Andriy Volkov, founder of the Investohills company: “Debts can be collected from Ukrainian oligarchs”

Andriy Volkov, founder of the Investohills group of companies, in an interview with spoke about how to force Ukrainian oligarchs to repay loans, about the “survivor’s mistake” and the debts of state banks.

Founded in 2009, the Investohills group of companies has become the largest operator of corporate debt management in Ukraine over 11 years of working with distressed assets, and over the past 5 years – the largest buyer of distressed loans of the Deposit Guarantee Fund of Individuals. Its portfolio of assets exceeds UAH 100 billion. For the period 2019-2020, the state income from the company’s activities exceeded UAH 2 billion.

In 2020, the Investohills Group created the Investohills Helianthus International fund, planning $100 million of foreign investments in the Ukrainian distressed debt market in order to renovate businesses that were actually destroyed by previous owners. Among the investors are three large specialized investment funds from the USA and the EU.

The beneficial owners of the Investohills Group of companies are Mykhailo Bakunenko (Chairman of the Board of the largest private oil and gas company in Ukraine – Ukrnaftoburinnia) and the founder of the company, managing partner Andriy Volkov (ex-Chairman of the Management Board of Alfa-Bank Ukraine).

In an exclusive interview Andriy Volkov spoke about how working with the debts of oligarchs differs from working with the debts of ordinary businessmen, how to properly raise risk managers and what businesses need to do in order not to get into debt.

Today, the modern banking sector of Ukraine is impossible to imagine without such a thing as “distressed assets” or “problem loans”. Let’s try to draw some kind of historical retrospective for the readers a little bit: how did the market of problem loans in Ukraine arise in general and, strictly speaking, how is it organized now?

— The market actually appeared not so long ago. That is, literally in the form in which it now exists, it is 3-4 years old. And in general, of course, the prerequisites for bad loans to appear and the “bankfall” that happened were laid for a very long time — over the past 15 years. If you remember the economic situation before 2008, everything was fine: banks issued loans, everyone paid off. But at the same time, already at that time, banks actually issued very risky loans: large amounts, sometimes without collateral. By 2008, it had generally acquired the character of a race for the growth of assets in the banking sector. And in 2008-2009, the first big crisis that happened in Ukraine has already shown that Ukrainian banks have very serious problems with risk management, portfolio quality and, in principle, with how banks manage problem debts. But after this crisis, no market was created.

This happened due to the fact that the NBU and the Ukrainian government at that moment decided to rescue (banks. – Save everyone you can. To flood these problems with money, to prevent banks from going bankrupt, to make their lives easier, that is, to prolong the life of these problem loans on balance sheets.

In my opinion, this was the wrong way, and it led to the fact that the problems that were created during this period, they continued to live with the banks. They lived and lived until 2014, when the next crisis happened and there were more problems. But even then, and based on the situation that was in the economy, and based on the political situation, and, most importantly, based on the fact that the leadership of both the country and the National Bank changed, no one turned a blind eye to obvious problems. They began to do banking reform. First of all, the National Bank has done a great job.

This led, among other things, to the closure of a number of banks and, in general, to problematic situations. But it also created a situation of clearing the banking system from problem loans, from NPL. And then this NPL evolved for several years, banks tried to do something with it in various forms, (connected. — ) The Guarantee Fund, until, in the end, we came to one simple thing that works all over the world. Problem loans, if the bank itself has not coped with them in a year or a year and a half or two, it is necessary to sell, clean up bank balances. And what we see now, in 2018-2021, this market, its foundations, its causes were laid in 2006-2011.

In July 2017, the NBU began to determine the volume of problem loans using a new methodology, and 58% of all loans from Ukrainian banks turned out to be non-performing. Ukraine came out on top in the world in terms of non-performing loans. Please tell me your opinion, why did this happen? This is unprofessionalism, this is corruption, these are some remnants of the past, lack of experience, what is it at all? What was that?

— As I have already said, in fact, this is a logical development of the situation that was laid back in the 2000s. That is, the wrong management of banks, risky policy. And the attempts of the National Bank to hide from this problem, to smooth it over for many years have led to the fact that the real volume of problem loans has accumulated in our banks is huge. After all, until 2017, how did banks mainly struggle with problem loans? They didn’t sell them. With the fact that they could not effectively restructure or take away some collateral, what did they do? Just refinanced. That is, they gave another loan, extinguished the old one with it, as if they were increasing it, went around in circles indefinitely.

