November 30, 2016 brought a real sensation to the Ukrainian financial market. At an auction the State Property Fund unexpectedly sold a majority state-owned block of shares (99.9945%) of the Ukrainian Bank for Reconstruction and Development (UBRD). A previous auction in April 2016 failed due to the absence of buyers, after which the National Bank of Ukraine declared that in case of a new failure, the bank would be liquidated once and for all.
What shocked the most was not the rare successful auction for the sale of rarely sought after state property but the buyer, the largest Chinese commodity exchange, Bohai Commodity Exchange Co Ltd, with an annual turnover of $ 1 trillion.
The acquisition of UBRD became the first direct entry of a company from the PRC into the tight and competitive Ukrainian financial market, divided between state and international players with a drop of domestic private capital.
The Chinese debut was extremely cheap. Due to lack of competitors, the Fund managed to raise only the starting price for UBRD – UAH 82,827 million (EURO 3,038 million). The buyer pledged to raise the capital of the institution by another UAH 2.5 million (EURO 91,700) in order to comply with regulations. It should be noted that UBRD was a very small institution, even by Ukrainian standards. It wasn’t very active and, accordingly, did not have any real problems or reputational risks. On the other hand, the bank owned a valuable banking license to operate in Ukraine.
Why would the Chinese need a Ukrainian bank? In 2016, fantastic theories started to circulate on the market. The Chinese investment was called the beginning of an expansion, the basis for a future vertical economic structure, the ground for financing future investment and trade projects under “Chinese” guarantees. Local bankers also voiced their biggest fear – the Chinese would rush in and offer cheap loans, gobbling up all current and potential customers.
Time would show that the most realistic version was that this investment was just a feeler. With minimal cost and risk the Chinese investor decided to secure a spot on the financial market of a country considered important for the implementation of the “One Belt, One Way” strategy. In fact, UBRD is a sleeping agent that together with some others is just waiting for the right moment to sharply step up its business of lending and guaranteeing investments to Chinese companies which are strengthening their presence in Ukraine.
This theory is confirmed by the recent acquisition by the same Bohai Commodity Exchange of a 49.9% stake in Ukraine’s PFTS Stock Exchange, which was approved by the National Securities and Stock Market Commission on March 13, 2020*.
As of January 1, 2020, the listed owners of substantial stakes in UBRD are Chinese individuals/citizens represented in the Bank’s Supervisory Board, as well as the State of China, represented by the Assets Supervision and Administration Commission of the State Council and the Territorial community of the Chinese city of Tianjin.
Judging by the numbers, at this point UBRD exists just for show. In terms of assets, it ranks 74th among 75 Ukrainian banks. It has only one branch, its head office in Kyiv. The latest news on the bank’s website — on the receipt of an International Legal Entity Identifier (LEI) code — is dated May 17, 2019. According to the bank’s latest financial report, as of 01/02/2020 its assets amounted to UAH 292,417 million (EURO 10 million) and liabilities to UAH 97,111 million (EURO 3,3 million). According to the NBU, UBRD finished 2019 with a loss of UAH 4.4 million (EURO 150,000). Currently, the bank’s capital is UAH 190,89 million which does not even meet the minimum requirement of UAH 200 million (EURO 7 million).
However, on September 28, 2019, UBRD’s management announced the start of a new era in the bank’s activities, presenting an updated IT-system and launching corporate online banking services. Yan Dongsheng, Chairman of the bank’s supervisory board, said that “UBRD will soon be firmly on its feet to embody the Belt and Road initiative, promote investment and trade between Ukraine and China, serve economic revival and contribute to Ukraine’s economic growth.”
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