When Dmytro Sologub came to the National Bank of Ukraine in 2015, he said it was like being in the eye of the hurricane.
The banking system was an orgy of insider lending so dirty that cleaning it up required a very strong stomach. More than half of the country’s banks, over 100, had to be pulled off the market and liquidated. Strict controls had to be implemented for the rest.
As Sologub departs the NBU seven years later, the banking system is in much better shape. But his last year on the job was demoralizing.
Much of the central bank’s staff is at odds with its new governor, Kyrylo Shevchenko, who took the reins in July 2020.
“The situation was much worse. In 2015–2016, the process was not well established, but we saw where we were going,” said Sologub. “Now we are going the other way. So this has been morally quite difficult.”
The economist will now head to Washington D. C. where he will work in the International Monetary Fund’s monetary and capital markets department, focusing on corporate governance in central banks.
His work will not have anything to do with the IMF’s approval of loans to Ukraine.
Taking stock
Sologub had been in charge of monetary policy at the NBU, which has done well on that front. Over the past several years, the sky-high interest rates have been brought down to a more manageable level and the hryvnia has stabilized. Aggressive inflation targeting has brought inflation down significantly.
Sologub said that when the NBU began its reforms in 2014, it couldn’t do everything at once and had to prioritize. The top achievements have been in the areas of banking oversight and macroeconomic policy.
One remaining problem is the continued dominance of stateowned banks, which represent more than half of the banking sector, he believes. This doesn’t have immediate negative consequences because they’re well capitalized and under good supervision but Sologub believes that they will have to be privatized in the future.
“When we look at good market economies, we rarely see a case of a state-dominated banking sector,” he said.
On the other hand, he is confident that the NBU helped create a stable financial system, which has so far weathered the COVID-19 crisis.
“The financial stability report published a month ago clearly indicated that the system is properly functioning,” he said. “There are no systemic risks at the moment despite the huge real sector crisis, the corona crisis.”
Staff changes
Sologub is the second-to-last remaining member of the old six-person management team that once worked under former governor Valeria Gontareva, and later under former governor Yakiv Smolii.
Smolii resigned in July 2020, claiming that he was under political pressure. After Shevchenko replaced him, other deputy governors resigned as well, leaving only Sologub and first deputy governor Kateryna Rozhkova, who still remains on the job.
Many department heads began resigning as well, starting in the fall. This has recently kicked into high gear. The heads of licensing, financial stability and credit support quit in protest at since the start of the month.
They accused the central bank’s new leadership of being autocratic and dismantling the collegiality that allowed the NBU to regulate by consensus.
In an emailed response, the NBU rejected the accusations. “Each employee is given the opportunity to express and argue their position. If, in the end, the majority takes a different position, it’s a sign of professional maturity to be able to accept the collegially agreed-upon opinion.”
In a recent interview with the Financial Times, Shevchenko said he was disappointed to learn about the resignations from the media. He said they were part of a “PR campaign over the resignations as an attempt to exert political pressure on the NBU.”
He warned that Ukrainian oligarchs are exerting a “dangerous and destructive influence” on the central bank.
Sologub would disagree. “When the IMF voices concerns about the central bank’s independence and governance 12 months in a row, in political circles, there’s a growing understanding that things at the NBU are not going well,” said Sologub.
“Whether it’s shared by the governor, I don’t know. His public position remains very much the same, he is very upbeat and very defiant.”
“The situation with the licensing department is not new; it became public for the first time.”
“This has been happening already across a number of central bank departments. The head of markets department was removed in an unfair way, the head of HR, the head of legal, and so on and so forth. It just didn’t get much public attention.”
“Eventually, the process was very much the same. The department head was replaced by a person who is weaker and also more compliant. Probably the same pattern can be expected from the licensing department.”
“In 12 months, there has been no formal hiring process at all, just one person who will say okay, he is now the department director,” said Sologub. “And even when there is a formal hiring process, there were a few times when my voice did not matter at all. The decision was already made.”
These changes, he added, were focused on bringing in people who would be more “compliant with what the governor would ask from them.”
