Nationalization of Alfa-Bank. What's Wrong?
On October 25, President Volodymyr Zelenskyy signed a law nationalizing a systemically important bank. While the law doesn't specifically name the bank, everyone understands it's referring to Alfa-Bank, writes ZN.
Alfa-Bank remained the last Russian bank on the market whose "Russianness" was stubbornly ignored. It so happened that Sberbank and Prominvest were sanctioned back in 2017, and with the onset of full-scale aggression, their licenses were revoked altogether. Meanwhile, Alfa remained on the sidelines for a long time, seemingly not being Russian.
Of course, there was a formal pretext for not imposing sanctions on the bank: unlike Sber or Prom, Alfa is not directly connected to Russia, and therefore was classified as a bank with foreign, not Russian, capital. However, everyone in the financial market knew that the offshore companies that supposedly owned the bank, the insurance company, and the leasing company of the same name were owned by Russian oligarch Mikhail Fridman (see fig.) and his comrades Andrey Kosogov and Petr Aven.
Nationalization of Alfa-Bank. What's Wrong?
Everyone knew, too, that the sanctions process in Ukraine is hardly legally flawless or entirely reasoned. But somehow, in the case of Alfa Bank, they decided to adhere to the letter of the law, so absolutely nothing changed in Alfa's operations in 2017, when other banks were sanctioned.
Things even got better, since sometime in 2019, the National Bank of Ukraine decided that there were more than just three systemically important banks (Privat, Oschad, and Exim), changed the terms, and acquired 14 important banks at once, including Alfa. This was generally fair: the bank had always been active in retail banking, had many clients, and just before the National Bank revised its "systemic" decision, it had acquired Ukrsotsbank, a sizable and also highly retail-focused bank. This means that, since 2019, resolving any issues surrounding Alfa has objectively become significantly more complicated.
Of course, we understand that this is, in fact, a Ukrainian company that pays taxes here, serves local clients, and provides jobs. But we also understand that before October 20 of this year—the day Ukraine imposed sanctions on Mikhail Fridman—he was profiting here and supporting the regime there that is now physically destroying Ukraine.
He wanted to continue receiving them, by the way. In fact, that's why he came up with the idea of recapitalizing the bank with a billion dollars in the form of perpetual subordinated debt, which would allow "respected" shareholders to earn interest while circumventing Western sanctions. Meanwhile, well-known banking expert (not really) David Arakhamia was already in full swing convincing everyone that this billion dollars was precisely what he, that is, the bank, was missing. Fortunately, our Western partners clearly hinted that such a solution would definitely not be acceptable, and, in general, the era of exceptional conditions for Alfa Bank should finally end.
But this is unlikely to happen. Nationalizing Alfa-Bank could actually create more problems than it solves. Many in both the government and the NBU understand this, although everyone agrees that this is likely the best possible solution, given that we're talking about a bank with three million individual clients.
In reality, the potential risks and obvious downsides of this nationalization outweigh the potential benefits several times over. For example, the law signed by the president allows the bank to be nationalized without recapitalization, as is. And the National Bank, as a reminder, allowed banks to violate capital adequacy requirements during the war. But this doesn't eliminate the need for recapitalization later. No, not a billion, but the bank will definitely need $500 million to meet regulatory requirements. And the state, as the bank's owner, will have to find these funds. Of course, one could try to sell the nationalized bank, but even that isn't straightforward.
Remember the nationalization of PrivatBank? This time, the procedure won't be much different, except for the recapitalization, meaning that the funds of persons associated with the owners will be converted into the bank's capital. PrivatBank's nationalization was challenged in over seven hundred lawsuits, a significant portion of which were prompted by this forced conversion. It's possible, indeed almost guaranteed, that the nationalization of Alfa-Bank will also lead to numerous, grueling court battles over many years. And courts are always a risk.
The prospect of legal action, coupled with the need for additional capital and, to put it mildly, the less-than-ideal business climate in Ukraine, make any attempt to quickly sell the bank after nationalization impossible. And I don't think it will be sold. For us, 70% of the banking system in state hands is a risk. For the authorities, it represents a major opportunity.
According to the "Price of the State" project, taxpayer expenditures on supporting state-owned banks over the past 12 years have exceeded $20 billion. There are several reasons for this: the return of nationalized banks to solvency, their recapitalization, and the interest costs on government bonds (OVGZs), which the state used to increase their authorized capital. By 2027, the state would have to inject another $600 million into state-owned banks, again covering the same interest on government bonds, and this is assuming no new state-owned banks are established.
After all, there's no point in hoping that things will improve after the nationalization of Alfa Bank. The only truly profitable state-owned bank whose dividends provide any compensation to the state is PrivatBank. For comparison, PrivatBank's dividends for 2021 amounted to UAH 28 billion, while Oschadbank's were UAH 318 million.
Nationalization of Alfa-Bank. What's Wrong?
The long-standing problem of most state-owned banks—the lack of transparency in decision-making—has also made little progress. Recall last year's scandal involving a dubious loan issued by Ukreximbank to a resident of the uncontrolled territories for the purchase of the Sky Mall shopping center. No corporate governance measures prevented this decision, because the "telephone right" still enjoys exclusive priority in state-owned banks.
Given the lack of active lending in recent years, and especially now, banks are practically the only ones in the country that still have money. This is also a risk, as power in Ukraine is also concentrated in a few hands, and while this may be good for our shared victory, it's certainly not good for our common future. Despite all the problems, the chronic shortage of funds, and the paralysis of the financial system, the government never stops offering populist, preferential loans at interest rates that are nowhere near market rates. State-owned banks are a godsend for such schemes, because who would turn down a shareholder? The likelihood that state-owned banks will hand out similarly unmarketable loans to businesses close to the Presidential Administration is also very high. In fact, state-owned banks have been operating under such schemes since the current president was still playing KVN. Financing the government through the voluntary-compulsory purchase of government bonds—of course! And state-owned banks are well aware of this avenue. This means that the purely academic assertion that the financial sector cannot develop on competitive market principles if the state is the main player in the market poses very real financial and political risks.
We've already warned that by making the entire country directly financially dependent on the central government, we risk creating not a new Ukraine, but today's Russia, where the central government alone decides which businesses survive and which die, and where regional development directly depends on the loyalty of local leaders to the leader. Unfortunately, we are now confidently moving toward precisely this scenario.
Is there a way out? Yes, we just need to make sure that the aforementioned corporate governance is truly independent and professional. But the disgraced former head of the board of Ukreximbank Evgeny MetzgeLess than a year has passed, and he's already sitting next to First Deputy Prime Minister Yulia Sviridenko at meetings, developing new government mortgage programs. And until there are better advisors in the country, there won't be any other best practices or benefits from state-owned banks. And all the losses will ultimately fall on our shoulders. What's more, we've already paid $20 billion.
Subscribe to our channels in Telegram, Facebook, Twitter, VC — Only new faces from the section CRYPT!