Cabinet’s “victories” and harsh reality: Ukraine’s economy last week

The highlight of the last week was the agreement with a special group of creditors on the restructuring of Ukraine’s national debt.

“In reality things are not what they are,” Stanislaw Lec, Polish writer.

Outcomes of talks on Ukraine’s debt restructuring. After an unscheduled delay in the suburbs of San Francisco, Ukraine’s Finance Minister Natalie Jaresko came back from the United States to Ukraine with good news for Prime Minister Arseniy Yatsenyuk – the country’s debt had been successfully restructured, as they put it in Ukraine.

Those outside the circle of the “best ever prime minister of Ukraine” can hardly share his joy though - at least, because what they hear from Ukrainian mass media is not exactly what it is. What they hear is that “the creditors have written off 20% of the debt.” But the reality is that it was not writing off and it was not 20%.

 According to the website of Ukraine’s Finance Ministry, the debt the Ukrainian authorities want to be restructured totals $22.6bn (nominal value), while, according to the same website, on June 1, 2015, the national debt of Ukraine amounted to 915.99bn UAH or $43.24bn. So, initially, they in Kiev sought to restructure only half of their debt. From the rest, we can deduct the private debts of Oschadbank and Ukreximbank - $2.8bn (restructured but not written off). Of the remaining $19.8bn, $18bn are government bonds and the bonds of the Financing of Infrastructure Projects state company. The rest is the debts of companies like Yuzhnoe, Ukravtodor and Ukrmedpostach as well as the Eurobonds of the Kiev Municipality and the Ukrainian Railways. So, by the writing off of $3.9bn, they mean just 20% of $19.8bn.

But this is not all. According to the selfsame Finance Ministry, the terms of the restructuring should first be approved by the owners of the bonds. This means that the talks are not over yet. So, what “victory” are they talking about?

Even if the terms are approved, in the next three or four years, Ukraine will have to pay creditors almost as much as they have “written off”: in the next five years, the Ukrainians will have to pay 1% of their GDP or over $1bn, and for the next fifteen years there will be no limitations. In fact, the agreement reached with the special group does not envisage any economic growth in Ukraine as repayments to creditors will keep growing. In case of a 3% GDP growth, Ukraine will be paying from 2021 to 2040.

Today, the Ukrainian economy can no longer live without new borrowings, and the only way for Ukraine to get new loans is to cut the gap between its national debt and GDP. This is not even a stalemate. This is a mate in two moves. And exactly this - rather than some alleged “victories” - is reflected in Fitch’s new “C” index for Ukraine - a rating that means that default is inevitable.

In fact, over the last six months, Ukraine’s new authorities have managed to throw their country into the arms of creditors for decades to come, and thereby to make it the West’s colony. In exchange, they will get good bonuses and a chance to escape when need be. And the hug of Ukraine’s western “partners” is so strong that the country will hardly be able to get free in the coming decades - no matter who the next regimes will be.

Another good news for Yatsenyuk is the four-year time-out for the principal of the debt. Today, they in the Ukrainian Cabinet perfectly know that four years in the present-day Ukraine are equal to eternity. In four years, Ukraine may not only have other rulers but may even look quite differently on the map. And many of them in the Cabinet may already be back to their native countries or may be sent to other countries wishing – like Ukraine today – to go through some great economic reforms.

And again, Ukraine is refusing to repay its debt to Russia. When in May the Supreme Rada approved a law suspending repayments of restructured debts, it was clear that the first repayments that would be suspended would be those to Russia. And now that the special group has “agreed to restructure” Ukraine’s debt, Yatsenyuk has a formal ground not to repay its $3bn debt to Russia at all. And his argument is that Ukraine cannot repay debts to an “aggressor country.”

But the point here is that, first, the agreement with the special group are not yet finalized. And also, why should Russia accept the terms negotiated with private creditors owning just 1/4 of Ukraine’s national debt?

If Ukraine is not going to pay back its $3bn debt to Russia just because the money was given to the previous regime, then, what grounds do creditors have for giving loans to the current regime? Or has Yatsenyuk decided to rule forever? In reality, he has just a few months left in office. And can we be sure that the next regime will not call the current one illegal – especially as there are much more grounds for calling it so? It means that the obligations the current regime is undertaking may also be called illegal?

All Yatsenyuk is saying today is aimed to fuel anti-Russian moods in Ukraine. The language he generally uses when speaking about Russia is the language of ultimatums: “Russia has not joined the committee of creditors. So, the terms it can hope for will in no way be better than the terms offered to the other creditors. It was their decision. Either they accept our terms or they will never get better ones.” This tone gives Russia a pretext to use its legal right and to demand that Ukraine repay its debt ahead of time as its national debt has already exceeded 60% of its GDP, which is contrary to the lending terms.

Alexander Dudchak, economist, specially for EADaily