Most of us still associate ‘nationalization’ of industry with the aims of the political left. Decades ago, the Soviet Union’s state socialist ideology seduced large swathes of the Western intelligentsia, most of which had never seen the effects of state management of the economy’s productive forces first-hand. Left-leaning Western governments occasionally opted for nationalization as a panacea during the Cold War, titillating fashionable lefties who imagined (dimly) that total state control must be chic. But state sector bureaucrats do not make good industrial innovators as a rule. In hindsight, Labour ‘Minister of Technology’ Tony Benn’s nationalization of Leyland Motor Corporation in 1968, to give one example, was the beginning of the end for the dynamic and successful British company. So dismal are the memories of this era that even Jeremy Corbyn – in pushing the Labour agenda in his own special, fist-pumping way – dares not call too loudly for the nationalization of industry.
Socialism is socialism, but what does it mean when a pro-Western government committed to private ownership and free-market economics decides to nationalize a big company? That’s what happened in Ukraine last month, when the Ministry of Finance took ownership of 100% of the shares in the country’s largest bank – still named (ironically) ‘Privatbank’ – for a total price of one Ukrainian hryvnia (about 2p). In a move that impressed outside observers for both its audacity and its swiftness, the entire deal was completed over four days between the 18th and 21st of December, too quickly for most of us even to think about right or left.
Teetering on the edge of total meltdown, Privatbank had prompted the emergency measure by failing to maintain enough reserves to ensure its continued liquidity and fulfillment of obligations to creditors (in accordance with prevailing regulations), portending economic cataclysm. Put more crudely, the oligarchic owners of the bank had looted deposits to extend loans to ‘related parties,’ often fly-by-night legal entities set up specifically to receive the credits before dissolving into thin air. Apparently, the funds ferreted out of the bank’s coffers by these ‘related parties’ weren’t expected back any time soon (one Ukrainian financial analyst even attributes to Privatbank’s owners the credo that ‘only cowards repay their debts’). So something decisive had to be done about the bank’s undercapitalization and insolvency. In the end, the paternal arm of the state extended the hand of salvation.
Declaring it a ‘backbone bank’ of his country, Ukrainian President Petro Poroshenko asserted publicly that Privatbank’s only hope was nationalization. Too many vulnerable Ukrainians depended on the bank in day-to-day life, making liquidation out of the question. The independently wealthy Poroshenko, long-time enthusiast of Ukraine’s EU integration, seems an unlikely tribune for populism, swanning about as comfortably with Western billionaires and Eurocrats as he does with his compatriots. But months earlier, critics had accused the outwardly elitist head of state of just that – populism – for promising restitution of thousands of citizens raked over the coals by a smaller, shadier bank that had quickly closed after swindling depositors out of tens of millions of dollars. The incident provoked one satirical Ukrainian commentator to post an appeal to Poroshenko on his Facebook page, asking for the ten dollars he’d lost playing online poker.
Soon, paying off the poor-schlep victims of one scam would feel like the prelude to a main event: nationalization of the country’s biggest bank. With whirlwind speed, the highest-tech and widest-spread financial institution in Ukraine became an asset of the state, and ordinary working people still had a few hryvnias in their personal accounts.
Where were the gasps from uncompromisingly free-market Western leaders and governments, always quick to chide leaders of emerging market economies for lapsing into statism? Hadn’t nationalizing businesses gone out with the Berlin Wall? Government bail-outs or ‘stimuli’ via deficit spending (taxpayers’ money) were one thing, but this was a ‘bail-in’: the government had taken control of the bank, converted its debt into shares, then bought all the shares in one fell swoop for (literally) tuppence. By definition, the state had expropriated property, something the Bolsheviks had enjoyed in the 1920s, but which had long been a no-no in Europe. In a country as notorious for corruption as Ukraine, surely the outside world’s first reflex should have been to cry ‘crook!’
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A closer look, however, reveals substantial international accord. The International Monetary Fund and the National Bank of Ukraine (NBU) had been cooperating (or colluding) for a while, preparing for Privatbank’s transformation from public to state company at just the right time. The day after the Ukrainian government declared Privatbank insolvent, the IMF issued a public statement that nationalization was necessary to Ukraine’s ‘financial stability’. Indeed, in a country where most opinion polls show broad discontent a little over two years after the pro-Western government formed its first cabinet, ‘stability’ – financial, political and social – is a general concern.
With Russia ready to restart full-scale war in an instant, plunging Ukraine into more death and destruction, fears of further public unrest are not unfounded. Against this backdrop, the man on the street can’t be safely ignored in forging a sound financial system. If it didn’t feel so strange to do so, one could almost laud the IMF for defending the interests of common man. At any rate, the transaction was pulled off without significant losses to any of the bank’s rank-and-file depositors, shareholders or owners.
But somebody had to lose, and in this case, it was Privatbank’s Eurobond holders. Under the Ukrainian government’s ‘bail-in’, these creditors were singled out for the short end of the stick, and while Eurobond holders might not attract much grassroots popular sympathy in today’s global climate, they do have a point to make. They claim they were deceived – by the NBU, by the IMF, and by Privatbank itself. All three misinformed them about the real state of the bank as early as 2015, when the NBU described the liquidity situation as ‘satisfactory’ and began ordering Privatbank to postpone the maturity dates of outstanding Eurobonds. The holders of these notes, representing a combined worth of several hundred million US dollars, now say they never had a chance to protect their interests. They didn’t know what was happening until it was too late.
Their allegation that Privatbank lied to them seems beyond dispute. On December 14th, days before the government began the lightning-speed nationalization, the bank’s management publicly denied rumors that a state takeover was imminent, calling such reports ‘fake news.’ But it now looks as though Privatbank was desperately trying to forestall mass panic and a public run on deposits, at least until the company had finally succumbed to the state’s paternal grip. That they pulled it off is impressive, but it’s also scant consolation to the stiffed Eurobond holders.
So what can the holders of these bonds do now? They weren’t to blame for Privatbank’s insolvency, after all. But since both the IMF and World Bank support the Ukrainian government, which is shielded from prosecution by Ukrainian law, appealing to either of those institutions for justice looks hopeless. The question isn’t whether these note holders can claim unfair treatment; it’s whether there’s anywhere they can seek redress. Right now, their options look limited to the nebulous court of public opinion.
As Ukraine’s Ministry of Finance prepares to enter the international bond market, the nationalization of Privatbank may come back to haunt it. The manifestly unequal treatment of Privatbank’s Eurobond holders will not bode well for its reputation in the global community of investors, and the holders of the Privatbank notes themselves are already a part of that community.
In stiffing the holders of Eurobonds, the Ukrainian authorities decided it was easier (and quicker) to bail-in outstanding bonds than to try to chase the real culprits’ ill-gotten gains down myriad financial rat-holes spread around the globe. They were surely correct. But investors in the Ukrainian bond market are unlikely to forget what’s happened to them, and in sacrificing elite financial interests to stave off popular revolt, Ukraine – with the help of the IMF – may only have delayed another, more complicated problem.
Chad Nagle is a lawyer and freelance writer based in the Washington, DC area.