by Deepen Bista , Marie Curie Fellow at Institute of International Relations, University of Warsaw
The present crisis in Ukraine that aroused in late 2013 was not only the outcome of its domestic conflict or desire to be with east or the west but the deeper reason is associated with its complete failure to reform its economic and political transition since the independence in 1991. Euromaidan was the sudden outburst of all the collective frustration and anger for the inability of the country to gain an economic and political reform over two decades of its independence and complete failure of its transition to a fully functioning state.
After the Euromaidan revolution in Ukraine, many international donor agencies provided financial and technical support for the transition of Ukraine. This policy paper using the literature review will examines the support of European Union (EU) in the banking and financial reform of Ukraine. Donor’s support for Ukraine’s economic transition is seen as very important however there are still plenty of shortcomings from the side of donors and international financial agencies including EU, in implementing their plans and recommendations. While plenty of headway has been made in banking and financial sectors, numerous complications and hurdles in adoption of the plans and policies still persist in these areas. Thus, this paper tries to study the reform policy adopted in banking and financial institutions and support by EU.
Since, the protest and subsequent annexation of Crimea by Russia and the conflict between Russia backed rebels in the east of Ukraine with the Kyiv, the international community has lent a helping hand to support Ukraine’s current transition. This present policy paper tries to examine the influence of international assistance done by European Union to reform Ukrainian financial institutions after the period of the Euromaidan 2013/14.
After the end of Euromaidan the immediate challenge Ukraine faced was the annexation of Crimea and the war in Donbas that decelerated the overall economic growth and investment. Under such an environment, it was very important to diversify, restructure and to adopt EU standards to expand Ukrainian market beside Russia and post soviet countries. But in order to do such things Ukraine must be able to implement and accept the rules and regulation of the EU market. Therefore, in order to restructure its economy and to become self sufficient many reforms were necessary within its internal structure and support from external communities like EU, IMF and others.
Ukraine has to go through radical economic reform before it can be accepted for any financial support from the external donors. Therefore, before giving Ukraine access to international loan facilities, the IMF demanded drastic reform. The most urgent need of reform was the financial sector and the restructuring of the National Bank of Ukraine.
Ukraine’s Financial Sector reform
In March 2014, the European Commission announced indicative support package of 11.2 billion Euros to Ukraine, which includes 8 billion Euros in loan from European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) to support the reform process in the 2014-2020.
National Bank of Ukraine (NBU) ordered the Ukrainian banks to carry out “stress test” in order to access the financial health and liquidity of the banking sector after the Euromaidan. An atoning result came after the “stress test” as it shows Ukraine’s financial sector was more depressing than anticipated. As a result, NBU was given more power and liberty to intervene by increasing their power to inspect, order tests, and if necessary even to liquidate the banks. By the end of 2016, banks were required to balance their capital reserve ratio, and after three years they are expected to build at least 10 percentages on their capital reserve ratio.
As per the requirement under the Deep and Comprehensive Free Trade Area (DCFTA), the regulations to supervise the Ukrainian banking sector was brought in line with the EU standards, along with the establishment of the deposit guarantee. With the EBRD, particularly involving in the financial security committee, international donor organizations have created a deposit guarantee fund for Ukraine. Further guidelines for international donors and financial institutions were provided by the recommendation and analysis from the United States Treasury and the European Union Directorate-General for Financial Stability. Thus the international financial organizations like IMF and the World Bank implemented these recommendations in their respective programs. And the bilateral donors like UK and Germany have actively implemented bilateral rescue and restructuring programmes for the financial sector reforms. The EU supports Ukraine effort to implement common standards of the financial sector on: foundation, management, ownership, asset securitization, resolution of credit disputes, credit monitoring, harmonizing leading practices, oversight and control of private banks through the Vienna Initiative.
Out of many other projects, one of the biggest EU project in Ukraine supervised by the EU Directorate for Financial Stability is the reform and restructuring of Ukraine’s state owned banking system. At the same time, EBRD on the other hand is trying to consider the possible changes to reform and restructure these banks by handing over these state-owned banks under the new management and selling them off after making it into profit after the period of five years.
Nevertheless, due to the current law of Ukraine, government cannot sell its asset under the book value therefore the sales looks highly unrealistic. So, in order to realize this goal, the Ukrainian government has to make some exceptional changes. Therefore, in order to control the establishment of new banks, new regulations to increase the minimum capital requirement were put forward. Since the Euromaidan, NBU has closed 70 out of 180 banks due to lack of capital..
Conclusion and recommendation
First and foremost, the EU support group that was established after the Euromaidan was unable to keep up to the expectation of Ukrainian reform efforts. The biggest shortcoming or the drawback was seen as the lack of permanent EU staff from the beginning. It was only in summer 2016, small numbers of staffs were sent to headquartered in Kyiv.
Another area of issue is the speed. The EU has its own set of rules to fund any activities and so it is often criticized for responding slowly to the urgent needs. The standard procedure for EU funding goes through three month of discussion over the application, three month for programme decision, three month for arranging documents, and finally by the end of one year the funding is granted. Therefore, funds were rather disbursed via the bilateral agencies, private foundations in Kyiv or the Council of Europe for the projects, which are in need of an urgent action. But there is also a realization among the policymakers that the EU cannot change its policy or procedure from accessing the period from need assessment to implementation just for Ukraine.
Most of the support by the EU to Ukraine takes the form of Technical Assistance or traditional donor programmes, rather than sending experts directly to conduct its activities and provide advice to the ministries or institutions. The shortfall of this process is its sustainability comes into question as of when experts returns, they take back their expertise with them.
As per the Ukrainian experts, they insist that the EU should supervise its aid implementation programs more closely and effectively. Most of the efforts are focused on the paperwork of the programmes rather than the achievement of their aims.
Though it is inevitable fact that technical expertise and financial assistance is needed in order to implement various plans and policies for Ukrainian financial reform. On the other hand, we can also not deny the fact that breaking the political and administrative deadlocks is yet another critical issue for the EU that effect the process of EU’s support to Ukraine’s financial reform.
 Andrew Wilson, Ukraine Crisis: What it means for the West, London: Yale University Press, pp. 159-160.
 International Monetary Fund, Ukraine Special Focus: A Roadmap for Urgent Macroeconomic and Structural Reforms, IMF, April 2014, available at http://www.worldbank.org/content/dam/Worldbank/document/eca/ 52 ukraine/ua-focus-april-2014-en.pdf, accessed on: 10.01.2017.
 European Court of Auditors, EU assistance to Ukraine, Special Report No. 32, 2016, p. 12.
 National Bank of Ukraine, National Bank of Ukraine launches the diagnostic exercises for banks and the assessment of risks arising from asset-side transactions with related parties (bank insiders) [Press Release], 20.04.2015, available at: http://www.bank.gov.ua/control/en/publish/article?art_id=16631926, accessed on: 23.01.2017.
 Gustav Gressel, Keeping up Appearances…, op. cit. pp. 53-54.
 National Bank of Ukraine. Banking Sector Review. October 2016. available at https://bank.gov.ua/doccatalog/document?id=37796168 accessed on 21.01.2017
 The period from submission of proposed project to the actual granting called the administrative period can take from eight months to anywhere around a year.
 Sergiy Solodkyy, Vitaliy Sharlay, How Could the EU Accelerate Reforms in Ukraine?, Kyiv: Institute of World Policy, available at: http://iwp.org.ua/eng/public/1838.html, accessed on: 05.01.2017.