Ukraine’s Backward Leaning Liability Lull
After a Moody’s ratings upgrade from the low junk category, Ukraine bonds rallied on a post-default market return as $3 billion in issuance split between rollover and new money was doubly oversubscribed at a 7.5 percent yield around the current secondary level. Buyers seemed to slough off concerns about the war with Russia, which won initial judgment in London for payments outstanding under the previous regime, and the 2015 20 percent haircut as the transaction followed a string of other far frontier sovereign bond taps including Iraq and Tajikistan. President Poroshenko called it “unbelievably positive” and the Finance Minister “transformational” despite lapses in the $17.5 billion IMF program now with lukewarm support from the Trump administration and subject to “backward risk” in the words of the Fund’s number two official. GDP growth is now positive but a long way from overtaking the near 20 percent output collapses from 2014-15, and energy, pension and anti-corruption reforms have stalled after early momentum. The courts have interfered with actions taken by the new integrity bureau, whose head has been publically threatened by the media and lawmakers under investigation. The President himself, with his popularity at a single-digit low, has fended off attempts by the panel to pursue allegations against his intact business empire. Heading into winter natural gas tariff raises are overdue for state company cost recovery, which will sustain 15 percent range inflation. A full accounting of the hole in the public pension system has yet to be made, and bank cleanup is still proceeding after the takeover of Privatbank, where auditors Price Waterhouse were found to miss a $6 billion balance sheet gap.
In Russia, the only MSCI core stock market in the red through August, the central bank uncovered a bigger defect at “systemically import” Okritie Bank, the leading private lender. The new local rating agency set up by the government before had downgraded it, spurring a deposit run. Supervisors accused it of “sugarcoating” the books by inflating the value of Eurobonds acquired as Western sanctions for the Crimea invasion restricted external investment. The bank’s head was a well-known trader and bought a portfolio of smaller institutions with cheap post-2008 crisis state funding. With nationalization through a 75 percent stake management was dismissed and another shaky private competitor, B&N Bank was also taken over soon after. With the moves Sberbank, with over $400 billion in assets and a 25 percent earnings jump the last quarter, solidified its dominance as analysts predict the official share of the sector could reach 80 percent. Their support could be essential abroad as well as Rosneft maneuvers to provide Venezuela a credit lifeline in exchange for additional oil field access and ownership. It already retains the right to seize 49 percent of US outlet Citgo in the event of Caracas’ joint venture lapses, while Treasury Department limits may hinder eventual overall workouts with a future debt investment ban. Meanwhile, VTB the second leading government provider, is under fire in Washington for its reported links with the Trump campaign including a post-election meeting with his son-in-law whose New York properties were in need of refinancing under backward cash flow.
