TL: Briefly describe how the unstable political situation in Ukraine affects consumers and the banking services sector? How has it led to a Ukraine crisis?
RK: Political instability strongly affects the Ukraine economy. Ordinary consumers of financial services in Ukraine remain the most vulnerable. From 2006 to 2008, Ukraine was very advanced in foreign currency lending. Banks actually refused to give loans in the national currency and tried to give out nothing but foreign currency loans: US dollars, Euros, Swiss Francs, etc. The average rate on foreign currency loans ranged between 10 and 14% per annum.
Since 2006, the national currency has devalued by 400% and, in turn, the population’s income has decreased several times. The result has been a failure to return foreign currency loans.
The State has been effectively eliminated from this problem. Meanwhile, the first wave of devaluations, which occurred in 2008-2009, was approximately 60% for US dollars and Euros and 100% for the Swiss Franc. The second wave made it impossible for 95% of the borrowers to repay their loans. And, once again, the government did not notice this problem, leading to this Ukrainian crisis.
In the period of 2014-2015, about 50 banks of the 180 available in Ukraine ceased their operations. This, in turn, adversely affected the situation of borrowers because many had deposits. A special governmental institution, the Deposit Guarantee Fund, is now using any excuse not to pay back owners their deposits. In addition, the amount of the guarantee is quite small, only about 9,000 USD.
The level of confidence in banking institutions is practically non-existent. Most investors are frightened by the actions of the National Bank and the Deposit Guarantee Fund and are trying to withdraw their deposits.
TL: What Ukrainian government measures are in place to protect consumer rights in the banking services sector?
RK: In general, the government does not deal with this problem in the Ukraine economy with the hope that it will take care of itself. However, politicians are trying to use it before the upcoming fall elections. They hand out promises and create visibility for themselves by providing solutions to the Ukraine crisis. Recently, the Parliament almost passed a law that would solve the problem with currency borrowers. But the speaker of the ruling party manipulated the vote process and sent the law to a third reading in violation of the regulations of the Verkhovna Rada, the country’s Supreme Council.
There is also government inaction with respect to depositors. The government even helps bank owners evade responsibility for leading banks into bankruptcy. Law enforcement agencies have indisputable evidence of theft of depositors’ funds, yet they do nothing. The government even helps owners take abroad withdrawn funds they receive from the National Bank’s refinancing.
Also, for more than a year, the National Bank forbids banks to fully reimburse depositors of foreign currency deposits. No more than $620 a day in refunds is allowed. Many banks have not returned deposits for more than a year, and the National Bank has taken no action with regards to this issue.
TL: What improvements are needed to ensure greater consumer protection in this sector and end the Ukraine crisis?
RK: Ukrainian legislation widely protects the rights of consumers of financial services in the Ukraine economy. But it is not obeyed and it is ignored by regulators. This, in turn, allows for plenty of abuse.
TL: At the end of last year and this year, the National Bank of Ukraine decided to ban Bitcoin transactions in order to reduce the financing of terrorism. What are your thoughts on this digital currency and its role in the Ukraine economy?
RK: It never played any role in Ukraine. In Ukraine today, there are significant limitations on the use of even authorised electronic money. Current legislation states that users have the right to use electronic money for payments using electronic devices in the amount equivalent to $1,450 a calendar year.
Moreover, the users-natural persons have the right to transfer electronic money to other users-natural persons using a prepaid card in the amount equivalent to $20 a day and no more than $160 within one month. Users–legal entities have the right to use electronic money only for payment of goods. These and other restrictions and regulations make it virtually useless to use electronic money in Ukraine.
TL: Is there anything else you would like to discuss? Please feel free to give any additional comments you have on the issue.
RK: Unfortunately, today in Ukraine, despite the presence of relevant laws, the rights of consumers of financial services are grossly violated. And the government turns a blind eye to these violations, exacerbating the crisis in Ukraine.
Partner at Kravets & Partners Law Firm