Region: Ukraine's central banker one of 'The Family'

By Peter Byrne

For the Kyiv Post

Ukraine's Parliament has approved the candidacy of a little-known 34-year-old with reported close ties to President Viktor Yanukovych's eldest son, Oleksandr, to head the central bank.

The controversial appointment of Serhiy Arbuzov was approved swiftly Dec. 23 by 282 lawmakers. It was criticized roundly by opposition party leaders, as well as by the heads of independent banking associations, banking experts and political analysts.

It took less than 30 minutes for deputies to oust Volodymyr Stelmakh as head of the central bank, replacing him with Arbuzov, who did not address Parliament or answer questions before the vote. Opposition parties boycotted the proceedings altogether.

Arbuzov's credentials for the job have been widely questioned by Ukrainian bankers and experts, but many feared going public with their concerns.

The appointment came hours after Ukraine's main foreign creditor, the International Monetary Fund (IMF), approved a $1.5 billion second tranche under a $15 billion stand-by lending package.

The IMF, which has repeatedly urged Ukraine over the years to boost the central bank's independence, was silent on Arbuzov's appointment.

Hours after Arbuzov's appointment, Ukraine's lawmakers moved to appease the IMF by adopting a budget for 2011, and government officials talked of moving fast on boosting retirement ages as part of a pension reform sought by the fund.

Previously unknown on the national scale, Arbuzov was appointed first deputy head of the central bank in September after working six years for a small Donetsk-based bank, Ukrainskyi Biznes Bank (UBB). He landed the top job at the central bank solely for being a trusted friend of the Yanukovych family, said Volodymr Fesenko, a political analyst and head of the Kyiv-based Horshenin Institute of Management.

"[Arbuzov] is widely regarded as a member of 'The Family,' as President Viktor Yanukovych's clan is now called in Ukraine," Fesenko said. "Just like in Russia under former President Boris Yeltsin, Ukraine's president has formed a 'family.' Arbuzov is now their representative at the central bank," Fesenko added.

Oleksandr Suhonyako, president of the Ukrainian Association of Independent Banks, said the Donbas native's appointment is the aviation equivalent of looking for the black box recorder after a plane crash.

"Ukraine's central bank lost its political independence at the start of the world economic crisis in 2008, and it's been all downhill since then," he told reporters Dec. 22.

"Passengers onboard a plane want an experienced pilot in the cockpit, not a novice. It will take Arbuzov a year to learn how to fly the central bank," Suhonyako said.

For economist Oleksandr Zholud, who specializes in monetary policy, financial sector development and pricing policy for Kyiv-based International Center for Policy Studies, Arbuzov is not an ideal choice.

"He has relatively little experience in regulatory banking, and his ties with the Yanukovych family pose huge potential problems," he said.

Vadym Karasyov, a political analyst, also took a dim view of Stelmakh's replacement.

The appointment of Arbuzov will open the door for the government to "use cash emissions by the central bank to cover the budget deficit," Karasyov said, adding that Arbuzov's appointment marked an end to central bank independence.

"Arbuzov is not a banker. He is a cashier with a large conflict of interest," Karasyov said.

In May 2010, the government appointed Arbuzov to a seat on the advisory board of the state-owned Ukreximbank. Just months later, his mother, Valentyna, was named head of the Ukrainian Bank of Development (VBR), a small Kyiv-based bank controlled by President Yanukovych's son, Oleksandr, whose brother Viktor is a parliamentary deputy with the pro-presidential Party of Regions.

The website of daily Ukrainska Pravda revealed in a series of investigative reports during 2010 that many of UBB's clients are companies involved with the privatization and renovation of Yanukovych's 138-hectare estate outside Kyiv. Its investigation revealed that Oleksandr Yanukovych bought a controlling stake in UBB from Eduard Prutnik.

The Presidential Administration did not respond to inquiries about possible conflict-of-interest issues arising from Arbuzov's appointment, neither would Arbuzov or the press service of the central bank.

Referring to Arbuzov's sudden rise to the pinnacle of Ukraine's banking sector, opposition leader Yulia Tymoshenko said it symbolized how the central bank had been "de facto put into the hands of the Yanukovych family."

The Tymoshenko faction in Parliament opposed Arbuzov's candidacy.

"If appointed to head the central bank, Arbuzov will threaten the stability of Ukraine's banking system," a party press release said.

"Arbuzov has a reputation in banking circles as a specialist in illegal hard-currency conversion, money laundering and tax scams," the party said.

Arbuzov earned a total $18 million (Hr 150 million) in 2009 in dividends, interest payments and royalties. He earned only $56,000 of the amount in salary for his work at UBB, according to his income declaration.

Arbuzov replaces Stelmakh, 71, who worked as first deputy central bank chief during most of the 1990s and headed the bank during most of the 2000s. After a two-year hiatus [2003-04] as advisory board chairman at the Kyiv-based Brokbiznesbank, Stelmakh returned to head the central bank under presidents Viktor Yushchenko and Yanukovych.

Parliament in June approved changes in legislation regulating the bank, lengthening the term of central bank chief from five to seven years and reducing the bank's board from 16 to 11 members. According to the Constitution, the head of the central bank is appointed and dismissed by Parliament according to the recommendation of the president.

Peter Byrne can be reached at news@praguepost.com