Economy First Look

Why did Ukraine just nationalize its largest bank?

Ukraine's government agreed Sunday to move PrivatBank into full state ownership, following concerns about its stability.

A customer uses a PrivatBank ATM in Kiev, Ukraine.
Efrem Lukatsky/AP
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Ukraine is moving its largest bank into full state ownership, the cabinet decided Sunday.

The move to nationalize the now inaptly named PrivatBank is an attempt to protect the country's financial system following concerns about its stability. The decision, backed by Kiev's international donors, "saved both the bank and the banking system," said Ukrainian President Petro Poroshenko in a statement Monday. PrivatBank had been hit hard by the conflict in eastern Ukraine and subsequent economic crash in 2014 and 2015.

"It is obvious that the only way to save the bank, and its customers' money, was to make it state property," President Poroshenko said. "The alternative would appear irresponsible because it would mean closing our eyes, hiding our heads in the sand and waiting for the bank to fail." 

The decision was made with the consent of PrivatBank's owners, the Associated Press reports, presumably referring to oligarchs Ihor Kolomoisky and Hennady Boholyubov, who controlled more than 90 percent of the bank. PrivatBank and its owners have not yet commented on the decision. Last week, the bank dismissed speculation about nationalization as an "informational attack" meant to destabilize Ukrainian politics. 

PrivatBank had a capital shortfall of about $5.65 billion because of risky lending practices, according to Reuters, and roughly 97 percent of its corporate loans had reportedly gone to companies linked to its shareholders. 

The decision to nationalize the bank, which the finance minister said would require a minimum of $4.5 billion from the budget, has the potential to unlock more aid from the International Monetary fund next year. It could also, however, threaten to cause further instability. 

Opposition lawmakers have criticized the move, with one calling it the "greatest robbery of Ukraine's state budget of the millennium." Radical Party leader Oleh Lyashko blamed the PrivatBank's problems on the central bank, saying, "Ukrainians have to pay from their pockets for these mistakes." 

Poroshenko has urged the bank's millions of customers to "stay calm," as he has reportedly submitted a draft amendment to parliament that would give additional protection to depositors. 

Much of the situation rests on the upcoming parliament vote on next year's budget, which, as agreed with Ukraine's international backers, must stick to a shortfall of three percent of economic output. 

"The adoption of the budget will be the indicator," political analyst Volodymyr Fesenko told Reuters. "If the budget is approved this week without problems it means the situation is under control of the president and government." 

This report contains material from the Associated Press and Reuters.