When considering the state of Ukraine’s banking reforms, it is important to consider not only what remains to be done, but how much the country has achieved, according to an economic adviser to the Ukrainian government.

“The fact that Ukraine is even alive, and surviving, and growing today, is quite amazing given where it was in 2014,” Daniel Bilak, chief investment adviser to the prime minister of Ukraine, said at the Atlantic Council on April 20.

Though Ukraine’s economy has endured what Valeria Gontareva, governor of the National Bank of Ukraine, describes as “a perfect storm” during “real wartime in our territory,” Bilak said that now, as a result of comprehensive reforms, “the trend is actually very good and when investors see this, they see Ukraine in a very different light than what they might read in the media.”

Russia annexed Crimea from Ukraine in March of 2014 and since then Russian forces have backed separatists in eastern Ukraine. In 2014, “we lost not just 10 percent of our territory at that time, we lost 15 percent of our gross domestic product and 30 percent of our export revenues,” said Gontareva in a keynote address. “We had [no] reserves to keep our peg to US dollar exchange rate,” she said.

However, as a result of vast improvements made in recent years, and with assistance from the International Monetary Fund (IMF), the World Bank, and the European Union (EU), Ukrainian banking reforms may largely be considered an international success story, according to Gontareva.

Bilak described how foreign investment in Ukraine has increased, and on April 3, the IMF disbursed $1 billion of the $17.5 billion allotted for financial support of the government’s ongoing reform program, contingent on the acceleration of the reforms.

“Participation from civil society is really the key feature in order for Ukraine to advance on their reform agenda going forward,” said Domenico Lombardi, director of the Global Economy Program at the Centre for International Governance Innovation.

After Lombardi’s introductory remarks, Bilak and Gontareva joined Francis Malige, managing director for Eastern Europe and the Caucasus of the European Bank for Reconstruction and Development, and Susan Schadler, senior fellow at the Centre for International Governance Innovation, for a discussion on the reform of Ukraine’s banking sector. Anders Åslund, a senior fellow at the Atlantic Council’s Dinu Patriciu Eurasia Center, moderated the discussion.

In a blog post for the Atlantic Council’s UkraineAlert, Åslund wrote that the latest funding tranche from the IMF to Ukraine arrived in spite of the need for further structural reforms, due to the great strides made toward macrofinancial improvements in recent years. Schadler agreed, stating much of the work done in Ukraine satisfies the components the IMF generally looks for to stabilize economies in times of crises.

Gontareva described how former Ukrainian President Viktor Yanukovych “supported absolutely artificial foreign exchange rate” and spent about $23 billion to do so. “Even without the ‘revolution of dignity,’” the 2014 protest in Maidan square in central Kyiv where thousands of Ukrainians demanded the government combat corruption and continue political and economic reforms, Ukraine was “on the verge of disaster… from a macroeconomic point of view,” she added.

Gontareva insisted that the base of future success in Ukraine is macro-financial stability. “A stable macro-financial environment is a must, it’s the first basement to do any further development of business, portfolio investments, or direct investments to our country,” she said.

Under Gontareva’s leadership, Ukraine adopted a flexible exchange rate in 2014. “It was very difficult to find this current level of our exchange when we really not only collected disbalances… but when we lost… 3.6 percent of our GDP” due to the annexation of Crimea and “lost more than 2 million of our population,” Gontareva explained.

However, today Ukraine is in a “stable macro situation” that is “absolutely predictable.” Gontareva expects 2 percent GDP growth and 9 percent inflation this year, with accelerated growth next year. At the same time, she added, a clean banking sector is ready to start lending. Ukraine has also internally transformed its central bank since 2014.

Ukraine’s inflation rate in 2015 was 43 percent, Gontareva said. In September 2015, the Council of the National Bank of Ukraine approved a 12 percent inflation target for 2016.  “Last year our inflation was 12.4 percent,” she said. “This year our target is 8 percent plus [or] minus 2 percent.”

Forecasts presented by Gontareva predict 6 percent inflation in 2018 and 5 percent in 2019, leading to “new life” in the financial and banking sectors in Ukraine.

The inflation-targeting monetary policy could not have been implemented without balancing the budget in Ukraine, or stopping fiscal dominance, Gontareva said.

After 2014, Ukraine undertook further reform in the banking sector to solve issues of insolvency and illiquidity, money laundering, and nontransparent ownership, said Gontareva. Additionally, “one of the biggest prior problems of the Ukrainian banking sector was related-party lending,” she said, which was so prevalent she referred to it as an “oligarch banking model.”

Ukraine’s economy has a history of corruption. As an example, Gontareva described how Ukraine developed a three-year program to eliminate related-party lending which utilized monthly installments for shareholders to repay their related-party loans and a four-year program for recapitalization.

Now, according to Gontareva, 100 percent of ownership in the Ukrainian banking system is accounted for—up from only 40 percent when she took over as governor in 2014.

“When we announced the nationalization of PrivatBank… capital shortage was minus 146 billion hryvnias” or approximately $5.6 billion at that time, said Gontareva. She said that now Ukraine’s spare liquidity in local currency is more than 100 billion hryvnia or more than $5 billion.

A flexible exchange rate allowing the “exchange rate to move, without startling markets,” a cleaned-up banking system without concerns of non-performing loans or unclear ownership, and sustainable fiscal practices generally lead to macroeconomic stability, Schadler explained.

Ukraine has addressed all three necessities, and according to Schadler, if “Ukraine can keep those conditions in place then… the risk of crisis is pretty low.”

However, while Ukraine has made great strides toward improving its banking sector, the panelists agreed there are many reforms still to be made. Schadler was more skeptical on matters of growth in investment, employment, and immigration which require a “huge amount of political maneuvering,” and where “Ukraine is at a very early stage, at best, of making progress.”

Malige suggested four factors, which “taken together will be building blocks for a much better functioning banking system, and therefore lending to the real economy, and therefore economic growth.”

These four building blocks, according to Malige, are: good conditions facilitating lending from banks which lower interest rates and shift lending to the real economy, rather than to the government; the development of capital markets; land reform that would allow banks to accept land as collateral; and privatization in the banking sector.

Making Ukraine attractive to investors by “building a better business environment” rather than focusing on largescale state funded projects is the next important step, according to Malige.

Bilak described how Ukrainian banks such as Raiffeisen and BNP Paribas are now lending in hryvnias at 10 or 12 percent over five-year terms, which was previously “unheard of.” This development demonstrates that there are now “mechanisms to get liquidity back into the system” in order for “small [to] medium-size businesses and foreign investors to be able to take that money and apply it in a sensible fashion,” said Bilak.

Jack Gloss is a communications intern at the Atlantic Council.

Image: (from left) Anders Åslund, a senior fellow at the Atlantic Council’s Dinu Patriciu Eurasia Center, moderated a discussion with Daniel Bilak, chief investment adviser to the prime minister of Ukraine; Valeria Gontareva, governor of the National Bank of Ukraine; Francis Malige, managing director for Eastern Europe and the Caucasus of the European Bank for Reconstruction and Development; and Susan Schadler, senior fellow at the Centre for International Governance Innovation, on the reform of Ukraine’s banking sector at the Atlantic Council on April 20, 2017. (Atlantic Council)