UKRAINIAN Debt in 2000

The Friday before last, Reuters spread information about the intention of Ukraine to announce the decision to reschedule its foreign debt. To avoid default, the agency claims, Ukraine will admittedly hold talks with the investment banks ING Barings, Warburg Dillion Read, and Credit Swiss First Boston, Interfax-Ukraine reports. The government may offer the creditors the so-called Pakistan option: to exchange Ukrainian foreign bonds for Eurobonds payable within 7- 10 years. The Ukrainian side has not yet officially confirmed this information. Meanwhile, the international rating agency Moody’s Investors Service has announced a new drop of Ukraine’s credit rating and the possibility of “its further reduction, pending the outcome of negotiations between Ukraine and its creditors.” It is quite obvious today that the stand of this country’s creditors has become a serious factor in the domestic political situation. And it is quite probable that, if we fail to come to terms with them now about debt rescheduling, we will later have to come to a “compromise” under the pattern of do what you are told.

I foresee two peaks in the payment and servicing of debts in 2000. The first falls on March 17 and is connected with the payment of $540 million on Eurobonds issued in 1997 via the Swiss bank SBZ Warburg. The bonds were issued for two years at the rate of 14.75%, which is an unprecedented favorable condition aimed to evoke the interest of investors. For example, the US issues such bonds at 6% for 30 (!) years. As long ago as 1997 many experts warned about the danger of speculative actions on the international securities market in pursuit of fast money. Now we have to pay it back. Nobody in the Ministry of Finance must have taken the pains to overlap the Eurobond redemption pattern according to the overall pattern of foreign debt servicing and hence the result. The situation is further complicated by the fact that the Eurobonds are in the hands of many small investors with whom it is very difficult to come to terms about rescheduling (for example, complicated negotiations next summer with ING Barings on rescheduling $163 million). The investors want to get their money on time and in full; otherwise, they threaten a court action over a sovereign default. It is noteworthy that not a single country has ever announced a default on its bonds, for every state would assess its chances and offer respective conditions for payment dates and reward interest rates.

The second peak, September 22, is also connected with Eurobonds, this time converted. We are to pay back $343 million. The government hopes to get, by then, certain funds from the privatization of large enterprises (Ukrtelekom, in particular) and to cajole the IMF into allocating the remaining $2.6- million EFF installments. However, the latter could raise some problems, for the IMF insists on canceling the 23% export duty on sunflower seeds and raising utility charges by a staggering 100%.

On the other hand, the IMF demands may now be more and more assuming a political nature: foreigners even talk about possible changes in Leonid Kuchma’s entourage under the pressure of creditors.

The philanthropist (as well as currency speculator and millionaire) George Soros has been propagating for two years on end the idea of the IMF’s “tough approach” toward customers. The countries living off IMF loans must unconditionally accept the Fund’s recommendations under pain of the discontinuation of financing. What is more, “recommendations” should refer not only to macroeconomic indices but also to a deeper level of economic management, as the official version claims, in order to prevent the formation of crony capitalism in the recipient countries. Mr. Soros claims that the “achievement of macroeconomic indicators” is a too general objective which does not require actual structural reforms and thus does not serve the objective — “true democratization” — as defined by Western countries.

Mr. Soros believes (and aired his views in the influential Washington Post of November 23) the West’s stand with respect to Ukraine should be especially tough, for this country’s leadership is speculating on its geopolitical position between NATO and Russia and, hence, demands more and more funds. Well-stocked with loans to carry out minimal social functions, the quasi- governmental elite is privatizing key enterprises in its own interests and pumping capital abroad (although, as the Western press reports, some Ukrainian People’s Deputies are being prosecuted in the West for money laundering and doing dirty business). Mr. Soros is pinning some hopes on Yevhen Marchuk, but he doubts that “the stables can be cleaned” to the end.

It is for this reason that the international community and financial institutions in particular should lay down the law to Ukraine. The IMF and World Bank are also reflecting on how to make their work more effective. Defeats in Brazil, South Korea, and Indonesia compel them to go on the defensive and seek the ways to reform their policies. Probably, the new IMF managing director (most likely a German Bundesbank official) will try to put some of these intentions into practice.

The IMF and World Bank joint session, which ended in late April 1999 in Washington, dealt with the possibility of amending the IMF Charter. If adopted, this decision will authorize the IMF to place under its protection the countries unable to pay off their foreign loans. A country like this will stop all foreign debt payments, while the IMF, together with that country’s government and other creditors, will draw up a program of compulsory deferment and redemption. In practice, it will be up to IMF experts to decide what such countries will have to sacrifice and what industries may be declared unpromising and subject to decommissioning.

This is why a new factor, the position of foreign creditors, has been added to the post-election political and economic game in Ukraine. Given the absence of free funds to satisfy the creditors’ requirements, Ukrainian authorities must obey them to the letter, even though a $13 billion debt (30% of GDP) is not considered critical in economie theory. For example, the debt of Russia is 50% of GDP. But that is Russia.

The structure of Ukraine’s public debt in 2000,
millions of US dollars (as reported by The Kyiv Post
on November 25, 1999)                                                        Creditor               Total    Base amount   Interest                        3026       1504          507  Russia..................140        140           —  Turkmenistan............160.5      140.9         19.6  Credit lines  (state budget)...........15.4       11.5          3.9  Credit lines  (commercial projects)...331.9      265.1         66.8  Fiduciary loans........1149.4      910.8        238.6  IMF.....................809          —            —  World Bank..............177.3       29.1        148.2  European Union...........23.1        —           23.1  Servicing securities  (bonds) Foreign debts....84.5        —           84.5  Other payments...........53.9        —           53.9 №2 January 25 2000 «The Day»
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