Borrow to be re-elected: Ukrainian leaders’ new tactics

During the last three and a half year, Ukraine has accumulated its state debt and is likely to borrow even more as the presidential election of 2019 approaches. The state debt increased by $5 billion for Jan-Sept 2017 alone totaling $76 billion, which is almost 85% of GDP. For comparison, in 2014, Ukraine’s state debt was equal to 40% of GDP.

The most recent increase in the state debt occurred last Monday, as the Finance Ministry of Ukraine raised $3 billion in its first sovereign bond issue since 2015. The 15-year dollar-denominated Eurobond was placed on external market with a yield of 7.375 percent. Suffice it to say that the payment for service of these bonds will exceed the debt amount by the repayment time. Besides, $1.6 billion out of $3 billion will be spent to pay for debts in 2019 and 2020. Consequently, net growth of the state debt after placement of the new bond will total $1.4 billion.

The interest rate is too high. Securities of only “third countries” such as Tajikistan, Honduras, Nigeria, are normally placed at such high interest rate. Noteworthy that the government under former president Viktor Yanukovych borrowed a similar amount of money from Moscow at the interest rate of 4.95 percent in late 2013. It should be recalled that the IMF recognized that debt as sovereign, though the incumbent authorities of Ukraine claim that it was “a bribe paid to Yanukovych in exchange for his refusal from European integration” (the High Court of Justice, London is expected to announce the final verdict on “Yanukovych’s debt” next January) . There are almost similar interest rates on foreign exchange instruments on the domestic market, and the IMF provides loans for just 3%. Noteworthy that Russia that is experiencing sanctions placed 10-year and 30-year dollar bonds in June at the interest rate of 4.25 percent and 5.25 percent, consequently. Demand for these bonds is quite high.

Probably, Ukraine’s government had to place bonds on external market since further financing by the IMF and EU is up in the air. President Petro Poroshenko and Prime Minister Volodymyr Groysman have actually launched presidential campaign not to lose their record low approval ratings when the requirements of the IMF and EU to increase gas tariffs for the population, cancel the moratorium on the export of round timber, open the agricultural lands market for private investors etc. are implemented. Besides, during a Yalta European Strategy (YES) annual meeting held in Kiev on September 14-16, Poroshenko criticized the idea of establishing an anti-corruption court recommended by the IMF in its last memorandum. He realizes the risks for the Ukrainian elite if a court of new jurisdiction directly oriented at Washington and Brussels is established.

In such situation, it would be logical if the Cabinet of Ministers and National Bank of Ukraine used domestic market of currency loans (like Yanukovych did) – the people still have billions saved “under mattresses” and still have nowhere to invest their money. The only investment is real estate, and the housing sector has increased some 15%-18% during the recent years. However, 76.5 thousand square meters of newly built real estate remains unsold since 2011 in Kiev alone.

The last placement of Eurobonds once again proved that the current government in Ukraine is temporary: in 15 years, when it is time to repay for the Eurobond placed in September 2017, the current leadership of Ukraine will be gone. Before that, those in power have some short-term tactical goals to implement and the key one is to retain power for spring and autumn 2019 unless any force-majeure situations occur. These plans appear to have taking shape.

First, new borrowings are needed to repay the external debt. In July, the National Bank announced that by 2019 Ukraine shall repay $11 billion foreign debt. According to the recently published draft state budget for 2018, foreign and internal borrowings are envisaged at 193billion hryvnias (about $6.5 billion) and 118bln hryvnias ($4 billion) will be spent to redeem the state debt. The Ukrainian “elite” does not care what will happen after 2019 and especially after 2021 when new conditions of debt restructuring signed by American-born finance minister Natalia Jaresco come to force (if GDP exceeds 3%, Ukraine pledges to pay at least $1.25 billion a year to creditors). Jaresco signed these conditions being well aware that it will not be her to implement them. Soon after, she left her historical homeland to save Puerto Rico from financial collapse.

Second, the Ukrainian government needs to gain favor of the key voters, pensioners, employees of the government-run enterprises and the law enforcement and army by providing miserable social benefits or not cutting the existing ones. To that end, the government perhaps plans another devaluation of national currency, privatization (this summer, government shares in heat and power enterprise were sold for 3 billion hryvnias to Rinat Akhmetov, a local tycoon that has improved the positions of his DTEK holding in the electric power market) and maybe opening of agricultural land market.

The debt burden of Ukraine is heavy as never before. Ukraine will hardly manage to resolve its debt problems and shift to sustainable economic growth even in the mid-term outlook.

Igor Federovsky, Kiev