When Russia occupied the Ukrainian territory of Crimea in 2014 and launched a militia war in Donbass and other parts of eastern Ukraine, Ukraine’s banking system suffered an impact. On February 24, 2022, as Russia launched its full attack on Kiev, experts feared that major banks would be forced to close, ATMs would run out of cash, and the hryvnia would collapse.

But two months after the start of the war, none of that happened. Ruslan Chernyi, editor-in-chief of Financial Club, told the Kiev Independent that about 70% of bank branches throughout Ukraine remained open. Others could no longer function due to their proximity to war zones in the east and south, but people could still use online banking apps and electronic payments.

The Kiev Independent reported that among a total of 69 banks, only four faced serious liquidity risks in the first few months of the war, while three others were at heightened risk because a large proportion of their consumer loans or assets were located in active war zones.

Yevhen Dubogryz, an expert at the nonprofit CASE think tank, noted that even in a worst-case scenario, Ukrainian banks had sufficient resources to keep cash flowing.

Banks immediately moved their cloud services

Faced with the first wave of attacks in February, banks and financial institutions were forced to respond quickly by evacuating branch personnel close to the war zones, migrating servers and data centers, setting up remote work guidelines, and communicating with the Ministry of Defense. The government allowed each bank to come up with a basic list of people who would not be called up for military service within the next six months.

It is also worth mentioning that the pandemic had already accelerated digitization, cloud operations, and remote work mechanisms over the past two years, which played a role in this war shortly thereafter. In particular, banks migrated their data centers and servers to the west, closer to Poland, ensuring operational continuity.

In addition to bombardment of bank buildings, information systems were also subjected to frequent cyberattacks. After the war started, the Russian cyber army attacked the Ukrainian Ministry of Defense, Ministry of Foreign Affairs, and state-run PrivatBank, (which is equivalent to Ukraine’s Mega Holdings). The US cybersecurity company Symantec reported at the beginning of the war that the data on 50 computers in a Ukrainian bank was maliciously deleted.

Russia shelled bank buildings, hacked internal information systems

Russia’s cyberattacks often serve as cover for cyber intrusions. Ukraine’s financial industry information security department often discuss the war that may continue after the land war is finished with government information security departments.

Some banks have had their own missions. PrivatBank used the court in the Hague to pursue the assets of its local branch after Russia invaded Crimea in 2014, including safe contents.

When the war broke out, the Russian ruble faced depreciation, but also hryvnia also faced pressure. The most important job of the central bank in the early days of the war was to stabilize the exchange rate. It immediately froze the exchange rate to 1 US dollar to 29.25 hryvnia, and prohibited buying or selling foreign currency on bank networks to prevent capital outflows.

The central bank froze the hryvnia

According to the Kiev Independent, the central bank quickly determined that Ukraine would not have foreign exchange income, which would affect the stability of the financial market and constitute a systemic risk for the country. On April 14, it relaxed the ban on buying, allowing people to exchange foreign currency cash with banks. According to the report of the Centre for Economic Strategy, this relieved the pressure on the exchange rate, allowed the financing market to recover, and also reassured hryvnia borrowers.

By March 2022, the Ministry of Finance issued war bonds and the central bank bought them to stabilize the exchange rate. In addition, Ukraine’s foreign exchange reserves increased by 2% in that month to US $28.1 billion, which was mainly driven by the International Monetary Fund (IMF), World Bank and the European Union.

Analysts note that the impact on the banking industry in 2022 was not as severe as expected, which is related to Russia’s invasion of Crimea and Donbass in 2014, which prompted the best banks to be liquidated or nationalized. For example, PrivatBank, which was originally owned by the Ukrainian oligarchs Ihor Kolomoisky and Hennady Boholyubov, was nationalized and is now the largest state-run bank in Ukraine. At least 18 million of Ukraine’s population of 43 million have accounts there.

In addition, the bank also introduced war zones into its risk rating system. For example, the eastern front is regarded as a high-risk red zone, with zero chance for companies to obtain loans. The closer to the green zone in the west abutting Poland, the more normal its economic activities are.

While banks in Ukraine are busy coping with immediate risks, banks in the entire euro zone are constantly revising their risk assessments, assessing and pricing potential risks for the entire theater, including Russian customers. Although the exposure of Taiwan’s financial industry to Russia has reached more than NT$200 billion, banks in the euro area have been consciously reducing their exposure to customers in Russia, or corporate customers with Russia as their market, every year since 2014.

After the war broke out, Russia became the top issue for all financial institutions in the Eurozone. Moreover, as concerns the SWIFT sanctions against Russia, related remittance business and customer background investigations, the “Russia risk” also includes Belarus.

The European Central Bank put forward some requirements for banks in the euro area. One of the important tasks is stress testing, including assessing default risk and simulating probable scenarios. For example, they must estimate the initial impact on profit and loss, capital and reserves due to a decline in GDP from natural gas supply, sudden expropriation of Russian subsidiaries by Moscow, or further international sanctions against Russia.

Increased probability of default by credit customers drags down Ukrainian banks

Going back to the integration of the Ukrainian banking and economic system, after the war broke out, many borrowers themselves experienced a liquidity crisis, which had a joint impact on the banking system. According to a report by the Kiev Independent, at one point during the war, as many as 70% of companies were forced to suspend operations, which sharply increased banks' non-performing loan ratios.

A systemic crisis loomed as banks’ interest income plummeted and they begin to cut lending to businesses. Therefore, in March 2022, President Volodymyr Zelenskyy announced an economic revitalization plan. During the period of martial law, the government's 5-7-9% loan plan ensured that companies could enjoy zero-interest loans of up to $2 million. But many complained that they still could not access credit.

As of mid-April, the program had disbursed nearly 1,400 loans totaling $127 million, most of which were concentrated in three key industries of Ukrainian state policy: agriculture, food production, and pharmaceuticals. Although the banking industry survived the first wave of Russian attacks, as the war dragged on, the chances of returning to pre-war profitability diminished every day. If the war continues at a similar pace, the banks will be forced to start shutting down at some point.

The Kiev Independent believes that even after the war, overdue loans and unserviceable debts may continue to exist. At least half of banks may need to be liquidated. A crisis is inevitable if normal economic activities cannot be resumed. Financial sector officials are trying to reduce the industry's pessimism, and Ukraine's central bank has planned a post-war financial system recovery plan. A healthy banking sector is crucial to the recovery of the country's economy, but like with other theaters, Ukraine will have huge foreign aid contributions to help rebuild.

US, EU draw up recovery plan

After the US launched the war in Afghanistan, it assisted in the reconstruction. From 2003-2020, the GDP of Afghanistan jumped from US $3 billion to US $19.8 billion, and the population increased by 17 million to a total of nearly 40 million.

This time, Ukraine will receive support from the EU and US to rebuild. On December 28, Zelensky and BlackRock CEO Larry Fink agreed to jointly rebuild Ukraine. It was the second time Zelensky met with BlackRock representatives to discuss a push for public and private investment into Ukraine to rebuild it following Russia's devastating invasion.