This article originally appeared at Business New Europe

The war between Ukraine’s government and the oligarchs has reached into the fragile banking system, as the central bank felt moved to reassure depositors in Privatbank, the country’s largest, after allies of President Petro Poroshenko made murder allegations regarding its owner, Ihor Kolomoisky.

Public showdown between Poroshenko and Kolomoisky around valuable energy assets are a reflection of the old political enmity

The National Bank of Ukraine (NBU) issued an unusual statement on March 27 to quell reports of what it called “false and provocative information in the media regarding Privatbank”. The statement referred to an allegedly concerted smear campaign mounted against Privatbank in the media and on social networks. “Clients and partners of [Privatbank] do not have grounds for concern regarding the dissemination of incorrect information pertaining to the activity of the aforementioned institution,” the NBU said, without specifying what information was meant.

Privatbank itself said in a parallel statement on March 27 that it was “aware that provocative and fake information about the bank will appear in coming days, disseminated by pro-Russian forces and the Russian media.”

Whodunnit?

These attempts to reassure the public follow sensational murder claims made by allies of Poroshenko involving Kolomoisky, Privatbank's co-founder. Kolomoisky, who shares ownership of the bank with his longstanding partner Hennady Boholyubov, is believed to be closely involved in the running of the bank, which is headquartered in his stronghold of Dnipropetrovsk.

The claims were made in the context of a bitter clash between Poroshenko and Kolomoisky over control of key state oil and gas companies, which Kolomoisky is believed to have de facto controlled for over a decade. Kolomoisky lost the dispute when Poroshenko stripped him of control of the companies and fired him as governor of Dnipropetrovsk region in the small hours of March 24.

During the clash, Poroshenko's allies made damaging allegations linking Kolomoisky to past – and recent – murders. Ukraine's security service (SBU) chief Valentyn Nalyvaichenko on March 23 sensationally alleged that the Kolomoisky-led Dnipropetrovsk state administration was linked to the murder of one his officers and the kidnapping of a second, on March 21.

At a hastily convened press conference on March 23, Nalyvaichenko accused the Dnipropetrovsk administration of abetting “a single organised crime group” involved in trafficking and abductions in the Dnipropetrovsk and Donetsk regions, which had been uncovered by the murdered SBU officer. Nalyvaichenko said officials in Dnipropetrovsk were now trying to block the investigation of the murder.

Headed by Kolomoisky, the Dnipropetrovsk administration was staffed by his longstanding associates Hennady Korban and Svyatoslav Oliynik, who both vehemently refuted Nalyvaichenko's claims at a press conference held in response to the allegations on March 24. Oliynik said he had been questioned about the allegations and had demanded the opportunity to challenge key witnesses. Both also said they fully supported the SBU investigation, while demanding that Nalyvaichenko undergo mental health checks.

Serhiy Leschenko, an investigative journalist-turned-MP for President Poroshenko's party, the Petro Poroshenko Bloc, then escalated the controversy surrounding Kolomoisky in an op-ed published in the Kyiv Post on March 27. Leschenko detailed a criminal investigation in 2005 into the billionaire's alleged involvement in a business-linked murder. “In 2005, Kolomoisky was suspected in the attempted murder of Sergei Karpenko, a lawyer who refused to contribute to the oligarch’s attempt to gain control over Dneprospetsstal, a steel producer,” Leschenko wrote.

Kolomoisky and his associates claim all the allegations against them are part of a Russian-backed smear campaign. Kolomoisky alleges that Poroshenko has bowed to demands to fire him made by Russian President Vladimir Putin. Kolomoisky also accused rival oligarchs of financing the campaign.

Despite the gravity of the claims, Poroshenko and Kolomoisky appear to have stepped back from the brink, with both now saying that they harbour no animosity towards each other. But the intensity of the locking of horns – inevitably covered on national TV – and the repeated talk of murder would suggest the clash has only abated for now.

The NBU and Privatbank's allegations of an organised smear campaign against it also relate to reports in Ukraine's most read newspaper, the government-critical Vesti. One quoted anonymous sources as saying that other leading banks had already closed lending limits for Privatbank. “This is not the case and amounts to a fabrication,” Privatbank press officer Oleh Serga assured bne Intellinews.

