Ukraine’s Bankruptcy. Help from Abroad Won’t Come
On Dec. 18 the Ukrainian government officially announced its refusal to repay its $3 billion debt to Russia. Repayment was due Dec. 20. Kiev also refused to pay both the $75 million in interest on the debt, as well as the additional $507 million that two Ukrainian companies still owe to Russian banks (the Ukrainian government had promised to back those firms’ debts).
Ukrainian officials have called this refusal a «moratorium», and some in the Ukrainian media have dubbed it an «embargo», but there is a crystal-clear meaning lurking behind those words, which is that the country is going bankrupt. That same day, Aleksei Pushkov, the head of the State Duma’s foreign-affairs committee, stated that if Ukraine introduced a moratorium on the payment of its debt to Russia, that would be the equivalent of the state declaring a sovereign default on its debt. And no speeches by Arseniy Yatsenyuk will be able to conceal that glaring fact.
Natalie Jaresko, the minister of finance of that bankrupt state, could not come up with a better explanation of the refusal to pay the debt, other than to call it «the will of the people». The current government has forced Ukraine into a corner: the country is now being held hostage by its debt restructuring agreement. If Kiev pays Moscow, then all the private creditors who signed the restructuring agreement will cry foul. The house of cards created by the restructuring will collapse. And there’s yet another element to Kiev’s reluctance to pay. Dmitry Medvedev summed up the logic of the Ukrainian government in one short word: «crooks». Washington has done all it can to encourage Kiev’s predilection for chicanery, as well as the government’s chutzpah in regard to its foreign debt.
But everything eventually comes to an end. There are now signs that Washington is preparing to hand Ukraine over to the tender mercies of its creditors and other financial vultures. The IMF’s Executive Board unanimously voted to recognize Russia’s loan to Ukraine as «official» or «sovereign». Someone might have thought that Uncle Sam, who has been championing the regime in Kiev, must have simply slept through that vote. But that’s not at all what happened. Especially since even the IMF director for the US voted in favor of that decision. What’s not to understand?
A change in the rules governing the IMF’s lending now allows the fund to continue to transfer loan funds even after a default has been announced on obligations owed to sovereign creditors, and here I would like to point out the logic behind the decision by the fund’s staff to alter those guidelines: subsequent IMF loans may be issued to a country that has defaulted, in order to help it repay its obligations to a sovereign lender. I would like to propose an unorthodox idea: the IMF will transfer the next scheduled installment of the loan funds to Moscow in order to settle the issue of the $3 billion debt, after which the creditors and other financial vultures can then get down to the business of divvying up the «Ukrainian pie». For Uncle Sam – the patron saint of those creditors and vultures – it is clearly preferable to let Moscow take its share and step aside, out of the way of the looters.
Now – about those creditors and vultures. To all appearances, an agreement was reached with them about restructuring the debt. However, Kiev has continuously emphasized that all its creditors and lenders were invited to attend the restructuring negotiations, including Russia, which Kiev considers to be comparable to financial vultures such as the investment fund Franklin Templeton. Yatsenyuk and Jaresko have insisted that the Russian loan issued to Ukraine in late 2013 falls under the category of private debt and that Russia’s place lay at the negotiating table alongside the Franklin Templeton fund and other vultures. And if a private lender did not take his place at the negotiating table – well, that’s his problem. The restructuring was carried out anyway. However, there are two important details that must not be overlooked.
First of all, not all the private creditors were present at that negotiating table. According to our data, the holders of at least a certain percentage of the debt were not represented at the talks. Those are most likely the hard-core vultures who are biding their time for now. Franklin Templeton could transfer a share of its debt securities to those «secret agents» who will emerge from their lairs at the proper time. It was «agents» like these who shattered Argentina’s debt-restructuring agreement that was reached in the 2000s. Those outsiders owned only a small percentage of Argentina’s debt, compared with its total face value, but it was enough that Argentina has today been re-saddled with its enormous sovereign debt from the early 2000s (although Argentina continues to resist the onslaught of the vultures and refuses to abide by a New York court’s rulings that invalidate its debt restructuring).
Second, even those private creditors who reached an agreement with Kiev in regard to the debt restructuring can re-scrutinize that earlier agreement, in light of the fact that they were misled by Kiev. Moscow was not a private (commercial) creditor, as Ukraine’s representatives suggested to them, but an official (sovereign) one, as ruled by the IMF. A situation could arise in which all those private creditors come together in unison to present Kiev with their demands for 100% repayment. And that’s without taking into account the maturity dates of the debt securities. Financiers call this a «cross default» (in which all creditors file repayment claims against a debtor in the event that a default is declared on any one of its debts).
Special note should be made of the fact that last week the investment fund Franklin Templeton denied the Ukrainian government’s request to restructure the debt of the city of Kiev. Nor is the relationship with the IMF on the right track for Yatsenyuk’s government, because the fund is dissatisfied with the progress of budget and tax reforms in Ukraine, as well as with the fact that a balanced budget has still not been passed. Without that, Ukraine will not see the next scheduled tranche from the fund (which Yatsenyuk and Jaresko expected to receive back in October).
As for the Russian Federation, it is preparing to go into action as soon as the grace period ends (10 days after Dec. 20). That will mean referring the matter to the English court system. No matter how long it takes for the court case to be examined, Russia should get its money (plus interest for late payment). The English court system has very little desire to get involved in politics, even on the side of the regime in Kiev. The English courts hold their reputation dear.
And the court case will come at an equally dear cost for Kiev. Private investors and creditors are not about to reinvent themselves just to comply with the political needs of the Ukrainian government. A default is always a default. Especially a sovereign one. Countries that undergo a sovereign default (bankrupt states, in other words) are not provided with new loans or investment. Even if such countries contrive to deceive their sovereign creditors, private lenders consider that to be the kiss of death for further business dealings.
I think that official Kiev has finally realized that it has utterly and irrevocably fallen into a financial trap. Jaresko has unexpectedly begun to stammer something about the fact that Kiev is «hoping for a pre-trial resolution of the issue» with Moscow. However, Ukraine’s finance minister made this statement about the debtor’s readiness for «good faith» negotiations with its creditor (which is a requirement under the new rules if a country is still to receive IMF money in the event of a sovereign default) on the same day as the announcement about the «moratorium» (i.e., the default). And even that was a verbal statement, not a formal proposal issued to the Russian Finance Ministry. I think that Kiev should have begun «good faith» negotiations several months earlier. Yatsenyuk and Natalie Jaresko now find themselves cornered on the financial chessboard. On Dec. 18, Kiev itself vehemently announced a «check». But beginning next year, its creditors will put it into checkmate.
