Valeria Gontareva
On February 17, the NBU lifted restrictions on repo transactions with government bonds. Previously, banks were allowed to receive refinancing up to 50% of their regulatory capital and up to 50% of the funds offered in the tender to support bank liquidity. This requirement has now been lifted. The amount of funds banks are eligible to receive is limited only by existing collateral (government bonds, deposit certificates, and foreign currency).
Bankers believe that increasing the share of government bonds in a bank's assets is a rather risky undertaking, especially now that restructuring or write-off of government debt cannot be ruled out. Lifting restrictions on government bond repo transactions reduces the risk. Bonds can be exchanged for cash without restrictions.
Experts have no doubt that, as a result, many banks will begin actively expanding their government bond portfolios. This will give them a chance to return to the state-owned enterprise payroll market. On January 20, the Cabinet of Ministers approved Resolution No. 37, which defined the criteria by which certain banks can—or cannot—work with public sector employees. One of the requirements is holding government bonds in an amount of at least 20% of the regulatory capital.
The question remains: from whom will banks purchase government bonds and at what price? Market participants are open about the likely response: ICU (Investment Capital Ukraine), a company recently founded by Valeria Gontareva, will meet the increased demand for bonds. The intermediary company may have been aware of the new regulation. The NBU's decision promises a handsome profit.
It is worth saying that government bond operations are not new for ICU and Avangard Bank, which was also owned by Gontareva (Read more about it in the article Valeria Gontareva. The Glitter and Machinations of the Queen of Coins). Government bond transactions are primarily registered through the Perspektiva exchange. According to the exchange's data, by the end of January 2016, companies previously associated with Valeria Gontareva were among the top five in domestic bond trading (in January alone, exchange members traded over UAH 6 billion in government bonds). However, ICU and Avangard had previously held the top spot in terms of transaction volumes, even during 2014-2015.
Both parliamentarians and experts have repeatedly stated that companies are laundering money from state-owned banks. By passing securities back and forth, state institutions enable shell companies to profit. At Perspektiva, government bonds are often sold at par or close to par just a few days before the coupon payment is due. As a result, the bulk of the profits remain with the intermediary, ICU.
"In simplified terms, the scheme looks like this. Let's say one state-owned bank has UAH 1 billion in government bonds in its portfolio, on which the coupon payment is about to mature. Typically, this happens twice a year. A few days before the interest income payment from the budget is due, the bank sells the bonds through the exchange to an intermediary (another bank, an asset management company, or a securities trader) at par value or close to par value. The private intermediary receives interest income from the budget of, say, 15% per annum—and a few days later sells the bonds back at par value (or close to par value) to the state-owned bank or other financial institution. Ultimately, the entire profit from the coupon payment is deposited in the intermediary's accounts and is subsequently redistributed among the parties to the transaction, or more precisely, its organizers," explains journalist Oleksiy Komakha.
The scheme appears legitimate; bank management can always explain that they urgently needed cash, and the deal was concluded on the stock exchange, meaning the price was market-based. Meanwhile, speculation annually costs state-owned banks hundreds of millions of hryvnias in lost profits. Speculators exploit not only resale opportunities just before coupon payments but also profit from discounts. Sharp price fluctuations on the Perspektiva market sometimes have no logical explanation.
Let's look at a few examples. For example, on February 5th of last year, domestic government bonds No. UA4000189013 were trading on the stock exchange at UAH 16,542.57, and the very next day they were sold at UAH 17,803.39. Over the course of the day, the bond price increased by UAH 1,260.82, generating UAH 76,5 million in revenue for the broker on a transaction involving 60,675 bonds.
Two weeks later, on February 18, government bonds No. UA4000189294 were sold at UAH 26,189.23. They were sold again the following day at a price UAH 444,55 higher, at UAH 26,633.78. As a result, the daily income from the transaction of 40,250 bonds amounted to UAH 17,9 million.
On February 27, the exchange registered the sale of 54,150 government bonds No. UA4000148589 at a price of 865 UAH each. A week later, on March 4, they were resold at a higher price of 386,76 UAH. As a result, the broker's weekly profit amounted to 20,9 million UAH.
