Ukraine’s Shakespearean tragedy: Default and Growth

The following is an opinion piece by our Eastern European Editor. You can read more of his work here. 

‘To default or not to default…’

‘When Hamlet was thinking ‘To be or not to be…’ he seemed to be capable of making up his mind. In case of Ukraine the ‘To default or not to default’ decision is up to someone else’.

On the 27th of August Ukraine government reached a ‘revolutionary’ deal in restructuring its debt with the private investors chaired by the ‘notorious’ risk-taking investment fund, Franklin Templeton. For war-torn Ukraine this deal was vital, since it was one of the IMF’s conditions for lending bailout money to the country. Furthermore, failure to sign a deal with the creditors would have meant a certain default for Ukraine.  Thus it appears that Ukraine can heave a sigh of relief and celebrate the agreement. Unfortunately this is where Russia steps in and whispers with its Minister of Finance, Anton Siluanov’s voice: ‘not so fast, comrades’.

Anton wishes to have a word. Image Source: Bloomberg

Before returning to Russia’s role in the deal let us take a look at Ukraine’s debt structure and details of the signed agreement. It has been agreed with the private creditors who own about 75 % of Ukraine’s bonds that, instead of defaulting on the debt, it will be restructured as follows:

  • The principal on the bonds will be cut by 20 %
  • The deadline for the payment on the bonds will be extended by 4 years
  • Interest rates will go up from 17,22 % to 17,85 %

These are the key points of the agreement. The most surprising fact is that the creditors somehow agreed to a 20 % cut, especially considering that only a month ago they would not agree to more than 5%. This gives a rise to a question whether it is a spectacular win of Ukraine’s negotiators or there is something more to the deal, something which is not communicated down to the jubilant citizens.

Apart from a 0, 53 % rise in the interest rate, Ukraine has committed to paying extra 15 % of surplus growth if its economy starts growing by 3-4% annually starting from 2019. Should he growth rate will be higher it will pay 40 %. According to the Economist intelligence unit, 4 % growth in 2019 seems to be very likely.

In a nutshell, Ukraine has got the deal which prevents it from defaulting winning the country 4 years to revive its economy and enter a growth phase. On the other hand, given the deal’s details, it is clear that eventually Ukraine will pay its creditors every penny it had borrowed, regardless of the 20 % cut. Ukraine did not win any money, however it won even more valuable resource- time. Therefore this deal should be deemed as a strong incentive for implementation of effective and structural reforms in the country. Otherwise, judging from Greece’s experience, Ukraine will have to go back to the negotiating table again, and this time the creditors might not play along.

Unfortunately, this article does not end on a positive note, for we have forgotten about one important stakeholder who is awaiting their 3 billion dollar payment due in December. As you may have already figured, the mysterious bonds owner is Russia.

In fact, the ‘Motherland’ is the only side that refused to restructure Ukraine’s debt and is demanding the payment to be made on time in full. Providing that Ukraine cannot offer Russia special conditions on the debt’s restructuring it has two options: first is to place a moratorium on paying Russia 3 billion $, in other words to default, second is to somehow have Russia agree to sign the deal on the common conditions. Russia realizes that Ukraine’s fate largely depends on whether it agrees to sign a deal or not, Ukraine is motivated and understands the importance of getting Russia to strike a deal. So let the negotiations begin.

Bogdan Nesvit

Bogdan Nesvit

Editor, Eastern Europe at InPRA
Having completed his under-graduation at Dnepropetrovsk National University, Bogdan read as a post-graduate at the University of Oxford and University College London(UCL).

Coming from Ukraine, he has worked for Ukrainian City Councils, magazines, journals and joined the United Nations in 2014.

He hopes to bring a different but robust prospective on Eastern European and Eurasian politics with his work.
Bogdan Nesvit

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