Turmoil surrounding Ukraine's central bank jeopardizes future IMF aid

Ukraine is looking for a new central banker, but applicants beware.

The job takes nerve. It means constant attacks from the TV stations of powerful tycoons. Then there is the pressure from politicians. Paid demonstrators are liable to turn up at your front gate.

The threats are hardly subtle. On Wednesday, a coffin and a row of extravagant funeral wreaths were near the home of Yakiv Smolii, who said he was forced out of the central bank's top post June 30 by systematic pressure.

It also blasted another hole in the clean-goverment pledges of President Volodymyr Zelensky, a former TV comedian and political neophyte who came to power last year promising to uproot the corruption that has plagued the country's courts, business culture and politics for decades.

Now, Zelensky's government could face some serious fallout from those Ukraine needs most: supporters in Europe, the United States and global financial institutions.

Questions over political interference in the National Bank of Ukraine, the central bank, could threaten future International Monetary Fund support for Ukraine at a critical time. Ukraine's economy, hard hit by the pandemic, is projected by the government to shrink by 4.8% this year.

The latest crisis over political interference in Ukraine's central bank also comes with Ukraine still mired in U.S. politics, including the still-active efforts by President Donald Trump's lawyer Rudy Giuliani to dig up dirt in Ukraine on Democrat presidential candidate Joe Biden and his son Hunter.

Leaks of confidential conversations involving Biden and former Ukraine president Petro Poroshenko - including a fresh batch made public Wednesday - have provided no major ammunition for Trump's campaign. But they underscore the unruly nature of Ukraine's politics and Zelensky's inability to control it.

The central bank crisis, however, raises the stakes sharply for Ukraine.

Analysts said the doubts over the bank's independence threatens billions in future IMF payments as well as other institutions and the European Union.

And some tracking Ukraine's economy, such as emerging markets expert Timothy Ash, suspect the attacks on the central bank are coming from powerful oligarch Ihor Kolomoisky, in an effort to weaken central bank governance and potentially regain control of his former bank, PrivatBank, which was nationalized by the central bank in 2016.

"Zelensky seems to have fired a Javelin missile through NBU independence," wrote Ash in a briefing note. "He seems to have allied now not only with Kolomoisky but the industrial lobby which argues that Ukraine does not need the IMF."

Even Smolii's predecessor as central bank chief, Valeria Gontareva, called on the IMF to block future funds to Ukraine - and reclaim tranches already sent in - if the bank's independence was not protected. In June, a critical $2.1 billion in IMF loans landed, but the conditions included an independent central bank, a floating exchange rate and continuing inflation targeting.

Other IMF prerequisites included the passage of a bill in May to prevent Kolomoisky regaining control of PrivatBank.

"If they try to cheat the IMF, the IMF should react in line with common sense," Gontareva said in an interview from London, citing apparent breaches of IMF conditions.

Gontareva fled to Britain in 2017 after her house was vandalized and masked men with Kalashnikovs delivered a coffin with her blood-soaked effigy to the National Bank of Ukraine, or NBU.

Last year, masked men with machine guns searched her Kyiv apartment and her home outside Kyiv was burned to the ground.

Ukraine's domestic intelligence agency, the Security Service of Ukraine (SBU), has ominously warned former bank officials against commenting on the bank's operations - a directive analysts said appeared aimed at Gontareva, Smolii and other NBU bank officials.

Gontareva described the SBU as "this Ukrainian KGB."

"I have not even experienced something like that in Soviet times," she said.

Warning bells began sounding March 4, when Zelensky abruptly fired the reformist prime minister, Oleksiy Honcharuk, and his government. Next, general prosecutor Ruslan Ryaboshapka was ousted after engineering an ambitious overhaul of the prosecution service seeking to weed out corruption.

Central bank chief Smolii says he was forced out in a meeting with Zelensky June 30. He said political interference had made it impossible to do his job.

On Wednesday, Zelensky called for an 11% devaluation of Ukraine's currency, the hryvnia.

"On the one hand [Zelensky] pretends that he supports central bank independence and on the other hand he immediately undermines all our reforms, because an independent central bank is not just a slogan," said Gontareva.

Before fleeing Ukraine, Gontareva closed dozens of banks and nationalized PrivatBank, the country's biggest lender, in 2016 after a $5.5 billion in deposits went missing.

It made her an enemy of the bank's former part owner, Kolomoisky, who is reportedly under investigation by the FBI for money laundering.

She believes he is behind the intimidation campaign against Smolii and the NBU.

"The nuthouse is calling for Gontareva," Kolomoisky responded in a text message Friday.

The tycoon, who had a past business association with Zelensky, has previously denied Gontareva's accusations that he instigated the intimidation against her. Lawmakers recently passed a law preventing the tycoon from regaining control of PrivatBank.

Zelensky's office said he supported the NBU's independence, in emailed answers to questions, adding the new NBU chief would be an experienced professional with a good reputation.

Answering concerns that Kolomoisky had long sought Smolii's departure, the office said the tycoon had no influence over state institutions.

"Smolii's resignation was a surprise to the president's office. No one expected or demanded his replacement," the office said. "The Office of the President cannot force a person to remain in office if he or she does not want to."

Smolii's version is different. He said it became clear at the June 30 meeting that Zelensky wanted him out. He asked Zelensky if he wanted him to go and the president said yes, Smolii said.

Goesta Ljungman, head of IMF's office in Ukraine, said that "the fact that the management of the NBU openly says that it is subject to political pressure should be of concern to all," speaking to Ukrainian business news website Liga.net.

"Reform seems to be dead in Ukraine," the analyst Ash added. "The obvious concern now is that we see a return to the disastrous economic policies run under former Ukraine president [Viktor] Yanukovich," he said referring to a pro-Russian Ukraine leader forced from office in the 2014 Revolution of Dignity.

The timing of Smolii's acrimonious departure was also a blow: less than three weeks after Zelensky signed a memorandum agreeing to IMF conditions to allow money to flow.

"Which means," said Anders Aslund, senior fellow at the Atlantic Council, "his word means nothing."