Ukraine’s Clipped Haircut Hurdles
Ukraine bonds and stocks showed double-digit losses, as the original end-June deadline passed for a deal with the Templeton-led creditor committee for $15 billion in relief linked to the broader IMF program praised as largely on track. Monthly coupons were paid both on the Eurobond and Russia’s package the Fund places in the official debt category to avoid possible cross-default clause activation The next servicing is in July and Kiev has passed a moratorium law that would trigger CDS upon imposition. Finance Minister Jaresko has pressed for a 40 percent haircut to reach the end-decade 70 percent debt/GDP target, but the four main commercial bondholders prefer maturity extension, equity swaps and economic growth warrants. The contrasting positions are reinforced by the absence of common sustainability data and assumptions as updated work from the latest staff mission awaits release. The exchange rate scenario against the dollar may be further downgraded toward 35-40 heightening fragility, but private funds retort that steep interest and principal reductions will pre-empt medium term market access. They also argue that Russia should not get de facto senior status as the IMF considers its policy for lending into arrears with the current impasse. In September a big $625 million installment is due and negotiations could last until that period with summer vacation and renewed Eastern fighting interruptions. The eventual value recovery could approach prevailing prices around 50 cents/dollar but most sell-side houses view such an outcome as optimistic and remain underweight.
Their caution may be strengthened by the conclusions of two papers on the country’s political and economic futures recently commissioned by the Bertelsmann Foundation. The former concentrates on the US and EU sanctions strategy with a call for balancing “assertiveness and engagement.” It criticizes the Minsk II ceasefire agreement as favoring Moscow and embedding the Donbass region as another CIS separatist enclave. Business and banking boycotts have not altered the ground situation or President Putin’s behavior with his popularity firm at 80 percent. Reserve and ruble recovery have traced oil prices and the temporary pain according to the Kremlin story could be attributed to the West’s harsh measures amid commodity swings. Central Europe has begun to break ranks with its high bilateral commercial and energy dependence and Italy and France have lamented lost transactions and cooperation on other policy issues like immigration and Islamic extremism. The author warns against Iran-style comprehensive freezes such as ejection from the SWIFT payments system as advocated by US lawmakers, which could “blow back and damage Western economies.”
Longtime Russia-Ukraine specialist Aslund offers a dismal economic review as he traces the post-2008 descent into crony and state capitalism, and Moscow’s shift from WTO toward developing the Eurasia Union. Financial sanctions have gone beyond the letter after a series of multi-billion dollar global bank penalties as compliance officers prevent all dealings. Capital outflows have continued at $30 billion in Q1, and actual reserves outside earmarked sovereign wealth funds may be just $150 billion. With consumption and investment falls GDP could shrink 10 percent this year, while inflation will stay at 15 percent despite currency rebound. Foreign investor sentiment is “miserable” regardless of sanctions, and unless an integration path can be restored cross-border ambitions will be clipped indefinitely, he concludes.