And there are stories when troubled enterprises have not actually paid anything to large banks, especially state-owned ones, for 10 years. The debt burden grew and grew, and it could not continue indefinitely.

And what happened in 2017? In the end, the National Bank made a method by which it stopped turning a blind eye to the real volume of problems. In fact, this reality has always been more or less in this volume, gradually growing, but it was still huge. And we have been ahead of all European countries for many years, at least, in terms of the volume of “problems”, we just didn’t admit it to ourselves.

So it turns out that in 2017 they finally confessed?

– Yes, that’s right, in 2017 they confessed, realized the full scale of the tragedy, if I may say so. It looks ugly, but at the same time it is a very correct step, because only when you know the real scope of the problem, you can deal with it effectively.

There is a fairly widespread expert opinion that says that if suddenly, unexpectedly, the oligarchs start paying all their taxes in full, lose preferences, abandon state contracts and start working in really competitive conditions, then all their empires will simply collapse under the burden of debts. Because they have accumulated a lot of loans for the purchase of enterprises and the modernization of production facilities, and these loans are problematic. Tell me, please, to what extent does this idea correspond to the state of things?

— In my opinion, this opinion, let’s say, simplifies reality a little, because the oligarch is still different from the oligarch, and they have different debt loads. And there are indeed such oligarchs or groups who have everything done for borrowed money, and there has never been their own capital in fact. Moreover, a huge part of this money was taken as loans from their own banks, which they owned until recently. —

Offhand, I think that out of the top ten oligarchs, three or four are in such a state that even if they are not forced to pay everything in the world and repay all loans, but simply pay taxes and interest on loans, everything will collapse at this moment. Not to mention just starting to pay the nominal value of the debt that they somehow took from depositors, from foreign creditors, from someone else in order to create these huge inefficient empires.

After all, what is the main point here? It’s not even that they don’t pay for something, but that they got this money so easily and easily that they created huge inefficient mechanisms that do not reflect our economy, our economic reality. And if they were really on equal terms for lending, they would never have done it.

Can we give some examples of inefficiency that distorts the Ukrainian economy?

— For example, there are several large agricultural holdings, including the largest in Ukraine, which were built over the past 15 years, while there was the possibility of lending according to the following principle: some agricultural enterprise was bought, a loan was taken against the collateral of this enterprise, the next enterprise was bought, a loan was taken against the collateral, a third was bought, etc. Credit, credit, credit, and such a pyramid was built.

Then all this was collected in a large pool, they went to foreign investors and said: “We have such a huge business, we want to refinance this whole story, replace Ukrainian loans with cheaper foreign money.” It was happening. And then nothing was actually extinguished with this money in Ukraine, but the following enterprises were bought. And in this way, a huge business was being built, which, probably, the economy at the stage of growth and development can digest and in some future, with constant re-loans and refinancing, somehow pay off sometime.

But as soon as something goes wrong, as soon as the growth phase stops, this is not a viable story. In a normal situation, when the economy and law work effectively, it should collapse in a couple of years. This does not happen with us. These inefficient enterprises have been living for years, somehow fighting off creditors.

Tell me, please, how great is the influence of oligarchic structures on the processes that occur in the market of problem loans, debtor structures in particular. That is, they slow down the development of the market; maybe they squeeze it into the illegal field? What’s really going on?

— Well, of course, there is an impact. But I would not say, fortunately, that it is decisive. In fact, despite all the skepticism that exists in society, this is the mechanism that has been created over the past five years to clean up bank balances and sell debts, it is completely market-based. There is a Prozorro system, there are foreign trading platforms, there is a Deposit Guarantee Fund, there are private commercial banks that sell everything on real market conditions.

And in this part, the oligarchs do not have much influence, they can only compete with other participants in this market, trying to buy their own debts. But how these debts were created, why they were not repaid, is, of course, mostly the fault of specific oligarchs who brought their businesses, their banks to this state.

You say, “you have brought your banks to such a state,” to the creation of problem loans. Could this be of interest to law enforcement agencies?

