How does corruption model of Ukrainian economy work?

Author : Oleksiy Kushch

According to many people, the main “corruption point” is in the public sector, and in order to reduce the activity of corrupt officials you just need to launch mechanisms of control over the allocation of public funds
22:19, 3 June 2019

Open source

The rent, corrupted model of the economy implies the constant use of the system  transforming political investments into financial dividends. It is in the structure of the basic financial flows, which are formed in the public sector and the real sector of the economy, the basic mechanisms for the corruption rent are laid. In this toxic social paradigm, any political influence group turns into a pathogenic virus for the state and society.

According to many people, the main “corruption point” is in the public sector, and in order to reduce the activity of corrupt officials you just need to launch such mechanisms of control over the allocation of public funds as ProZorro system or parliamentary investigation commissions.

In fact, the corrupted economy is much more inventive. And today we will talk about the rarely mentioned model of using it for private purposes. Let’s talk about state banks.

The things began on the wave of preparations for Euro 2012. At that time, the country built a lot of necessary infrastructure in the form of stadiums, which are empty now, But money was needed to finance these "sports presents". Much money. Budgetary and credit resources were sorely lacking. And then a thought appeared: why not use state banks in the scheme?

The proposal was so innovative that the range of tools of this system was immediately thoroughly expanded to include state-owned companies.

The technology there was, on the one hand, as simple as possible, and on the other, truly innovative. There is a state bank. The government, as a full owner in the person of the Ministry of Finance, decides to recapitalize, that is, to increase the share capital, for example, by UAH 20 billion. For this, it is also a good idea to get a conclusion from the National Bank that the financial institution is about to die without additional financial injections.

But there is no money in the budget. And you do not need them. Capitalization is carried out by entering funds into the authorized capital of internal government loan bonds. But participants of the scheme need a cache, not valuable "papers". To obtain the necessary cash flow, monetization of the government bonds portfolio is carried out. On the one hand, the introduction of bonds in the authorized capital increases the liability of the bank.

On the other hand, the same bonds appear in the asset, because their owner is no longer the Ministry of Finance, but a capitalized bank. Then these government bonds are redeemed, as a rule, by the National Bank, since taking into account the conditions of issue, they are of no interest to anyone on the market, because of the very long circulation times. In the process of redemption, the bonds fall on the balance of the National Bank, and the money for them is transferred to the account of the state financial institution.

Monetization is completed, the cache flow is formed. Now is the time to share the money. Cash flow distribution occurs through the issuance of credits to controlled structures. Is it worth explaining why the level of problem (non-performing) loans in state banks is much higher than in private ones and exceeds 50% of the total loan portfolio.

Under these conditions, the NBU performed the function of quasi-fiscal domination, essentially printing money and replacing fiscal as well as budget mechanisms.

It was with this tool that the emission mechanism was damaged in 2014-2015, when, as a result of the recapitalization of Naftogaz and then banks, the total inflation over the next five years was 100%, and the hryvnia depreciated more than three times.

In the period from 2005 to 2010, banks were not actually involved in the process of quasi-fiscal financing: the amount of lending to central governments on their part fluctuated between 4 and 29 billion hryvnias. From 2010, the build-up of this mechanism began, and by 2013, the figure reached 101 billion hryvnias.

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But in 2015, a real financial sabbath began: as a result of the banking “walpurgis night” that lasted for three years, the amount of banks' investments in government debt instruments (mainly government bonds) rose to 418 billion hryvnias in 2017.

Thus, if you take the balance, then the net capitalization of this scheme in 2016-2017 amounted to more than 300 billion hryvnisa or the equivalent of 10 billion euros at the current exchange rate. This is a kind of official reflection of the scheme.

Let’s talk about lending. We see only the top of the iceberg - the portfolio of government bonds owned by banks. Monetization amounts, primarily with the participation of the NBU (as well as cross-monetization of state-owned banks), no longer lie on the surface and require additional calculations. And lending indicators, taking into account non-performing loans, can only be determined at all with the help of a special check.

This chart helps to see how the scheme "breathes": during the year, bank investments in government bonds range from 395 billion hryvnias (minimum) to a maximum extremum point of 425 billion hryvnias, that is, the backlash is up to 30 billion hryvnia, or the equivalent of one billion euro. A good "unlimited card", especially considering that the movement of these funds does not require compliance with any budgetary procedures and cannot be passed through established financial control mechanisms.

If we calculate such an indicator as the ratio of central government requirements to banks regarding counter-obligations, we will see that in 2005 it was at the level of 34%, which indicates a partial balance between the counter-claims of banks and the state. At the same time, in 2019, the value of the indicator was reduced to 7% - and this is already a clear sign of "schemes".

Or maybe the banks' requirements for the state and the whole scheme described above are just a part of the new format of the banking system and there is no scheme related to state banks at all?

As the structure of banks ownership in the government bonds portfolio shows, state-owned banks account for 88% of all investments, or 325 billion hryvnias. Banks of foreign banking groups have only 6%, or 22 billion hryvnias, and banks with private capital - about the same (24 billion hryvnias). The commercial banking sector does not play these games.

And this once again confirms that, most likely, we have a mirror scheme: on the one hand, state banks' investments in government securities (at the same time they paid nothing to the Ministry of Finance for most of the portfolio, but simply received "papers" in the process of capitalization) and on the other hand, the monetization, which previously took place with the participation of the NBU, when state banks were already receiving quite real billions of hryvnias into their correspondent account with the subsequent launching of “credit” programs.

Total state spent on the capitalization of banks is about 10 billion dollars in terms of the rate. This amount roughly coincides with the equivalent of 11 billion dollars that were raised in the budget in the privatization process. But it is easier to create a financial hole than close it. Now the state is forced to spend 2 billion hryvnias a month or 24 billion a year only to service bonds contributed to the authorized capital of banks.

So the state account is not closed yet, and in the coming years there are no prospects for this. True, the NBU promised to stop monetization and abandon quasi-fiscal domination. Legally, this is still not limited in any way, and for renewal it is only necessary to once again find a reason like in 2015.

In the future, the topic of additional capitalization of state-owned banks in Ukraine, monetization and lending may become something like anti-corruption Nuremberg. It suffices to trace whose companies were credited in the interval of six months after the "monetization" of the government bonds, made by the Ministry of Finance to the authorized capital of state banks. But as history shows, any Nuremberg can take place only if there are international prosecutors ...

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