By Anthony Deutsch
AMSTERDAM (Reuters) - Ukraine's talks with the International Monetary Fund (IMF) for a new loan program have stalled because of the dispute between the state and a powerful tycoon over control of nationalized lender PrivatBank, the deputy central bank governor told Reuters.
Under new President Volodymyr Zelenskiy, the government has been negotiating a new IMF loan program to replace a $3.9 billion standby agreement that expires at the start of January.
Deputy Central Bank Governor Kateryna Rozhkova said in an interview during a trip to the Netherlands this week that the size of the program could go up to $8 billion.
But Kiev must first resolve a dispute with Ihor Kolomoisky, one of Ukraine's most powerful businessmen, who is fighting to reverse an IMF-backed decision in 2016 to nationalize PrivatBank, Ukraine's largest lender.
Kolomoisky says the bank was nationalized on a false pretext and vehemently disputes the central bank's assessment of PrivatBank's financial state at the time the lender was taken into state hands.
"The discussions with the IMF for the next funding tranche are frozen, stalled because of the issue of PrivatBank," Rozhkova said. "It is a red line for them, and for the international community."
She warned of a "huge danger" to Ukraine's investment climate if the dispute was not handled properly.
The PrivateBank issue "must be resolved, and not by any settlement with the former shareholders".
"It represents the difference between the old days of oligarchic influence on the banking sector, and the new transparent and independent banking sector," Rozhkova said.
Rozhkova was disappointed by what she said was Zelenskiy's decision to remain on the sidelines in the conflict rather than actively defending the 2016 decision.
"The IMF want a strong signal from the government of the continued administrative independence of PrivatBank, and the independence of the National Bank of Ukraine," she said.
Since the start of his election campaign this year, Zelenskiy has faced scrutiny over his business ties to Kolomoisky but dismissed suggestions he would help the businessman regain ownership of PrivatBank or win compensation.
He told a press conference on Thursday he was ready to discuss PrivatBank's fate with Kolomoisky but stressed he would defend the interests of the state.
The IMF, Rozhkova said, has so far not been convinced by the reforms in Ukraine. "It's about the court reform, the rule of law. It's about the oligarchic power structure."
In a statement in September, the IMF did not mention PrivatBank or Kolomoisky but said Ukraine needed to tackle corruption, reduce the influence of oligarchs over the economy and minimize "the cost to taxpayers from bank resolutions."
Kolomoisky has challenged the 2016 nationalization of PrivatBank in a series of lawsuits.
A court in Kiev is due to rule next week in a suit seeking to overturn the nationalization and return the bank's running to the hands of its former owners, whom Rozhkova accuses of gross mismanagement.
"Unfortunately I don't trust our courts system because the system was not reformed," Rozhkova said.
She warned that a ruling against the nationalization could hurt investor sentiment.
"The impact on the markets will be negative and immediate and we cannot continue working with the IMF under the staff-level agreement in this situation because the IMF needs (clarity)," she said. "It's a huge danger for Ukraine."
The central bank says a $5.6 billion hole had been left in PrivatBank's finances due to shady lending practices under Kolomoisky's ownership. Kolomoisky disputes that. Zelenskiy met Kolomoisky publicly in September and days later Kolomoisky told reporters he saw scope for a compromise on PrivatBank.