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FM AMEMBASSY KYIV
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C O N F I D E N T I A L KYIV 002207 
 
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DEPT FOR EUR, EUR/UMB, EEB/OMA 
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E.O. 12958: DECL: 11/06/2018 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE: PROMINVESTBANK FAILURE TEST CASE FOR NBU 
 
REF: A. KYIV 2142 
     ¶B. KYIV 2105 
 
Classified By: Edward Kaska for reasons 1.4 (b) and (d) 
 
¶1.  (C) Summary and comment:  Liquidity problems, a run on 
deposits, and a possible corporate hijacking at 
Prominvestbank, Ukraine's sixth largest bank, last month 
contributed to the run on other Ukrainian banks, which were 
already jittery due to the world financial crisis (refs). 
The Acting Chairman of the Security Service of Ukraine has 
blamed an unnamed criminal organization based in Donetsk 
oblast for the corporate hijacking.  Nationalizing 
Prominvestbank appears unlikely, given that the anti-crisis 
legislation recently approved by the Rada (parliament) and 
signed by the President does not provide the necessary 
funding.  Ukrainian Finance Minister Viktor Pynzenyk on 
November 5 told U.S. Treasury officials that a decision had 
been made to sell Prominvestbank to an unnamed strategic 
investor.  Rumors abound as to the identity of the buyer, 
with many media outlets claiming the Party of Regions 
deputies and siblings Andrei and Sergei Kluyev are behind the 
deal. 
 
¶2.  (C) The NBU has a choice with Prominvestbank:  it can try 
to sell it to a strong, financially sound bank with the 
management know-how needed to turn the institution around. 
Alternatively, it can give it to other business interests 
with little or no experience in modern banking, but which 
have the wherewithal to pay or otherwise secure themselves a 
sweetheart deal.  The NBU's decision will shed light on 
whether it wants to use Prominvestbank as a showcase example 
of how best to deal with troubled banks in Ukraine.  End 
summary. 
 
Corporate Hijacking at Prominvestbank? 
-------------------------------------- 
 
¶3.  (U) Volodymyr Matviyenko, Prominvestbank's main 
shareholder, publicly said in September that the bank had 
been subject to a "raider attack," or corporate hijacking, 
aimed at lowering Prominvestbank's capitalization before 
takeover talks.  Matviyenko and his family members who own an 
unknown percentage of Prominvestbank's equity, have attempted 
to find a buyer for more than two months (Note:  Before he 
founded Prominvestbank in 1992, Matviyenko from 1987 to 1991 
was the chairman of the board of the Ukrainian SSR's branch 
of Promstroybank.  He also was briefly chairman of the NBU in 
¶1991.  Before the financial crisis, Matviyenko reportedly was 
worth almost $1 billion.  End note.) 
 
¶4.  (C) Corporate hijackings are commonly called "raider 
attacks" in Ukraine, but their perpetrators have nothing in 
common with corporate raiders launching unfriendly takeover 
attempts in more developed equity markets.  Business 
syndicates in Ukraine usually carry out corporate hijackings 
by bribing courts and law enforcement officials to wrest 
control of a company from legitimate owners.  They often use 
obscure regional courts because they are cheaper to bribe and 
faster than other courts.  According to the Ukrainian 
Entrepreneurs' Anti-Raider Union, about 2,500 corporate 
hijackings have occurred in Ukraine over the last four and a 
half years.  The GOU recently announced plans to take 
vigorous action against corporate hijackers, and even 
resuscitated a long-dormant government/private sector working 
group tasked to deal with the problem. 
 
SBU Chief Blames Criminal Conspiracy 
------------------------------------ 
 
¶5.  (SBU) The Acting Chairman of the Security Service of 
Ukraine (SBU), Valentyn Nalyvaychenko, in mid October told 
reporters that a criminal group in Donetsk was behind 
Prominvestbank's problems and had attempted to embezzle UAH 
400 million ($80 million).  The group reportedly stole the 
money from funds that Prominvestbank used to pay pensions and 
salaries in the Donetsk region.  According to Nalyvaychenko, 
the conspirators tried to cover up the embezzlement by 
undermining the bank's financial stability.  In addition, 
they allegedly called Prominvestbank customers and sent text 
messages to their mobile phones, encouraging them to withdraw 
their money from the bank.  The group also placed 
infomercials in newspapers and minibuses that reportedly 
attempted to blacken Prominvestbank's reputation.  All of 
these activities reportedly were financed with a portion of 
the money that was embezzled.  Nalyvaychenko added that the 
group used Donetsk-based bank Unikom, which he said is owned 
by Bloc Yuliya Tymoshenko Rada (parliament) deputy Oleksandr 
Shepelev.  For his part, Shepelev publicly denied the 
allegations and said he would sue Nalyvaychenko for 
tarnishing his reputation. 
 
