Whenever someone wants to sound like an expert on Ukraine's economy these days, agriculture gets touted as a bright spot.
But then there are stories like VAB, a bank owned by farming magnate Oleg Bakhmatyuk, that dampen enthusiasm. And there are others: unfortunate creditors who can’t get back the money they lent to Mriya, an agriholding in a
stage of default, further erodes spirits. (Mriya does not belong to Bakhmatyuk.)
VAB, whose
$1.5 billion in assets makes it the country’s 16th biggest bank, was recognized as insolvent by the National Bank of Ukraine on Nov. 20 and was placed under temporary administration the next day. There was talk that it is going to be merged with state-run banking mammoth Oshchadbank.
The VAB made a statement blaming the National Bank for making the situation worse as the regulator introduced restrictions on the foreign exchange market that made access to dollars and euros for repaying debts more problematic.
Yet in June, VAB failed to pay off a $113 million eurobond, although, unlike Mriya, the bank managed to reach a
deal with creditors to push the deadline to 2019 with a tiny raise in
interest – up to 10.9 percent from 10.5 percent. However, little changed in
bank’s ability to service its liabilities, as already in October it missed a coupon
payment of paltry $2 million.
This
particular piece of debt was issued back in 2007, before the major economic
crisis of 2008-2009 that made many investment analysts change their
“buy” recommendation regarding Ukrainian assets to “sell.”
As VAB couldn’t meet its obligations in 2010, when the eurobond was maturing,
it restructured it until 2014. The hryvnia’s 50 percent devaluation this year makes
debt denominated in foreign currency much more expensive.
For months, bank clients have been experiencing difficulties trying to pay with VAB
cards or withdrawing cash from ATMs. The bank’s call center explains away these problems as “technical issues.”
The bank’s
problems are bigger than its latest financial report, which revealed $3.3 million of net
losses for the nine months of this year.
It needs an injection of at least $185
million, said Bakhmatyuk during a news briefing on Oct. 28.
“We as
shareholders want to give $185 million of additional capital or get it from
the Finance Ministry, but this shouldn’t be a simple nationalization, but rather this should be the responsibility of the shareholder, Finance Ministry and additional
refinancing (from the National Bank).”
However,
for every single dollar that he provides to rescue his bank, Bakhmatyuk wants
the government, and ultimately taxpayers, to match it with two, according to Dzerkalo Tyzhnya, a weekly. This means that if his input will be $185 million, he expects the taxpayers to cough up as much as $370 million. Denys
Maltsev, VAB’s chief executive officer, said they want a 5-year loan from the
National Bank.
“I
wonder why the National Bank keeps its key interest rate so high. In developed countries, central banks keep rates low to stimulate business. But
as usual, Ukraine bucks the global trend,” Bakhmatyuk criticized. The key rate currently stands at 14 percent while in
October inflation almost reached 20 percent for the year, so Bakhmatyuk’s
criticism is more about his having skin in the game than sober
macroeconomic reasoning.
Yet on
Oct. 7, the central bank’s deputy head Oleksandr Pysaruk said the regulator will
help VAB financially, calling it a systemic bank that is “too big to
fail.” He didn’t go into details on how this would be done and the
central bank would not disclose any to the Kyiv Post.
However, National Bank Governor Valeriya Gontareva admitted that the regulator under no
condition will add anything to the shareholders’ equity of any bank, but will
only provide money liquidity if an institution is dealing with massive deposit
withdrawals. Individual clients have taken back more than 9 percent of the hryvnia cash
they deposited with Bakhmatyuk’s bank, while the whole sector’s loss of private
deposits reached 25 percent. Later, the NBU stated that it can’t accept the shareholder’s scenario on bailing the bank out.
There is a lot of speculation in the market that Bakhmatyuk used his bank to finance his agriculural empire’s growth, at the cost of the bank clients.
“What
Bakhmatyuk did to his VAB bank is absolutely unacceptable,” a manager from the
investment department of BNP Paribas, a French bank, told the Kyiv Post. He
refused to be identified because he’s not authorized to speak on the issue.
“And now, when I look at the financials of his Ukrlandfarming, compare them
to those of MHP (major local poultry producer) I understand that something is
definitely wrong with them.”
Attempts to reach Ukrlandfarming for comment were not successful; the firm did not respond to an email sent Nov. 19 for comment.
Bakhmatyuk,
whose fortune Dragon Capital investment house estimates at $804 million, owns
Ukraine’s biggest land cultivator, Ukrlandfarming, which grows grain and produces eggs. Cargill, an American food maker, bought a 5 percent
stake in Ukrlandfarming at the beginning of this year. Meanwhile, Avangardco,
an egg arm of Bakhmatyuk’s business empire, has been trading on the London
Stock Exchange since 2010. Its shares have lost more than 20 percent of their value
since October.
The businessman acquired control over VAB in 2011 after he paid $75 million for the shares the bank
had to issue in order to cover losses from massive deposits outflow and non-performing loans. Thus, the majority ownership rights
transferred from Israel’s Kardan holding to Bakhmatyuk.
However, Bakhmatyuk quickly realized that the bank was not as problem-free as the Israelis had said it was. Sergey Maksimov from Russia, who owned up to 49 percent of the
bank at some point, was at the same time the key debtor who was not paying his debts. After negotiations on debt settlement led to nothing, Maksimov
was arrested and spent several months in Lukyanivka, Kyiv’s famous jail.
Driven
by desire for revenge, Maksimov wrote nasty letters to the people who
were investing in Avangardco, Bakhmatyuk told Forbes Ukraine in 2012. “I
had to meet them (to explain everything). Combined pleasure with business,”
Ukrlandfarming owner said.
Bakhmatyuk was not planning to become a banking giant. Rather he needed a bank that would
provide cheap loans to his agriculture business. He publicly admitted that
wants to keep up to 70 percent of VAB portfolio in loans for the ag industry,
basically for his own companies.
“I’m
an active opponent of lending to consumers, when someone just shows his
passport, gets Hr 20,000, and then leaves for who-knows-where,”
Bakhmatyuk said.
However, using people’s deposits to provide cash needed for running businesses in
agriculture has proven to be a poor banking strategy.
VAB’s
headquarters in Kyiv used to have a huge mural of The Beatles on one of its
walls. “I don’t care too much for money,” they once sang, a refrain that perhaps Bakhmatyuk took too much to heart. Now, it may be time to change his tune.
Kyiv Post associate business editor Ivan Verstyuk can
be reached at [email protected].
Editor’s Note: The story has been updated to include the VAB statement, more accurate figure on banking sector’s deposit withdrawals and information from the sources that the VAB is likely to be merged with the Oshchadbank.
