Chronic and Systemic Failures in the Ukrainian Banking System since Independence
- Matthew Parish
- Mar 23
- 3 min read
Since gaining independence from the Soviet Union in 1991, Ukraine has struggled with a fragile and inefficient banking system that has been plagued by hyperinflation, poor regulatory frameworks, corruption, and economic instability. These issues have severely hampered the country’s financial sector and inhibited Ukraine’s economic development. Although some reforms have been introduced, the Ukrainian banking system remains in dire need of restructuring to align with international financial norms, particularly as Ukraine moves towards European Union membership.
The Soviet Legacy and Early Banking Reforms
During the Soviet era, the banking system was highly centralised, with Gosbank, the State Bank of the USSR, serving as the main financial institution controlling all monetary transactions. There were no private banks, and both consumer and commercial banking were strictly regulated by the state. Upon gaining independence, Ukraine had to rapidly transition from this centralised system to a market-oriented banking sector: something it achieved with only limited success, as the legislative reforms put in place in the early 1990's were inadequate.
The early 1990s saw the establishment of Ukraine’s first private banks, most notably PrivatBank, founded by oligarch Ihor Kolomoisky. While PrivatBank quickly became the dominant player in Ukrainian banking, it also became a symbol of the systemic failures within the industry, including fraud, money laundering, and political manipulation. PrivatBank was ultimately nationalised in 2016 after allegations of massive embezzlement by its owners. Kolomoisky was indicted for fraud and money laundering by the Ukrainian authorities, and a US warrant seeking his extradition from Ukraine to the United States for fraud and money laundering remains outstanding. Kolomoisky was arrested by the Ukrainian authorities in September 2023, and in 2024 he was charged with murder. He remains in Ukrainian custody.
Currency Instability and Inflation
One of the major challenges faced by the Ukrainian banking system was the transition from the Soviet ruble to Ukraine’s own currency. Initially, Ukraine introduced a temporary currency, the Ukrainian coupon, which was essentially a Soviet ruble with a Ukrainian trident stamped on it. However, the coupon suffered from extreme hyperinflation, leading to its eventual replacement in 1996 with the hryvnia (UAH).
Despite the introduction of the hryvnia, inflation remained a persistent issue, which led to a lack of confidence in the domestic currency. As a result, many Ukrainians preferred to store their savings in US dollars (USD) cash, a habit that emerged in both Russia and Ukraine (and a number of other post-Soviet countries), a trend that continues today. The transition to the euro (EUR) has been slow, despite Ukraine’s aspirations for closer ties with the European Union.
Banking Regulations and International Transactions
Ukraine’s banking regulations have historically made both domestic and international transactions cumbersome and expensive. Wire transfers using the SWIFT system remain almost impossibly slow, each one being examined by the Ukrainian banking supervision authorities, and international transactions are often subject to bureaucratic red tape, requiring substantial amounts of paperwork to process them. This has resulted in a reliance on informal money transfer systems and fintech solutions, many of which operate outside standard regulatory frameworks. While these services offer faster transfers, they lack capital adequacy requirements, posing risks to financial stability.
Integration with the European Financial System
If Ukraine is to achieve full economic integration with Europe, its banking system must be aligned with European banking standards. This includes:
Encouraging the use of Euro-denominated bank accounts and transactions to reduce reliance on the USD.
Aligning Ukrainian banking regulations with those of the European Central Bank (ECB) and ensuring the hryvnia’s value is stabilised through ECB support rather than external backing from the US Treasury (as is currently the case).
Simplifying and expediting SWIFT transactions to encourage legitimate financial flows.
Strengthening capital adequacy requirements for fintech companies operating in Ukraine.
Conclusion - integrating Ukraine's banking system into Europe
The Ukrainian banking system has been plagued by systemic failures for decades, ranging from hyperinflation and currency instability to regulatory deficiencies and corruption. While progress has been made, further reforms are crucial to integrate Ukraine into the global financial system, particularly as the country moves toward EU membership. Strengthening regulatory frameworks, increasing consumer confidence in the hryvnia and Euro, and aligning with European banking standards will be critical steps toward achieving financial stability and economic resilience.