— Yes, of course. In fact, in most banks that have gone into bankruptcy, there are, to one degree or another, as lawyers correctly say, signs of money withdrawal. And I will say, probably, in a simple way: yes, the owners and management simply withdrew money from them. Who managed to withdraw almost the entire balance, and who 10-15%. But such a situation, when nothing was stolen from the bank before bankruptcy, is a very rare story. Believe me, we know all these banks thoroughly, because we are constantly faced with this. One, two, three, four, maybe, cases when the management and owners of the bank really fought to the last for the bank to survive. Basically everything was stolen before the crisis even started.

Recently, the Verkhovna Rada adopted Law No. 5599, the so-called “law on oligarchs”, on de-oligarchization. Can it somehow affect the situation on the market of problem loans and how effective can this law be?

— Firstly, unfortunately, neither I nor our lawyers have yet seen the latest version of the text (the interview took place at the end of October. – ), so maybe we don’t know some details. But in general, based on what is being discussed, what analysts are talking about, it seems to me that this law is more political than economic, so it has more political, not economic consequences.

The only thing that comes to my mind within the limits of the restrictions that this law introduces for oligarchs is that they cannot directly participate in large-scale privatization. Which is not at all obvious to me that this is some kind of reasonable thing. Maybe it is necessary that they participate in a large privatization, you just need to monitor the concentration of monopolization. This is the first.

And secondly, even such a ban without serious elaboration, without serious by-laws will not work. The oligarch will not participate in privatization under his own name. He will have some intermediaries, some companies will work for him, and there you can still figure out who exactly of the oligarchs is buying what and in what shares.

If we are serious about the fight against oligarchs, I think we should adopt a different law. The law that — maybe you will smile now — helps us. We are really fighting the oligarchs. We are forcing — not only Investohills, but companies like us, creditor banks, etc. — oligarchs to pay. We force them to return at least part of the money they took in loans, which they took from their banks, which they, in fact, took from depositors and from the state. A law that would protect the rights of creditors would be much more effective in the fight against oligarchs.

Well, well, do you want a special law against oligarchs… We have a bunch of banks owned by oligarchs. Everyone knows who owned which bank, even if there was no specific last name. Everyone knows: this bank is so-and-so, this so-and-so, this so-and-so. Now all these banks are bankrupt, and, as I said, in most of them huge sums were simply stolen.

It is necessary to adopt a law that will link all this together, connect this oligarch, who was a beneficiary there, through some of his offshore companies with a specific problem and force him to return this money to depositors, the Fund, the state, creditors. That would be a real struggle.

Is there a difference between an oligarch and a businessman? How does it manifest itself?

– Oligarchs differ from ordinary businessmen in that they have more monetary resources to hire high-quality lawyers and, most importantly, administrative ones to influence the judicial and law enforcement systems. And that’s the biggest problem. Some businessmen also, of course, have such opportunities. Especially regional kings who were, or even are, regional governors or mayors of some city and created some kind of business there. Of course, it is difficult to fight there at the local level.

We may lose the courts of first instance somewhere, but then we are trying to transfer all this to Kyiv, to the Supreme Court. The influence of the local regional elite is already much less there, and we get just decisions, and not those in which, in form, maybe everything is “OK”, but in fact what the hell.

Which assets are most often problematic? From which industries? You talked about agro, for example, what else?

– Agro, in fact, is an exception. Just problematic agro is more of an oligarchic story, where there is simply a huge credit burden. In general, agro is a very lively, efficient sector, and there are just a few problematic stories there.

The main problems are assets related to trade, non-prime-location real estate and industrial assets.

This is due to the economic situation that we had 5-6 years ago, the jump in the dollar exchange rate, the closure of the Russian market for Ukrainian goods. Despite the fact that most large and medium-sized enterprises at that time had loans in foreign currency, so it was industrial assets that suffered the most, especially large inefficient enterprises.

But do not forget about another very important factor: someone has suffered more, someone less, but what kind of debtors do we get? Not just those affected by the crisis and who have problems. We get those who do not want to pay, because the banks and the creditors themselves agree with those who want to pay in one format or another. And we already get sifted guys who are only ready to fight, who sometimes take a principled position: even if there is an opportunity to pay off, restructure the debt, negotiate with us (we see from these businesses that they are profitable) – but no. Bankruptcy, asset withdrawal – all methods are used, only to pay nothing to anyone.

