December 18, 2016 / 11:51 PM / 8 months ago

Ukraine to nationalise its biggest lender, PrivatBank

A man leaves a branch of Privatbank in Kiev, Ukraine December 14, 2016.Valentyn Ogirenko

KIEV (Reuters) - The Ukrainian government announced on Sunday that it will nationalise PrivatBank, the country's biggest lender, in one of the biggest shake-ups of the banking system since the country plunged into political and economic turmoil two years ago.

In a statement late on Sunday, the government made no mention of the size of the potential burden to the state budget, but said it would ensure a stable transition and the smooth functioning of the bank.

The Finance Ministry will take over PrivatBank, which is part-owned by one of Ukraine's richest men, the powerful oligarch Ihor Kolomoisky. Finance Minister Oleksandr Danylyuk said depositors' money was safe and secured by the state, and that the bank was functioning normally.

"The private shareholders of PrivatBank proposed to the government that it become the bank's owner in the interests of its clients," the government said in a statement.

"The transition period begins on 19 December. The state will ensure a smooth transition and the stable functioning of the bank."

Under Western-backed banking reforms, Ukraine is meant to shut lenders that cannot meet capitalisation targets, but with nearly $6 billion in private deposits - 36.5 percent of Ukraine's total - PrivatBank is considered too big to fail.

The bailout could fuel instability in Ukraine, where opposition parties have repeatedly called for snap elections to unseat the pro-Western leadership that took power after the 2014 Maidan protests.

The opposition has harnessed the anger of depositors from banks that were previously shut down in a sweeping cleanup of the financial system, mobilising rallies and demanding the central bank chief's resignation.

The announcement comes just days before parliament has to vote on next year's budget, which must stick to a shortfall of 3 percent of economic output, as agreed with Ukraine's international backers.

There was no official statement from PrivatBank. Oleg Gorokhovsky, PrivatBank's deputy chairman, wrote on Facebook that the bank had seen increased withdrawals in recent days of 2 billion hryvnia ($76 million) daily against previous peaks of around 1.5 billion hryvnia ($57 million).

"Of course, the bank needed a capital increase and to improve the collateral for loans," he said.

The plan was to do this over a period to 2018. However, Gorokhovsky said after the outbreak of violence in the east and against the backdrop of a sinking economy, the bank experienced what he described as a series of "information attacks" that led to an outflow of funds from individuals and corporate clients.

"The decision on a voluntary and peaceful transfer of the bank to state ownership was made at a time when we realized that we could not survive the (latest) information attack," he wrote.

Over the past few months the central bank has repeatedly declined to comment on speculation that PrivatBank would be taken under state control due to an inability to meet an end-2016 recapitalisation target.

Recapitalising PrivatBank and other large lenders and reducing their lending to shareholders was one of the tasks mandated by a $17.5 billion International Monetary Fund aid-for-reforms programme.

Kolomoisky's control of strategic industries, including energy and media holdings, has put him at the centre of ongoing power battles among the political elite since street protests ousted Moscow-backed Viktor Yanukovich and the pro-Russian rebellion erupted in the east.

PrivatBank's nationalisation is the culmination of the banking sector cleanup, which has closed dozens of lenders that were seen as little more than personal piggy banks for their owners.

($1 = 26.2100 hryvnia)

Additional reporting by Alexei Kalmykov; writing by Alessandra Prentice and Matthias Williams

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