Ukrainian President Volodymyr Zelensky is under pressure over how he will resolve a long-running dispute regarding a nationalized bank and its former oligarch owner.
How he proceeds could be a "deal-breaker" as to whether Ukraine's international creditor, the International Monetary Fund (IMF), gives the country a further much-needed aid program, experts say.
The dispute centers on a bank called Privatbank that was nationalized in 2016. It was the country's largest commercial bank but became state-owned after being declared insolvent. The government backed the nationalization — which was seen as vital to protect its 20 million customers and to preserve Ukraine's already fragile financial stability.
A stress test of Privatbank had noted "imprudent lending policies" and Ukraine's central bank initially said that 97% of its corporate loans had gone to "related parties" of the main shareholders — Igor Kolomoisky and Gennadiy Bogolyubov. An assessment that both disputed.
The IMF, which had given Ukraine a $17.5 billion aid package in 2015, backed the nationalization but insisted earlier this year that "it is important that the authorities continue their efforts to recover losses from former owners and related parties of failed banks."
In early 2018, the central bank released the findings of an investigation by corporate investigations consultancy Kroll that said that, prior to nationalization, Privatbank had been subjected to "a large-scale and coordinated fraud over at least a 10-year period ending in December 2016." Again, Kolomoisky and Bogolyubov denied those allegations.
Disputes between the former main shareholders and the government have taken place since 2016 with multiple legal battles (reportedly 600). There have been attempts by the state to recover losses from Kolomoisky and Bogolyubov, who themselves argue that the nationalization was done on spurious grounds.
The chances that Privatbank could be returned to its former owners were boosted in April when a Ukrainian court ruled (in the last days of former leader Petro Poroshenko's presidency) that the nationalization was illegal.
An IMF team is currently visiting Ukraine but a spokesman told CNBC Wednesday that the Fund does "not comment on speculations or rumors" regarding the future of Privatbank. They added it would be discussing "policies that would be needed for the Fund to be able to continue to support Ukraine."
"The treatment of the Privatbank situation will serve as a bellwether to assess Kolomoisky's influence on government policy and decision-making, as well as inform the IMF's stance on continued cooperation with Ukraine," Otilia Dhand, senior vice-president at Teneo Intelligence, said in a note Wednesday.
"The fund is unlikely to approve of any compromises on the nationalization of the bank, which would put the government's $5.5 billion investment in its recapitalization into question. However, it is unclear what would be the red line for the fund to abandon negotiations with the government."
Close observers of Ukraine's new president are keeping a close eye on whether Zelensky could be influenced by Kolomoisky with whom he has business ties. Zelensky is a former comic and actor who starred in a hit TV show called "Servant of the People" (about an ordinary man who becomes president) that was produced by his own production company but broadcast on Kolomoisky's 1+1 TV channel, which has shown other shows featuring Zelensky.
Kolomoisky was widely seen as one of Zelensky's main backers and his channel boosted Zelensky's visibility and popularity ahead of the April election that saw him defeat Poroshenko.
However, Zelensky has repeatedly said he is not under Kolomoisky's influence, stating ahead of the election that "I'm not a toy in the hands of Kolomoisky," Ukrainian news agency Interfax reported in March.
Zelensky campaigned on a manifesto to reform the country and beat corruption, just like the TV character he played. Whether he can maintain this promise with the apparent backing of a powerful business man who supported his candidacy is now under scrutiny.
Kolomoisky has felt comfortable enough under the new Zelensky administration to return to Ukraine after two years of self-imposed exile living abroad, although he has denied he is now an advisor to the president.
The oligarch said last week that he had met with the president on September 10 for the first time since his inauguration, following an invitation. Zelensky's press office was reported as stating on a Facebook page that the meeting was about "doing business in Ukraine" and about the energy sector.
Kolomoisky told reporters Friday at an energy summit that he had not discussed the future of Privatbank with the president. But eyebrows were raised when Kolomoisky signaled the dispute could be better resolved under Zelensky's leadership. "We (Privatbank's former owners) do not agree with the nationalization, this dispute is easier to resolve today than under the previous president," he said, according to Reuters.
Ukraine's Prime Minister Oleksiy Honcharuk added fuel to the fuel to the fire when he told the Financial Times newspaper earlier this week that he was positive "about any rhetoric directed towards searching for a compromise." But he later told Reuters that no negotiations over Privatbank were taking place.
Responding to the developments this week, Timothy Ash, a senior emerging markets strategist at Bluebay Asset Management, said the question over Zelensky now is whether he is a "'Servant of the People' or 'Servant of the Person'."
"Whether the guy is really a reformer, or just in the pocket of another oligarch, will be determined by how he plays this one out. Lots of warm words on reform hot topics like land reform will count for nothing if Zelensky backs Kolomoisky in reversing the Privatbank nationalization," he said in an emailed note.
The tide certainly appears to be turning against the state when it comes to Privatbank. Last week, a day after Zelensky met with Kolomoisky, police raided the headquarters of the bank and seized documents as part of a criminal investigation into whether some of its officials had overstepped their authority.
Meanwhile, Valeria Gontareva, who was the governor of Ukraine's central bank in 2016 and made the decision to nationalize Privatbank, says she is the victim of a campaign of harassment because of the nationalization.
Gontareva, who now lives in London and works as an academic, was injured when she was hit by a car in London in August, and then a car belonging to a family member in Ukraine was torched in September. Earlier this week, her home in Ukraine was burned down in a suspected arson attack. Kolomoisky has denied any involvement in the incidents.
The comments from Kolomoisky and Honcharuk come at an awkward time for Ukraine after media reports by Bloomberg and UNIAN, a Ukraine news agency, a few days ago suggested that the IMF could be about to agree a three-year $5 billion credit line to Ukraine.
The IMF did not respond to questions from CNBC about the new aid program, but reiterated that it had been emphasizing "the importance of creating an effective anti-corruption framework, that's been a critical element of our engagement with Ukraine for the last few years."
Any move to reverse a decision on Privatbank could jeopardize that aid, strategists like Timothy Ash warn. He believes that "any hint at backtracking around the nationalization of Privatbank is a deal breaker for the IMF — and quite rightly."
But not everyone believes that Zelensky will be a push over.
"We had previously written that we were skeptical of the narrative according to which the oligarch 'controls' Zelensky from behind the scenes … we continue to be of the view that such theories are likely overblown," Andrew Bishop, a partner and global head of policy research at Signum Global Advisors, told CNBC in an email Thursday.
"First, we believe Zelensky has a genuine desire to reform his country. Second, presidents — even the most 'newcomer' amongst them — tend to develop a certain confidence of their own once in office," he said.
- Reuters and the Financial Times contributed reporting to this story.