What is the difference between the debts of oligarchs and the debts of ordinary businessmen? That is, in which areas exactly do the oligarchs spend the most?

– Everything is about the same everywhere. You know, because we have a huge portfolio (of distressed assets. – ), we have, as it were, a slice of the entire economy of Ukraine. And where the situation is worse, we have more of that. And it doesn’t matter whether it’s an oligarch or an ordinary businessman.

How to make the oligarchs pay their debts? Is it even possible? Here you say that they have an administrative resource, there is an opportunity to hire the best lawyers, there is an opportunity to tell on their media that they did not take these loans, and so on. And to make everyone believe in it, perhaps, to be re-elected to the Verkhovna Rada next time. Especially popular rumor, it generally gives these oligarchs supernatural power. And you’re trying to get money from them…

– Well, in fact, you can collect money from the oligarchs. Firstly, it is collected from some of their specific businesses. Secondly, whatever it was, the Ukrainian judicial system is working. It doesn’t work exactly the way it should. Similarly, law enforcement. There are many problems related to corruption, inefficiency, weak protection of creditors’ rights. But, nevertheless, somehow in our country the law still exists, and this is a guarantee that you are an oligarch or not an oligarch, there is always an opportunity to go to court, sue and fight with you.

And, besides, there are foreign courts. It’s no secret that oligarchic structures are characterized by the fact that some of their assets are structured or even moved abroad. And we can sue abroad for the debts that exist in Ukraine. The legal system there is more effective, and it is the oligarchs who are attacked there, if I may say so, easier.

A little clarification in order to understand the volume of the problem loans market and the place of Investohills here. Tell us, how many percent of this market do you occupy and how many percent of the other players?

— Of course, this is all very evaluative, since the main part of the portfolio of problem loans that has been circulating on the market over the past few years is what the Deposit Guarantee Fund has been selling. As part of the purchases of problem loans, not assets (some buildings, something else), in 2019-2020, our company bought about 50% of what the Fund sold.

In 2021, maybe a little less, there are 40 percent, but at the same time we also bought problem loans from commercial banks. Of course, there are fewer statistics on volumes for them, there is not such a transparent history here, not all in one place. But, according to our estimate, the share of Investohills in the market among financial non-banking institutions that deal with problem debt is somewhere around 50%. That is, the closest competitors are quite far from us in terms of portfolio volume.

According to the National Bank, in the first half of 2021, the share of non-performing loans in the banking system decreased by 3.8 percentage points and now stands at 37.2%, and this is the lowest figure since 2017, when we admitted to ourselves that we have problems with this. Can I hear your forecast, what will happen next? And maybe it will seem like a provocative question, but what will happen to your business if suddenly, unexpectedly, the share of problem loans somehow drops to zero?

— Firstly, the fact that the share of problem loans is decreasing in the banking system is a natural process. It is related to several things. The very first point is that we recognized the scope of the problem, showed everyone clearly, both the National Bank and the banks themselves, how many problems they have in the balance sheet that they need to focus on. And after that, systematic work began both on the part of the National Bank and on the part of individual banks.

The second factor: after all, at least some lending has begun since 2017, both retail and corporate. But taking into account the risk management policies that were implemented in banks after the crises and the requirements of the National Bank, lending is now much less risky and produces much fewer problem loans. Therefore, in general, the portfolio of banks began to grow slowly, and, accordingly, the share of the “problem” that was, is decreasing.

If everything continues as it is now, if the trends do not change, then, accordingly, the share of problem debts will decrease.

Here you need to understand something else: where problem debts are concentrated. Commercial banks, in fact, for the most part have already solved these problems and in one way or another over the past 5-6 years have already somehow sorted out their debtors – restructured loans, collected collateral, sold credit obligations.

The bulk of the problem debt is in state-owned banks. And in these 30-something percentages (problem loans. — ), I’m just sure, most of them are problem debts in state banks.

This is the next point for our financial market, where there should be a change in attitude towards the NPL and a change in the system of work. It should begin with the sale of these distressed assets, because without this, the government, the state will continue to capitalize these banks indefinitely, and there will be nothing else there.

Dmitry Bunetsky talked, especially for