Vertical power
Asked if there is pressure from outside, Sologub said he is not sure but he can say that the bank’s style of communication with external authorities changed significantly over the past year.
“Before, it was very decentralized. For example, if there is some question related to my area with the Cabinet of Ministers or the president, I was directly responsible,” he said.
Now, Shevchenko does this job for the most part.
Rozhkova and Sologub had been given formal reprimands and votes of no-confidence late last year for talking to the media of their own volition and violating the bank’s “one voice” policy. Rozhkova later accused the NBU of trying to censor her interview with the magazine Novoye Vremya.
This centralization of decisions contradicts the principle the bank has been built on — collegiality, according to Sologub. Since the central bank supervises critical areas that are filled with corruption risks, “it’s better to have collegial decision-making… to avoid possible integrity problems,” he said.
Several former NBU employees who spoke to the Kyiv Post told the Kyiv Post that the bank’s current leadership criticized them for “voting the wrong way” or going against the governor’s wishes, which led to their desire to resign.
Oleksandr Bevz, director of bank licensing, said he was chewed out by deputy governor Yaroslav Matuzka for this reason.
In an interview with news outlet Liga.net, Matuzka said he was “surprised” by resignations of the former employees.
Sologub said that signs of the new management style aren’t very blatant.
“There are people who say the NBU is fine, they say monetary policy is still fine. I agree, but monetary policy is a very transparent area,” he said. “It’s not so easy to change something in monetary policy and hide it.”
“Compare that to banking supervision because in banking supervision there are banking secrets. If you see irregularities, you can’t really voice it.”
He said banking supervision has deteriorated. “Even now we see worrying signs where individual banks got preferences… Unfortunately, over the past 12 months, we have seen some evidence of that.”
“It has been sporadic so far,” he said. “(These issues) do not represent systemic risk but if things continue over the years and some banks see, okay these banks got some preference, why not me and so on, it might come to that.”
Asked if he believes the NBU is a robust institution if a single governor can make all these changes, Sologub said he believes the recent resistance is evidence that independence remains.
“After this public outcry, maybe things could change,” he said.
Replacement
Sologub said that the bank’s choice for his replacement is “actually some kind of sign that it’s clear that the central bank is not going very well and there is actually the idea to replace me with a very respected person.”
Shevchenko recently approved former deputy economy minister Serhiy Nikolaychuk to replace Sologub. He had also previously worked as a macroeconomic researcher at ICU, an investment firm, and directed the monetary policy and economic analysis department at the NBU.
Sologub said this nomination was a pleasant surprise. He worked with Nikolaychuk for five years and knows him very well. The new deputy governor understands the job “100%,” according to Sologub.
“To me, the nomination of Serhiy is a very interesting sign. I did not expect this but it’s very good. As good as it gets.” Several banking experts, including former employees, believe that Shevchenko didn’t want Nikolaychuk, making his appointment surprising.
Some experts have said that it’s likely that the candidacy might have been the work of the office of President Volodymyr Zelensky, which raises questions about political pressure on the central bank.
In response, the NBU said it “strictly adheres to the principles of independence, building constructive cooperation with public authorities to achieve the regulator’s goals.”
IMF
Asked about the relationship with the IMF, Sologub said Ukraine needs time to convince the agency to approve the additional loans.
“When we first came to the NBU… we saw skepticism from the IMF, investors and donors because we had no proven track record. We needed time to break this kind of skepticism and we did.”
“With what has happened since (last) July, we’re back to this situation and more time is needed. Not only time but the track record also has to be clean.”
Time is not a luxury Ukraine has in abundance. The country has a week to convince the IMF to approve the next $700 million loan tranche of the $5 billion stand-by agreement before the Fund’s representatives go on recess until the fall. Ukraine has $3.8 billion in debts coming due in September.
If negotiations spill over into the fall, the IMF may want to see the new budget passed before the disbursement. The stand-by program ends in December and if Ukraine doesn’t get the tranches by then, it won’t get them at all.
