At around the same time, Russian Prime Minister Dmitry
Medvedev expressed his opinion that Ukraine will not pay this money back
because the Ukrainians are “swindlers”- to use his words.
Russian President Vladimir Putin hasn’t commented on this
matter, probably because he has been too busy preparing for his speech of
gratitude for 10 years of loyal and valuable service from the nice people over
at RT.
Some commentators have suggested that Kyiv should not repay
this money, not least in part as compensation for the damages caused by Russia’s
temporary occupation of Crimea. I disagree, I think matters should be
compartmentalized, Crimea is Crimea and that matter must be dealt with in an
appropriate forum and through necessary channels, conflating the question of
Crimea with this debt or any other matter doesn’t help to see things for what
they are. Russia’s annexation of Ukrainian territory was an illegal act of
military aggression, the “referendum” that followed had neither legitimacy nor
credibility, and the announced results were obviously an insult to
intelligence. Let’s not cloud those basics of that matter with anything at all.
There’s also a suggestion that the $3 billion shouldn’t be
repaid and this sum should instead be treated as reparations for the damage
caused by the unprovoked war in the east of Ukraine. It’s not hard to see why
some would argue that perspective. For certain though, $3 billion is nowhere
near enough for the rebuilding costs, let alone compensation. Again though, I
disagree with this course of action.
Ukraine’s debt to Russia is simply a reality that we have to
accept. It exists. Like the need to purchase some gas and coal supplies from
Russia. Face facts, there’s a debt. It is a matter to be considered within the
frame of reference surrounding this issue and nothing else.
Now, what are the frames of reference of this specific
issue?
An exceptional team from the Ukrainian Finance Ministry have
led a process of renegotiation of all debt that lasted for many arduous months.
The team presented the debt holders with facts based on Ukraine’s current
economic circumstances, ability to pay, needing to achieve economic stability,
and economic potential. Through a combination of doses of cold hard reality,
willingness of all parties to compromise, and the incentive of trading part of
the old debt for performance related potential future upside those investors
and the Finance Ministry reached a deal.
Russia refused to participate, and refused to accept the
same conditions as every single other debt holder.
In the FT Minister Anton Siluanouv writes: “In late 2013,
Ukraine had been in recession for more than a year, its current account deficit
was becoming unsustainable, its international reserves were barely enough to
cover three months’ imports, and no other creditor was prepared to lend on
terms acceptable to Kiev [sic]. Yet Russia provided $3 billion of much-needed
funding at a 5 percent interest rate, when Ukraine’s bonds were yielding
nearly 12 per cent.”
In late 2013 Ukraine was still ruled by Victor Yanukovych.
That is who Russia loaned that money to. The minister quite helpfully points
out here that while Yanukovych was illegally enriching himself (and some other
now Moscow-resident friends) to an obscene degree, he was also overseeing a
period where Ukraine’s economy was tanking through gross mismanagement.
The Minister also handily points out that no other lender
wanted to give Ukraine money. Again, this is correct, but the reality is that
nobody wanted to lend money to the Yanukovych regime who were well known to be
mostly interested in working out how much of any loan or grant they could
steal.
“Yet Russia provided $3 billion of much-needed funding at a 5 percent interest rate” the minister says. Why? Why was Russia offering such
generous terms (to a leader renowned for his corruption)? The date was Dec. 17 and Yanukovych had flown up to Moscow to get some instructions from
the boss. This followed events on December 8th and 11th
that had given both Yanukovych and Putin very very real cause for concern.
One Dec. 8, one million people took to
the streets of Kyiv to protest against Yanukoych and his band of crooks. That
was the second consecutive Sunday when that number of Ukrainians took to the
streets in protest. In response, over the night of Dec. 10-11, Yanukovych tried to clear Maidan by force. It is testament to
the determination of the people that they stood toe to toe with Berkut riot
police all night long and by daybreak the Berkut eventually retreated. No
molotov cocktails were used, no bricks were thrown. The police sprayed teargas and used batons and tried to rip down the barricades but, reinforced by
people coming to Maidan from all over Kyiv, Maidan was not beaten.
That Russia’s “financial assistance” package came six days
later was no coincidence. It wasn’t $3 billion dollars of “assistance” that was
offered, in fact it was $15 billion. And a 1/3 reduction in the price of gas.
This was an attempt to buy an end to Maidan. It was so huge that there was no
way the ordinary men and women on Maidan could fight against it. The mood was
glum while the people and the politicians struggled to find an adequate
response and Yanukovych was already calculating how much he could steal and
Putin really didn’t care.
What was not known at that time though was that in
structuring this bribe, sorry, debt instrument between two sovereign nations,
they’d been a little bit too clever. And, fortunately, they’d also agreed that
any disputes would be referred to an English court.
There’s a provision in the agreement that there could be no
set off, essentially, this means that Ukraine cannot refuse to pay this debt by
offsetting it against some other debt that Russia might owe to Ukraine. We have
to ask, how and why might Russia end up indebted to Ukraine? What
considerations were being factored in for this unusual clause to be included? The
net flow of cash for all of Ukraine’s independence has always been the other
way, largely (but not only) because of gas purchases.
It is perfectly normal that Russia says that they are suing
over an unpaid $3 billion debt, what else are they going to do? Let’s see how
the appearance of this strange provision in the agreement can be explained, in
an English court, as anything other than a tacit admission that there were
plans to seize Crimea or other Ukrainian lands and that those plans were considered
seriously enough to warrant this no offset provision as early as 17th
of December 2013.
It will also be interesting to see arguments presented in an
English court with regard to the investment strategy of Russia’s National
Wealth Fund. At the time of this “investment” the assets of that fund stood at
$88 billion. A $15 billion loan to (Yanukovych’s!!) Ukraine (at less than half
of the prevailing market return rate!!!) would have represented over 17% of a
Sovereign Wealth Fund being invested into a country whose economy (according to
Minister Siluanouv) “had been in recession for more than a year” and that, to put
it mildly, doesn’t seem like a very good investment.
17% invested in any one place would be overexposure, such
over exposure then to a country in economic trouble would be madness, knowing
that the money would be stolen adds gross negligence to the list of all that’s
very wrong about this “assistance”and that the interest rate was well below
market is a big red flag demonstrating the mismanagement and abuse of the
assets of a fund that technically belongs to the people of Russia.
All of this makes me think that it would have been easier for
Russia to have just accepted the restructuring like everybody else. Maybe it
was when the team from Ukraine’s Ministry made their pitch about “needing
to achieve economic stability” and Russia’s knee jerk reaction was that there
it would be a cold day in hell before they assisted in any such thing…
Ah well. See you in court.
p.s. The worst that can happen, Ukraine pays a debt that it
does actually owe, after a lengthy and revealing court procedure.
p.p.s. Thanks to the all-but-one IMF members who voted to
change policy to allow lending into arrears.
