Ukraine’s battle between the banks and the borrowers

Lviv, Ukraine – Maria Baranska, a 68-eight-year-old grandmother of four, could pass as a poster child for Ukraine’s post-Soviet economy.

Two decades ago, in 1996, Baranska pooled a lifetime of savings to become the proprietor of the photo studio where she had worked for 19 years as a state employee.

In the years that followed, the two-storey building located in a historic neighbourhood next to the tramway came to occupy a niche market in the western Ukrainian city of Lviv.

“We had line-ups on Sundays,” says Baranska, describing those boom times. “Soldiers would come to have their pictures taken, and if a girl bought a hat, she would come here to have her picture taken and [her friends] would get photographed wearing that same hat also.”

When the technology shifted from film to digital, Baranska took out – and paid off – two bank loans to upgrade her equipment. Then in 2007, she signed her name as a guarantor on a third loan intending to launch her son Oleg into business.

This was “the start of our troubles,” explains Baranska, discussing a process that has seen her in court fighting a bank that is intent on evicting her from the centrally located, fourth-floor apartment where she has lived since 1991.  

Ukraine’s interest rate is among the world’s highest: annual rates of 30 percent on loans made in the national currency are common.

In a bid for cheaper credit, during the early 2000s many borrowers, like the Baranskys, signed contracts committing them to receive and pay back their bank mortgages in dollars or Swiss francs.

These arrangements supplied loans at percentages ranging from one third to one half of the national currency average. But they exposed borrowers to the risks of exchange rate fluctuations, and in the case of Maria and Oleg Baransky the timing was unlucky.

Pummelled first by the world financial crisis then by political instability, the value of Ukraine’s currency, the hryvnia, declined from a rate of five to the US dollar in the year the Baranskys took out the loan to 25 to the dollar today. So, in 2007, the Baranskys’ $120,000 mortgage was worth 600,000 hryvnia, but with the changing rates, their debt has ballooned up to more than 2 million hryvnia today, despite monthly payments in excess of $1,300 over more than seven years .

Maria Baranska still works 10-hour shifts every day at the studio where a picture of Ukraine’s President Petro Poroshenko presides looks down from the wall. But, after the seven years of payments that also included a 14 percent yearly interest, Oleg and Maria defaulted in 2015, still owing about $80,000 on the original $120,000 loan.  

The Baranskys’ story is not atypical. Following a directive from the Central Bank, Ukraine’s banks stopped issuing foreign currency loans in 2009. Still, according to the Independent Association of the Banks of Ukraine [NABU], an industry lobby group, there are 54,000 foreign currency loans outstanding in the country for a combined value of $2.4bn.

“In 2006 and 2007 people had money,” says Lyubov Molchanova, a specialist with the Kiev-based debtor advocacy group Financial Maidan, contextualising the problem. “There were stable jobs and stable salaries. People took loans to buy a home, or a car, or for healthcare or education.”

Herself a former banker, Molchanova blames the banks in that pre-crisis period for corralling clients into foreign-currency mortgages. “They would tell [borrowers] ‘the national currency is expensive; you won’t be able to pay [the interest]. If you [take a loan] in foreign currency it’ll be cheaper and better’,” she says.

‘I used to have 12 employees. Now I have two’

On the macro level, until October 2008, the Ukrainian government intervened economically to maintain the exchange value of the hryvnia at a fixed rate, creating a sense of security, explained Molchanova. 

After this was discontinued during the financial meltdown in late 2008, many a Ukrainian small business wilted under the twin pressures of declining sales and escalating debt service costs in hryvnias.

“I used to have 12 employees,” says Katia Ravlyuk, 40, a clothes shop owner, debtor, and friend of Maria Baransksa’s, in Lviv. “Now I have two.”

The effects of the crisis have cut across a cross-section of society. Like Baranska, Raisa Sharikova is enmeshed in a legal process that could result in her losing her home as well.

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Standing in front of the court in Zhitomyr, a small, dusty city west of Kiev, the 49-year-old accountant explains how her family contracted a loan of $20,000 from Ukraine’s Taskombank in 2008 to upgrade the insulation in their apartment.

