    With the media filled with lists of potential central bank governors, Timothy Ash warns: “If the candidate is not sufficiently reform minded, the risk is the entire NBU board resigns — and the IMF pulls the plug on the USD5bn IMF Stand By Arrangement.”

    The European Investment Bank has agreed to loan €50 million to UNIT.City innovation park for the construction of four buildings totaling 70,000 square meters at the complex in northwest Kyiv’s Lukianivska district. Vasily Khmelnitsky’s UFuture Group, owner of UNIT.City, will finance the rest of the €110 million project. At buildout, at the end of 2023, the new ‘campuses’ are to provide workspaces for 15,000 tech workers at tenant companies.

    With a non-profit IT education academy at its core, “the project will contribute to creating one of the biggest hubs merging dedicated infrastructure with an innovation ecosystem for IT and technology companies in Central and Eastern Europe,” summarizes UNIT.City. “It will put together start-ups and IT training, high technology companies and R&D centers, incubators and accelerators within a 25 ha inner-city site.”

    Dragon Capital is investing $5 million for the purchase and renovation of a five-story office building to create a permanent home for the Kyiv School of Economics. With the first students expected in September, the building will have modern lecture halls, a conference hall, a student lounge and the capacity to train 600 students at a time. Located at Mykola Shpak 3, between Peremoha Avenue and the US Embassy, the 4,441 square meter building also will house the Center for Economic Strategy and VOX Ukraine.

    The building will be named after Dragon, a longtime supporter of KSE. Tomas Fiala, Dragon’s CEO, said yesterday: “We are confident that Kyiv School of Economics provides the best economic education in Ukraine that is on a par with leading global universities.”

    Tymofiy Mylovanov, KSE president and former Economy Minister, said: “The School has not had a home for 25 years, and now, thanks to Dragon Capital, we will be able to give our students a sense of true alma mater and create a platform for the development of economic thought in the country.”

    From the Editor: As baseball player philosopher Yogi Berra said: “It’s like déjà vu all over again.” In early March, President Zelenskiy fired two thirds of his cabinet just as coronavirus was cooking up the worst economic depression since 1929. Now, just as Ukraine returns to world markets, the President apparently provokes the resignation of the highly respected head of the central bank. That killed the $1.75 billion bond deal. The President’s track record of  replacing the best and the brightest with B-team ‘yes men’ and ‘yes women’ explains why the business community is up in arms today. It remains to be seen if the President gets it. With Best Regards Jim Brooke