Liquidity Woes Worsened Bank's Position 
--------------------------------------- 
 
¶6.  (U)  Problems at Prominvestbank, which is heavily 
invested in the metals sector, worsened following the drastic 
drop in demand for Ukrainian steel products.  The bank could 
not refinance its debt and in September requested a $1 
billion loan from the National Bank of Ukraine (NBU).  The 
NBU subsequently approved a UAH 5 billion ($833 million) 
yearlong credit line at the end of September.  However, due 
to what it perceived as Prominvestbank's poor management of 
the crisis, the NBU in early October announced that it would 
manage the bank for up to one year and declared a six-month 
moratorium on paying Prominvestbank's creditors. 
Prominvestbank reportedly misrepresented short-term deposits 
as periodic investment on its books and used those funds to 
refinance long-term loans.  The NBU appointed NBU Deputy Head 
Volodymyr Krotyuk as interim manager of Prominvestbank. 
 
¶7.  (C) Widespread media coverage of the run on 
Prominvestbank, combined with news about the world financial 
crisis and failures of large western banks, caused a panic 
among Ukrainian depositors.  They began withdrawing their 
deposits and cash, causing long lines at cash machines across 
the country.  In one week, over $3 billion worth of deposits, 
or 4.3 percent of all deposits, were withdrawn from Ukrainian 
banks.  Seeking to calm investors and depositors, President 
Yushchenko and Prime Minister Tymoshenko in October said that 
Prominvestbank's problems are due to an isolated corporate 
hijacking and not the result of the world financial crisis. 
 
Prominvestbank Probably Won't be Nationalized 
--------------------------------------------- 
 
¶8.  (C) Although some high-level Ukrainian politicians, 
including Tymoshenko and Rada Speaker Arseniy Yatsenyuk, have 
called for Prominvestbank to be nationalized, the anti-crisis 
legislation that the Rada passed on October 31 and President 
Yushchenko signed on November 3 does not contain any 
provisions that would allocate budget funds to either 
Ukreximbank or Oshchadbank, Ukraine's two largest state-owned 
banks, to take over Prominvestbank.  The first draft of the 
anti-crisis package earmarked UAH 1 billion (about $167 
billion) for Ukreximbank to buy Prominvestbank, but 
Ukreximbank representative Viktor Kapustin told reporters 
that he was against using Ukreximbank to help keep 
Prominvestbank afloat because it would only hurt Ukreximbank. 
 Deputy Ukreximbank Chairman Mykola Oudevechenko told us on 
October 31 that his bank stoutly refused to assume 
responsibility for Prominvestbank.  Ukreximbank's impeccable 
credit standing would have suffered a steep discount to book 
value because nobody knew the true extent of Prominvestbank's 
problems, Oudevechenko told us.  Moreover, NBU Governor 
Volodymyr Stelmakh on October 22 publicly said that the NBU 
does not intend to expand the loan facility already provided 
to Prominvestbank and called for a strategic investor to be 
brought in immediately to help resolve the bank's problems. 
Finance Minister Viktor Pynzenyk told U.S. Treasury officials 
that a decision had been taken to sell Prominvestbank, but 
Pynzenyk refused to name the buyers. 
 
Why Buy Prominvestbank? 
----------------------- 
 
¶9.  (SBU) Stelmakh in early October said that Prominvestbank 
has a sound loan portfolio.  Before Ukraine's financial 
crisis, the total volume of Prominvestbank's assets (UAH 27.5 
billion, or $5.7 billion) placed sixth out of 178 Ukrainian 
banks and represented almost 4 percent of the Ukrainian 
banking system's assets, according to the NBU.  Matviyenko 
has said he thinks the bank is worth as much as $4 billion, 
while experts expect Prominvestbank to sell for $1.2 billion. 
 The temporary NBU administration at Prominvestbank has noted 
that the main shareholders (about eight to ten people) have 
the option to sell about 80 percent of the bank's shares. 
 
