Ukraine’s government - whether Soviet red or NATO blue, tilting East or West – has rarely been accused of being straight shooters. Sometimes it was better than others, but politics here is a blood sport. So much so that that the country was cut off from IMF and the World Bank funds in 2011. After the mob ousted their pro-Russian President Viktor Yanukovych in 2014, Ukraine shocked the world by negotiating a restructure of its bonds a year later to rebuild its international reputation.
Ironically, that’s where their troubles really started. I was in-country then and the dodgier bits of the rust-belt east really were very pro-Russian. To hear pro-Western Kyiv tell it, they could go back to Mother Russia. Until their sneering grievances got overrun by reality.
Kyiv managed stay ahead of its debt service after the February invasion until June when the government was running a monthly deficit of $5bn. In July, it negotiated a $6bn debt holiday from private investors like Rothchilds, JPMorgan Chase, BlackRock and some other investors – along with a restructuring into a $3.2 bn instrument that is tied to the national GDP. Yuriy Butsa, the chief of Ukraine’s public debt management leveraged the deal, more or less, with shame. No small feat, as this is not a sector not known for having a lot of it to leverage.
It’s one thing for investors to be flexible about a debt when their reputation is on the line. Practically, they can’t repossess the entire country. For one thing, Moscow has already trying it and they wrecked the place. To get investors to fork over more cash is another bucket of minnows.
The IMF and World bank are still being weird about assistance, they are already stretched and don’t want to loan money to a country that is actually repaying its debt. Which might explain the emerging market debt crisis, but I digress. Ukraine has about $24 bn in reserves and the reconstruction bill was reckoned, before this week barrage of civilian targets across the country, at $350 bn. And the war isn’t over yet – for that matter, there doesn’t seem to be either a coherent end game or an off-ramp for Moscow.
And yet, you have to hand it to Kyiv, it has been as resourceful with its finances as its donated and captured military kit. The government has developed an app that citizens can use to buy government war bonds. The problem is that the average Ukrainian is trying to survive the week, not plan for retirement. So, Ukraine is being forced to return to private investors.
The pitch came from the Brady Plan, used in the 1980s for countries in Latin America and Asia to clean up their finances. It works, more or less, like having a co-signer for a loan. Dad co-signs a car loan for Jr, and it on the hook if things go sideways, but until then, Jr. is paying the note. In this case Dad is Vlodymyr’s rich Uncle Sam. Theoretically several rich government would be on board, but I’m not sure even Kyiv wants the British bond market involved. So Ukraine issues bonds backed by US Treasuries, but funded by private lenders. It makes the issue a lot less hairy for investors and it is cheaper for governments than pledging new grants of money – only about half of which has gotten to the borrower.
There is a lot to consider with the pitch: Bond markets like danger, but they don’t like it that much. The final shape of the war, or Ukraine for that matter, has yet to be determined. Still, someone is going to have to Marshall Plan the hell out of the place.