With an income of 3,500 hryvnias a month at that time, scheduled payments of 1,750 hryvnia’s a month were manageable at first, but grew burdensome as the value of the hryvnia slid. 

In the spring of 2014, when Sharikova’s 18-year-old son enlisted to fight separatist rebels in the east, the family had to invest its own money to equip him with a flak jacket and other gear.

“The prior?ty was to keep him alive. The gear they were handing out [at the front] didn’t protect [him],” recalls Sharikova. Struggling with the high interest, Sharikova ended up paying $38,000 in principal and percentages on the $20,000 loan before defaulting in January 2015 still owing $7,000.

Who is to blame?

The question of who is to blame and what to do about the debt debacle has stirred controversy. Last December, under pressure from the banking sector, President Poroshenko vetoed a bill passed by Ukraine’s parliament that would have converted loans like Sharikova and Baranska’s back into hryvnias at a pre-crisis exchange rate. 

In the meantime, starting in early 2015, debtor activists held protests and pitched army tents in central Kiev to draw attention to their plight.

Following Ukraine’s 2014 Maidan revolution, the country’s new government voted for a moratorium that has suspended most, though not all home evictions in cases of unpaid mortgages. 

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No legislation aimed at making debts more manageable has succeeded since then in navigating its way through parliament to be signed into law.

Debtor advocates and banks trade blame for the impasse. Activist groups, including Financial Maidan told Al Jazeera that they are demanding a significant write-down of their debts, but the banks warn against easy answers. 

“There’s this impression that banks are a kind of fat cat that’s overeaten,” explains Olena Korobkova, executive director of the banking association, NABU.

But Korobkova says this caricature is at odds with the reality of a banking sector that is itself in crisis.

“About 70 banks [out of 187] have been liquidated in [the past] two years,” she explains. “They lost billions [when Russia annexed] Crimea. We have [assets] in Donetsk that we can’t get to [because of the war there].”

Sitting in her office on a bustling Kiev street above a luxury goods store, Korobkova emphasises that the banks are vulnerable, and need the hard-currency income from the mortgages to pay their depositors, some of whom have accounts in dollars.

She concedes that some may have been lax a decade ago when evaluating potential borrowers, but rejects suggestions that the banks could have factored the possibility of a currency collapse into their risk assessment, arguing that the political crisis, which is behind the latest round of devaluations, was unforeseeable.

“Banks have been taken hostage by same situation as the borrowers,” she contends.

Two bills from two sides

Korobkova argues that a unilateral debt write-off could provoke more bankruptcies and inflation. Earlier this year, after consultations with the government, the NABU threw its support behind a debt relief bill that it views as a compromise. The cost of this bill to the banking sector will be 45 billion hryvnia ($1.8bn) according to the association.

Under the bankers’ bill, known as bill 4004, qualifying debtors would see their mortgages converted into hryvnias at half the exchange rate in effect at the time of the bill’s passing. Financial Maidan has responded with a bill of its own that mandates a two-thirds mark-down. But there are differences in the two texts that go beyond the relief amount and extend to the criteria for eligibility.

According to the bank document, among other conditions, eligible debtors must have taken out a loan for the purpose of buying a home, the borrower should not have any other home, and the account should not have been in arrears before January 1, 2015. 

Olena Korobka argues that such restrictions are legitimate, saying “there are conscientious and unconscientious borrowers” and citing cases where a debtor has bought three apartments in an expensive district and is renting them out.

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But, activists opposing the bank deal insist that the effect of these cumulative conditions is to disqualify as many debtors as possible. Maria Baranska and Raisa Sharikova, for example, both of whom could lose their apartments, would each be ineligible for relief, in Baranska’s case because she took a loan to start a business, and in Sharikova’s because her loan went to renovate a home and not to buy one.

Furthermore, in their final analysis, bankers and activists differ drastically in their assessment of how many debtors would qualify under the criteria of the banks. Korobka quotes a number of 37,000, while Financial Maidan says the figure is no more than 3,000.

This April, in a vote in parliament, neither the bill presented by the bankers nor that of the activists garnered enough support to move past the first stage of deliberations. Each party is in the process of drafting a new bill along essentially the same lines, they told Al Jazeera.