On the same two days (February 27 and March 4), 28,500 government bonds (OVGZ No. UA4000148571) were resold. In the first transaction, the price per bond was UAH 850, and in the second, UAH 1,251.26. Thus, the broker earned UAH 11,4 million in a week.
In the summer of 2015, the broker earned millions on transactions conducted on the same day. On June 25, 40,000 bonds No. UA4000190292 were sold first at UAH 21,165.10 and then at UAH 21,562.96. The price difference over the course of one day amounted to UAH 397,86, generating UAH 15,9 million in revenue from the total transaction volume.
In September, a broker also earned UAH 6,4 million in one day on the price difference for government bond No. UA4000177406. On September 14, 9,550 bonds were sold at UAH 1,071.75, and on the same day, they were resold in two blocks of 4,775 bonds at UAH 1,744.00.
Why does the NBU turn a blind eye to state-owned banks siphoning off hundreds of millions into the hands of intermediaries? "This question should be addressed directly to the management of the National Bank. That is, the question of what the secondary market for government bonds is and why the lion's share of transactions are conducted on the Perspektiva exchange. This issue has been raised repeatedly, and, in my opinion, the quality and depth of the National Bank's responses have been extremely inadequate. Therefore, some doubts probably arise regarding the lack of transparency of these transactions. As well as the principles by which companies or platforms are selected to trade this instrument on the secondary market. Because the initial placement takes place at the level of the Ministry of Finance," says financial analyst Alexey Blinov.
Other experts are more frank: the “haircut” of “state banks” by ICU and Avangard is a way to make money.
"Avangard Bank and ICU are actively trading government bonds. This is not prohibited by law. But it's clear that Gontareva has access to power and is abusing her official position," asserts Oleksandr Okhrimenko, president of the Ukrainian Analytical Center. "Previously, she (Gontareva) simply conducted more transactions through securities traders. Now that she has a bank, she uses the bank in her schemes. The specifics of working with bonds have certain nuances—you need to involve several entities; a single trader is not enough. In this case, a bank is involved. The fact that Avangard has begun to work more extensively is legally unacceptable. It happens that a bank buys for a billion and sells for a billion. The question is where the profit goes. This is very difficult to track. There are indeed many rumors circulating in the market that these transactions may bear the hallmarks of corruption. Of course, if this were a European country, Gontareva would have been fired, at the very least, and there would be a criminal case. Because such schemes are strictly prohibited in Europe. Officially, she's no longer the owner of Avangard, but rumor has it she still is. In Europe, something like this would have gotten someone kicked out long ago, at the very least, jailed. Here, everyone just turns a blind eye, and no one sees it."
Last year, the Shevchenkivskyi District Department of the Main Directorate of the Ministry of Internal Affairs in Kyiv launched a pre-trial investigation into corruption in the trading of domestic government bonds (DGBs) by financial institutions previously owned by Valeria Gontareva before her appointment as head of the National Bank. The Ministry of Internal Affairs noted that the pre-trial investigation was being conducted under Part 2 of Article 192 (causing property damage through fraud or abuse of trust). Yuriy Derevyanko, a member of the Verkhovna Rada Committee on Preventing and Combating Corruption, who submitted an inquiry to law enforcement regarding this matter, believes the case was deliberately transferred to the district police to be hushed up.
"We don't know the scale involved. But we did note that Investment Capital of Ukraine, a company formerly owned by Gontareva, increased the volume of OVZG trading by 120% in 2014. That is, the trading volume was 197 billion hryvnias. The criminal proceedings should have determined the scale and the amount involved, but in principle, these are quite large trading volumes. Avangard Bank and Investment Capital of Ukraine were involved in this scheme. The question is who is selling, why, and what income the seller is receiving, or could have received. And why didn't they receive it themselves, but rather allowed someone else to receive it the day before the interest on the OVZG was paid? And was it a fictitious sale or a real one, and at what price? These are all questions for the investigators, who must ultimately determine whether a crime has been committed," the MP explains.
A year ago, speaking in the Verkhovna Rada, Valeria Gontareva stated that her official salary was approximately 8,5 hryvnias, which she found unsatisfactory. But what is the real income of someone suspected of patronizing government bond speculation? According to market participants, the supplement to the civil servant's modest salary amounts to at least a billion hryvnias per month.
And this is according to the most conservative estimates.
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