Vesti had also quoted Serga as saying that refinancing loans to Privatbank only covered one-third of deposit flight from the bank, and complaining that the NBU is helping only state-owned banks.

The bank has had its share of negative coverage recently. As bne IntelliNews reported, a number of open-source journalist investigations identified apparent large international outflows from Privatbank in 2014. The outflows took the form of lending to related parties, totalling over $1bn allegedly moved abroad via Privatbank's Cyprus branch. The bank says the investigations, although open source, were based on falsified data. On March 30, the Kyiv prosecutor informed MPs that there was no ground for suspicion of wrongdoing on the part of the bank.

As if warring with Poroshenko was not enough, Kolomoisky also accuses rival fuel trader and MP Ihor Eremeev, owner of the Kontinuum fuel concern and head of the parliamentary group Volya Naroda, for running a smear campaign against him. On March 13, MP Oleksandr Onishcenko, an MP in Eremeev's group, registered a draft bill on the nationalization of Privatbank "to ensure the stability of the financial system." Privatbank called this a "provocation and stupidity." The bill was later withdrawn.

Liquidity fears

As Ukraine's leading savings bank with 26% of retail deposits, Privatbank is highly exposed to swings in public sentiment. Ordinary Ukrainians are flocking to the country's troubled banks to withdraw their savings as hard currency cash. This has already led to the crash of Ukraine's fourth largest lender Delta Bank in early March.

According to Privatbank figures filed to the NBU, hard currency deposits held by individuals at the bank dropped from the hryvnia equivalent of $7bn at the start of 2014 to the hryvnia equivalent of around $3bn a year later, allowing for devaluation of the hryvnia to the dollar.

The outflow from Ukrainian banks continued unabated in the first quarter of this year, according to the NBU. “Liquidity is now concentrated in the big state-owned and foreign-owned banks,” NBU first deputy head, Oleksandr Pysaruk, told the UNIAN news agency on March 27.

Privatbank's current liquidity ratio of cash assets to short-term liabilities, at 83.9%, remains well within the NBU normative of 40%. At the start of 2015, its 11.2% capital adequacy exceeded the NBU minimum of 10%. The bank is set to boost capitalisation by 26.2% in April, it said on March 18, by issuing shares to its current shareholders.

As evidenced by the NBU's swift dismissal of what it termed the “false and provocative information” against it, Privatbank is confident it will continue to enjoy strong central bank support, despite the controversy surrounding one of its shareholders. "Given that this is the number one bank in Ukraine, it is likely the state will support Privatbank," reckons Dragon Capital analyst Andrey Bezpyatov.

On March 27, the NBU announced a further stabilisation loan to Privatbank of UAH800mn, which takes the volume of its stabilisation credits in February and March alone to UAH4.9bn ($200mn). According to the NBU, all credits were secured with valid collateral, including railway rolling stock, aircraft and shares in the bank, and would be used exclusively to fund payments to retail depositors.

Direct hit

But apart from the damage already done to its reputation that could accelerate deposit flight, Kolomoisky's conflict with Poroshenko will have a very direct impact on Privatbank: the cash-rich state oil companies that Poroshenko reclaimed for the state comprised a major part of Privatbank's corporate business for over a decade and they could now take their business elesewhere.

According to Dragon Capital's Bezpyatov, "it may take some time before real change of management happens” at the oil companies, but when it does, it will be bad for Kolomoisky's bank. Privatbank's accounts show that 20.23% of its lending goes to one customer, fractionally exceeding the maximum of 20% allowed under NBU regulations. The customer is believed to be the Ukrnafta oil and gas company, which is likely to have equivalent funds on deposit at the bank.

Energy Minister Volodymyr Demchyshyn said on March 23 that state companies would now transfer their business to state-owned banks Ukreksimbank and Oschadbank. Ukrtransnafta alone has deposits totalling “several billion hryvnia” with Privatbank, Demchyshyn said, adding, “I do not know whether we can access them”.

Privatbank's Serga told bne IntelliNews that the minister's fears were unfounded. "In the whole history of the bank, there has never been an situation when a corporate client has been unable to access its accounts," he said.