Day in court

In municipal courtrooms across Ukraine, hearings are being held between debtors and banks. The sessions typically last less than 15 minutes. 

The mistrust between the two sides is palpable. Some borrowers accuse the banks of account falsification. Activists also claim that the banks are exploiting Ukraine’s mortgage law. According to Molchanova of Financial Maidan, legislation in Ukraine does not limit the amount of a person’s property a creditor can seize to secure the monetary value of a debt.   

Activists say the banks have their eye on prime, centrally located apartments like Maria Baranska’s, and, in cases of repossession, have sold them at below market value before coming back to the debtor for further repossessions.

Korobkova says that in such instances the banks sometimes sell groups of mortgages that are in default to a collection agency, and that what those agencies then do with the collateral of each individual borrower is out of the banks’ hands.

Day of reckoning

Another contrast between the activist and bank-sponsored debt-relief bills is the matter of home evictions.

The bill presented by activists demands that the moratorium on evictions be extended by three years, whereas under the bank rules, evictions can start again as soon as the law is signed.

One person who can appreciate what this will mean in practice is Lyudmila Kaminska. The 38-year-old single mother is living on a disability pension. She was stuck with a $45,000 mortgage when her husband ran off in 2008 shortly after the couple bought a new apartment. After a period of struggling but failing to keep up with payments with the help of relatives, Kaminska’s mortgage was referred to a judge in 2010.

Kaminska continued to make partial payments until 2014, but one day last December, while Kaminska was at a meeting with her bank, three collectors from a Kiev-based agency knocked on her apartment door.

“He stuck his foot in the door. He said the apartment wasn’t ours any more,” recounts Kaminska’s 19-year-old son, Andrei. He is a medical student, who was at home with Kaminska’s father at the time.

According to Andrei, when he tried to close the door one man threatened to break it, and the three agents then forced their way inside. Andrei and his brother Sergei, 16, describe how over the next 36 hours a tense standoff ensued as the collectors called for back-up and about 30 men hired by the collection agency squatted in the kitchen and an adjoining bedroom, while the family and a smaller number of supporters from Financial Maidan movement in Vinnytsia huddled in the back room.

The brothers say that from photographs of the men, they were able to identify one of them as a local criminal who had spent time in jail.

The Kaminskys say that the collectors stole a knife, made a mess in the kitchen and promised to return before leaving the next day. In subsequent weeks the family received phone calls from the collection company, and in mid-March they received a video in the mail showing other households in Ukraine being evicted.

Because Kaminska’s mortgage had been outstanding for several years, it was not covered by the moratorium voted for by parliament in 2014. But according to the Kaminskys, their dispute is about more than just payment arrears.

Speaking through Andrei as an interpreter, Kaminska alleges that when Ukraine’s UkrSibbank sold her mortgage to the collection agency in 2011, she was not informed of the change, and that the bank continued to pocket her subsequent payments, amounting to $5,000, without applying them to her debt. 

UkrSibbank did not respond to repeated phone calls and emails from Al Jazeera seeking to obtain a comment on this allegation. 

This experience has left the family defiant. “There’s no way we’re paying. We don’t know who to pay,” says Andrei.

Common good

In promoting their respective agendas, both the NABU and the debtors insist that they are working for the common good. Korobkova argues that adopting an activist-style write-off would equate to risking “the macro-economic stability of the country for the benefit of less than one percent of the population”.

For their part, debtors speak angrily about the high interest rates that they say are a cause of their continued indebtedness, and are choking the middle class.

“If we had decent interest rates, this country would flourish,” says Katia, Maria Baranska’s friend from Lviv. “We’re young and energetic.”

By email, Alexander Kravchuk, an economist with the Kiev-based Institute for Social and Labour Research, explains that the high interest rates in Ukraine are determined largely by the perceived risk of default. But it seems that the prognosis might be a self-fulfilling prophecy.

Experiences like the Kaminskys’ show that future evictions could get violent in the absence of established rules.

Debtors represent a broad spectrum of society, are organised, and are present in all regions of Ukraine. Until now, the moratorium has maintained a social peace, but no one knows what will happen if this is challenged.