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Zelensky must be seen to be on the straight and narrow

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Ukraine’s wildcard new president Volodymyr Zelensky has been making all the market-friendly noises investors could wish to hear, turning the country into a darling of emerging market portfolio managers. But there’s a wasp at the picnic: one oligarch's quest to regain his former bank is threatening the country’s economic future.

Igor Kolomoisky, oligarch and former owner of Privatbank, is pursuing an aggressive legal campaign to win back the bank, which was nationalised and taken away from him in 2016 at the insistence of the IMF, according to either various media sources, or due to a $5.5bn-$7bn capital shortfall, according to Privatbank’s management.

Kolomoisky has been pursuing litigation in courts around the world in an effort to reverse the nationalisation and to extract $2bn of compensation for lost share capital.

Valeria Gontareva, who oversaw the nationalisation of Privatbank during her time as the governor of Ukraine’s central bank in 2016, has received death threats in the past three weeks. Her Kiev home was raided by armed men who claimed to be police, although Gontareva says they were not. Her car, her daughter-in-law's car and her house in Ukraine have all been burned in acts of arson. And she is still in hospital recovering from injuries from a hit-and-run car accident in London, where she now lives. 

The incidents have prompted the National Bank of Ukraine to make a statement declaring “the unacceptability of these purposeful, systematic attacks on the ex-governor of the central bank, Valeria Gontareva, and, through her, all reformers who worked and work for the benefit of Ukraine. This is no longer a series of incidents, it is TERROR. Its purpose is to intimidate reformers, past and present, and to paralyse our activities, to silence us”.

The statement calls for action and an impartial investigation of the attacks.

Gontareva has publicly accused Kolomoisky of orchestrating the attacks, although she admits she has no evidence. Kolomoisky denies involvement.

Zelensky’s meteoric rise from TV stardom to the presidency was fuelled by the Ukrainian people’s profound dissatisfaction with what they see as a chronically corrupt political establishment.

Although initially nervous of a completely unknown quantity entering the political sphere, investors around the world have been charmed by the comedian’s positive manner toward the European Union and the IMF. Ukraine’s bond spreads ratcheted in sharply.

And, while Zelensky’s GDP ambitions are unrealistic — a relief, since servicing GDP warrants with 7% growth would be devastating — his reform programme, though aggressive, is perhaps the most plausible Ukraine has ever seen, thanks to his party’s majority in parliament.

But even before his election, sceptical voices spoke up. Kolomoisky owns the TV station that hosted Zelensky’s show, and the oligarch publicly endorsed the comedian during his campaign, using network airtime to promote him.

Zelensky, of course, denies that he is in Kolomoisky’s pocket and has said that he will not attempt to assist the oligarch in regaining control of Privatbank.

While there is no proof that Kolomoisky exerts meaningful influence over the president, the murmurs are growing louder, and given his anti-corruption platform, Zelensky cannot afford to lose credibility.

If Zelensky wishes to dispel the speculation over his relationship with Kolomoisky, the former comedian must do better than he has been. Zelensky met with the oligarch last week. Then on Tuesday morning Oleksiy Honcharuk, Ukraine’s prime minister, told the press that he was "open to compromise" with Kolomoisky over Privatbank, although Honcharuk later used Twitter to say there were no negotiations underway.

But it is not just Zelensky’s hard-won favour with Ukrainians that he stands to lose. International investors — generally willing to overlook corruption when returns are as good as Ukraine offers — began to stir on Tuesday morning as a sell-off in Ukraine bonds began.

If Privatbank’s nationalisation is reversed, Ukraine’s relationship with the IMF will be damaged — perhaps irreparably — and Ukraine’s ability to access international capital under such circumstances will become expensive.

While a breakdown in IMF relations will mean a hike in cost of funds, as long as the Ukrainian economy continues to grow, there will likely still be plenty willing to buy into it.

If Zelensky is as arrow straight as advertised, he must distance himself from Kolomoisky. If Privatbank is returned to the oligarch’s hands, the president will face accusations of involvement. And that could dash his administration’s hopes of re-election and prove fatal to the country’s best hope for reform.

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