Party of Regions Deputies Get Sweetheart Deal? 
--------------------------------------------- - 
 
¶10.  (SBU) Although interest in acquiring Prominvestbank has 
been robust, few concrete details about potential buyers and 
the negotiating process are known.  So far, a consortium 
represented by Party of Regions deputies Andrei Kluyev, 
Sergei Kluyev, and Valentyn Landyk appear to be the leading 
contenders, according to media reports.  Some media reports 
also claim that former Prime Minister and Party of Regions 
head Viktor Yanukovych and representatives in the General 
Procurator's office support the Kluyevs' efforts to purchase 
Prominvestbank.  Press have reported that the Kluyev brothers 
already acquired a 70 percent stake in Prominvestbank and 
appointed Igor Frantskevich, former representative of Indeks 
Bank and Raiffeisen Bank Ukraine, to take over NBU Deputy 
Head Krotyuk's interim administration at Prominvestbank. 
Frantskevich reportedly began work at Prominvestbank on 
November 4.  Moreover, some reports claim that the brothers 
Kluyev received for free 50 percent of the 70 percent stake 
they acquired. 
 
¶11.  (C) The Kluyevs months ago started taking steps to buy 
Prominvestbank.  They reportedly offered the Matviyenko 
family $1 billion for their Prominvestbank shares and then 
subsequently lowered their offer to $300 million.  Some argue 
that once financial markets recover the Kluyevs intend to 
sell Prominvestbank at a steep mark-up, which could help beef 
up the Party of Regions war chest as it prepares for the 
presidential election in late 2009. 
 
Kluyevs: A Front for More Well-Heeled Interests? 
--------------------------------------------- --- 
 
¶12.  (C) Some experts have questioned the Kluyevs' capability 
to come up with the capital needed to conclude the deal, 
given the recent liquidity crisis in world financial markets 
and the Kluyevs' net worth, which amounts to only $600 
million.  According to some estimates, to buy Prominvestbank 
an investor would need to provide $1 billion to resolve the 
bank's liquidity problems, pay $400 million for the bank's 
statutory capital, and return $1 billion to the NBU for loans 
Prominvestbank received.  The media has no shortage of 
theories about who might be behind the Kluyevs. 
 
Other Big Players Also Jockey for Prominvestbank 
--------------------------------------------- --- 
 
¶13.  (SBU) Another consortium consisting of Russia's Alfa 
Bank and Mykola Lagun, co-owner of Delta Bank and 
representative of a group of investors, also sought to 
acquire Prominvestbank.  According to media reporting, the 
consortium of investors Lagun represented reportedly included 
Ukrainian oligarchs Viktor Pinchuk, Dmitriy Firtash, and 
Russian metals magnate Alisher Usmanov.  Separately, Russian 
bank Sberbank in October appeared poised to conclude a deal, 
but no longer seems to be in the running. 
 
¶14.  (U) No matter who concludes a deal with Prominvestbank's 
current shareholders, it must be approved by the NBU, 
according to NBU Governor Stelmakh.  The director of the 
NBU's legal department, Vassiliy Pasechnik, would be 
responsible for providing approval, but he reportedly is on 
vacation.  It is unclear whether his deputy, Vladimir 
Novikov, is authorized to approve any deal to purchase 
Prominvestbank. 
 
¶15.  (SBU) Comment.  The deal to acquire Prominvestbank from 
the Matviyenko family has been nontransparent and fraught 
with shenanigans from the start.  Given the fluidity and 
opaqueness of the situation, a different consortium could 
still emerge as the majority shareholder of Prominvestbank, 
despite the flood of news about the Kluyev deal.  It also 
cannot be ruled out that the GOU may step in at the eleventh 
hour to halt the deal with the Kluyevs.  While a private bank 
probably has the resources to better manage Prominvestbank 
than the state, it's unclear whether selling the shares 
instead of nationalizing them will reassure Ukrainian 
depositors and restore confidence in the Ukrainian banking 
system.  The NBU's actions on Prominvestbank will shed light 
on whether it wants to use Prominvestbank as a showcase 
example of how best to deal with troubled banks in Ukraine. 
End comment. 
TAYLOR