UkraineAlert by Anders Åslund
Ukraine’s reform agenda suffered a serious blow on July 1 when Yakiv Smolii, the highly respected governor of the National Bank of Ukraine (NBU), resigned due to what he called “systematic political pressure.” At a time when a wide range of Ukrainian reforms are facing rollbacks and reversals, Smolii and his reformist colleagues at the NBU were among the last reformers still standing. Smolii’s departure now places significant question marks over the country’s future direction.
News of the resignation sent shock waves through Ukraine’s business and political communities. Tomas Fiala, who heads Ukrainian investment management company Dragon Capital, spoke for many when he called Smolii’s exit from the central bank a red line. “We will now postpone all new investments,” commented Fiala. “For the past five months the authorities have been doing the exact opposite of what investors, both domestic and international, expect from them and advise them. This is the last straw. One can only guess what the motives are. It is either complete incompetence or sabotage motivated by Russia.”
Smolii first entered the NBU as deputy governor in 2014 as part of governor Valeria Hontareva’s team. In May 2017, Hontareva was forced out, allegedly due to pressure from Ukrainian oligarchs Ihor Kolomoiskiy and Hennady Boholiubov, whose bank Privatbank she had nationalized in December 2016. Hontareva was later targeted in a series of alarming incidents. She was hit by a car in London, her house outside Kyiv was burnt down, her Kyiv apartment raided, and her daughter-in-law’s car set on fire.
Since taking over at the NBU in 2017, Smolii remained loyal to Hontareva’s reformist mission and her team. As political and oligarchic pressure on the NBU mounted, The most exposed figure was Smolii’s first deputy for banking regulation, Kateryna Rozhkova, who has a reputation as a true iron lady. It was Rozhkova who, together with Hontareva, closed down more than one hundred of Ukraine’s 180 banks from 2014 to 2017 in a major shakeup that won international praise and transformed the fortunes of the Ukrainian banking sector.
Prior to this industry clean-up, it was commonplace for banks in Ukraine to have banking capital equal to about eight percent of banking assets, with owners taking 80-90 percent of assets for themselves as “loans” never to be paid back. Since 2014, the NBU has put a stop to such practices, and the former beneficiaries are not happy about it.
The NBU has also been the driving force behind significant macroeconomic progress in recent years. Ukraine has long suffered from high inflation and an unstable or unsustainable exchange rate. Smolii fixed both problems. Under his leadership, Ukraine’s inflation has fallen to the current level of 1.7 percent a year, the lowest ever recorded in independent Ukraine. With a floating exchange rate, the hryvnia currency has now stabilized at close to 27 hryvnia per US dollar. Moreover, Ukraine’s international currency reserves have surged to USD 28 billion from a low of USD 5 billion in 2015.
For the IMF, the NBU has been the outstanding performer in Ukraine. As the IMF commented in its June 2020 press release announcing a new USD 5 billion standby agreement for Ukraine, “The NBU has skillfully managed monetary policy during a very challenging period. Central Bank independence should be preserved, and monetary and exchange rate policies should continue to provide a stable anchor in the context of the inflation-targeting regime, while allowing orderly exchange rate adjustment and preventing liquidity stress.”
Given this impressive record, why has President Zelenskyy not done more to protect Smolii from undue political interference? First of all, it is important to acknowledge that Smolii is not one of Zelenskyy’s people. There are many in Zelenskyy’s circle who might want such a good job. Secondly, Smolii has adopted uncompromising positions towards Zelenskyy’s alleged oligarch ally Kolomoiskiy. The NBU governor’s resignation now strengthens suspicions that Zelenskyy is unable to say no to Kolomoiskiy.
(c) The Atlantic Council