Smoliy’s resignation sparks international ramifications

Yakiv Smoliy

Marco Levytsky, Editorial Writer.

The July 1 resignation of National Bank of Ukraine (NBU) Governor Yakiv Smoliy – just two years into his seven-year term – has sent shock waves through international financial markets and the business community as a whole. On the very first day after his resignation the hryvnia dropped 1.3 per cent.

As a result of the financial uncertainty that this created, Ukraine was forced to postpone a US$1.75 billion Eurobond sale. Finance Minister Serhiy Marchenko announced the suspension on July 2, saying the decision came after “a long night of negotiations with investors” following the resignation. “We are ready to pause and then decide what to do next,” Marchenko said, insisting that there was no threat to Ukraine’s financial stability.

The resignation could also endanger a pending US$5 billion loan from the International Monetary Fund (IMF) aimed at helping Ukraine cope with the fallout from the global coronavirus pandemic. The IMF praised Smoliy’s leadership of the NBU. “Under his leadership, Ukraine has made important strides in achieving price stability, amply demonstrating that an independent central bank is a key element of modern macroeconomic policymaking,” said an IMF spokesman in a statement. “That is why the independence of the NBU is at the centre of Ukraine’s IMF-supported program, and why it must be maintained under his successor.”

The European Union said Smoliy’s resignation “against the backdrop of alleged political pressure sends a worrying signal”. In a statement on July 2, EU spokesman Peter Stano stated that “establishing a strong and independent National Bank has been a fundamental achievement for Ukraine, and remains crucial to the country’s future success”.

In his resignation letter, Smoliy cited “systematic political pressure” as the reason behind his departure. “I want my resignation to be a warning against further attempts to undermine institutional grounds of central bank in Ukraine,” he said.

Speaking to the Verkhovna Rada before deputies voted to accept his resignation on July 3, Smoliy described his decision as “a protest, a signal, a red line”. He said that the political pressure to which he was subjected would lead to decisions “that are not economically justified…and can cost the Ukrainian economy dearly”. Among these were demands to lower interest rates, let inflation rise, and keep the national currency, the hryvnia, weak. He also mentioned smear campaigns against him and other central bank employees and paid rallies outside the institution.

Many observers see the hand of oligarch Ihor Kolomoisky behind Smoliy’s departure.

“Ever since the central bank nationalized PrivatBank in December 2016, its former owner – billionaire oligarch Ihor Kolomoisky – has been waging a campaign of intimidation and lawsuits against the NBU,” wrote Anna Myroniuk of the Kyiv Post on July 3.

“After alleged insider lending and bank fraud emptied PrivatBank of US$5.5 billion, taxpayers came to the rescue of the nation’s largest financial institution. But Kolomoisky has been trying to get the bank returned to him for four years. And Kolomoisky is believed to have strong influence over President Volodymyr Zelenskyy,” she added.

John Herbst, Director of Eurasia Center, Atlantic Council and former U.S. Ambassador to Ukraine noted that “In explaining his decision, Smoliy cited political pressure, and the Ukrainian media has been reporting for months that oligarch Ihor Kolomoisky has had the NBU leadership in his sights in his Sisyphean battle to regain control of PrivatBank, or at least to obtain additional compensation for having lost it. The departure of Smoliy is regrettable, and raises more doubts about the reform credentials of President Zelenskyy’s team”.

Roman Waschuk, former Canadian Ambassador to Ukraine, stated on July 2 that the “flurry of events over the past twenty-four hours in Ukraine forms the latest chapter in the demolition derby that has hit the systemic reforms of the Maidan period since President Zelenskyy entered office last year”.

“Healthcare and education were targeted first, with policy-driven Western-oriented ministers and deputies replaced by youngish but reliably malleable post-Soviet ‘fixers’. With the presidency now apparently a transactional policy-free zone, vested interests are having a field day, including in the financial sector. As foreshadowed in Zelenskyy’s hit TV series ‘Servant of the People’, we are now witnessing mounting resentment at Western lecturing and financial strictures, which are derided as ‘external control’. This has culminated in effectively telling the IMF and international investment community to go to hell, after having first pocketed an initial IMF tranche of US$2.1 billion. This is emotionally gratifying, perhaps, but fraught with macroeconomic peril in a world that is entering what is likely to be a prolonged coronavirus-inspired economic crisis. One year ago, at the Toronto Ukraine Reform Conference, we tried to show President Zelenskyy the benefits of maintaining financial stability and an open economy. Unfortunately, between the Ukrainegate impeachment scandal and the pandemic, there hasn’t been much leader-level positive Western engagement (Chancellor Merkel excepted) since then to counter the self-interested populist nativism being peddled to Zelenskyy by his oligarchic whisperers.”

Smoliy’s resignation is just the latest of a number of setbacks that have plagued the Zelenskyy presidency in the last few weeks. Previously it was his continued vendetta against former President Petro Poroshenko, culminating in the preposterous charge of “high treason and abuse of office”. This came as a result of leaked recordings of confidential conversations that allegedly took place in 2015-2016 between Poroshenko and then Vice President Biden, as well as John Kerry, who was the U.S. secretary of state at the time. Not only did this originate with a pro-Russian politician, Andriy Derkach, but it also involved interference in the U.S. election process – and for the benefit of Russian President Vladimir Putin’s sycophant, Donald Trump. But what is even more significant about the row with Smoliy is that it severely damages Zelenskyy’s perceived image as a reformer. The question may well be raised: Is Zelenskyy really the “Servant of the People” as his campaign pledged to him be, or a servant of the oligarchs just like all the other presidents who preceded him?