By Yuriy
Gorodnichenko
UC Berkeley, VoxUkraine
The International Monetary Fund (IMF) made two important decisions recently. First, the IMF issued a new policy that allows the IMF, in certain circumstances, to provide financing to a country even when it has outstanding arrears to official bilateral creditors. Second, the IMF ruled that Ukrainian bonds were purchased by the Russian government IS to help the Yanukovych government is bilateral intergovernmental debt. What do these decisions mean for Ukraine?
The first
decision clearly gives a huge benefit for Ukraine. Before the decision, the
Ukrainian government was effectively on the Russian hook. If Ukraine
does not pay on the Yanukovych debt, Ukraine can be declared in arrears and
thus all funding from the IMF has to be cut. Given the dire state of public
finances and lack of access to international capital markets, this scenario
could have been a serious, if not fatal, blow to Ukraine. Not surprisingly, the
Russian government refused to agree on any restructuring of the loan. However,
the IMF changed its policy and now the Russian position is significantly
weakened. Ukraine is only required to negotiate restructuring in good
faith. Because “good faith” is a rather oblique term, the Russian
government may not see much money from Ukraine for a long time: Ukraine is
likely to engage in long negotiations, make various offers, involve courts,
etc. It may take many years before there is any kind of resolution and
meanwhile Ukraine has funding from the IMF which unlocks more funding from
other sources.
In light of the
first decision, the second decision is less important—there is no fundamental
change in the bargaining powers of the Ukrainian and Russian governments—but it
means that Ukraine cannot include the Russian loan in the perimeter of
recently restructured debt held by private bondholders. Ukraine may
disagree with this decision but if it wants to have funding from the IMF,
Ukraine has to respect this decision. In current circumstances, Ukraine does
not have much choice and thus it will have to do what the IMF ruled and open
talks with the Russian government. The second decision, however, can open a
Pandora’s box.
Formally, the
Russian government did not loan the Ukrainian government directly. It was
Russia’s National Welfare Fund (NWF) that loaned money to Ukraine. Furthermore,
it was done via a bond issuance in Ireland. In other words, Ukraine issued debt
securities that in principle could have been bought by anybody but it
“happened” that the whole issue was bought by the NWF. Here’s the official story from
the IMF:
“… Russia’s
Finance Minister, Mr. Siluanov, explained that assistance was being provided
via the NWF because the funds had not been appropriated in the federal budget,
ruling out a direct intergovernmental credit. Since the NWF’s investment
guidelines did not permit investment in Ukrainian bonds (due to the credit
rating requirements), a specific government decision was needed to amend them.
This implies that the NWF, in acquiring the Eurobond, was acting on behalf of
the government. Subsequently the Russian authorities confirmed to Euroclear, at
the request of the Ukrainian authorities, that the Eurobond has at all times
been 100 percent owned by the Russian Government.”
This reasoning
is problematic. Imagine that the Russian government did not hold Ukraine debt
“at all times” and sold the bonds to a private investor (e.g. a hedge fund like
Franklin Templeton). According to the ruling of the IMF this could have changed
the legal status of the debt. But this is a violation of the principle
that the rights of bondholders do not depend on the identity of bondholders.
Governments, households or firms cannot say they are going to pay good guys and
default on bad guys. Borrowers have to treat bondholders equally.
Now consider a
transaction where the NWF on behalf the Russian government buys bonds (a whole
issue) that were issued by the Ukrainian government and that were previously
held by private investors (e.g., Franklin Templeton). Does this mean the bond
now is a part of bilateral intergovernmental debt?
If not, then
there is a clear inconsistency in the ruling: buying and selling bonds at any
time should be treated uniformly. If somebody buys a bond after
issuance, it does not make this bondholder lesser or different in his rights.
If yes, then
should the U.S. debt held by the Chinese/Saudi/Russian governments or their
sovereign funds be treated as bilateral? Absolutely, not! And yet, this is what
is implied by the IMF ruling. “A specific government decision was
needed” condition is a fig leaf: a bureaucrat or a party in a foreign capital
can make a magic transformation of private debt into bilateral without even
consulting the government that issued the debt.
In summary, the
first decision was long overdue. No lender should hold up other lenders. The
IMF made a similar decision about private debt holders a long time ago—in
1989!—and only now applied the same principle to governments. The second
decision appears much more controversial. It lacks logical consistency and
creates a precedent that may backfire in the future not only for developing
countries but also for economic heavyweights. Fortunately, it does not change
anything materially for Ukraine in the near future. Indeed, the Ukrainian
government went ahead with a predictable move: it announced moratorium
on debt payments to Russia and, acting in good faith, invited the Russian
government to resolve the issue in court. Viktor Yanukovych may be a star
witness!
This article was originally published at VoxUrkaine. All Rights Reserved by the Original Publisher.