Having Received a $2.1 Billion Tranche From the IMF, Ukraine May Default in Order Not to Repay This Debt

The other day, Ukraine received a new tranche of $2.1 billion from the International Monetary Fund. On the whole, the IMF approved another package of loans for Ukraine in the amount of $5 billion. Note that the entire budget of Ukraine for 2020 is approximately $48.2 billion. And the current (and previous) loans will somehow have to be paid off.

But how? According to experts, Kiev is ready… to simply refuse to pay back western partners by defaulting on its debts. Moreover, it may have a new mighty patron in the east (and by no means Russia). The specialist in international politics and president of the Russian-Asian Union of Industrialists and Entrepreneurs Vitaly Mankevich spoke about this with Komsomolskaya Pravda.

HOW TO DETERMINE IF A COUNTRY IS ON THE VERGE OF A DEFAULT?

I apologise in advance – I will start with a difficult one. There is such a concept as “credit default swap” (CDS). Let’s say you bought the securities of some state – for example, “country X”. But a global economic crisis starts, you are afraid that “country X” will default on its debts, and then you will lose your investments.

At that time you buy on the financial market… insurance in case “country X” goes bankrupt. This security is called a credit default swap.

But the organisation that sells you this kind of insurance is also not stupid. It’s like in the car business: the price of insurance for a daring driver who has had a lot of accidents will be more expensive than for a grandfather who goes to the country once a week.

I.e., the higher the probability that “country X” goes bankrupt, the higher the value of our credit default swap. It is considered in points.

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So: the cost of a 5-year-old CDS of Ukraine now fluctuates at the mark of 500 points (sometimes going over 1000). For comparison, Germany has 16.3; in Russia – 80.9.

A score below 100 points indicates a low probability of default; a score above 300 indicates an increased risk. So, in Argentina, which recently made a technical default, the price of CDS exceeds 6000 points.

Does this mean that the default of Ukraine is real? Or is Kiev able to maintain solvency in the current conditions?

TOTAL DEBT – $84 BILLION

Let’s try to count. The European Union has currently issued loans to Ukraine for more than €3.8 billion – a record amount for a program of assistance to EU partner countries. And Ukraine’s entire external debt is about $84 billion: taking into account the loan from the EU in May for €500 million, but excluding the new €5 billion tranche from the IMF, the first part of which came in mid-June.

Formally, this loan was issued in order to overcome the consequences of Covid-19. For the sake of obtaining it, Kiev made record concessions: an increase in the cost of utility bills for the population, as well as the adoption of the “anti-Kolomoisky law” (as you know, the previous president Poroshenko nationalised Privat Bank, one of the largest in the country, owned by oligarch Igor Kolomoisky; the latter secretly supported Vladimir Zelensky, who won the 2019 election, but now a legislative barrier has been placed in front of his plans to return his lost property and influence).

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One way or another, the political climate of Ukraine may become unstable again in the near future: many deputies of the Rada do not agree with the conditions proposed by the IMF, a new round of internal struggle begins, the side result of which may be a default.

Here, the opinions of the Kiev elite were divided: some believe that it is more profitable to default and spend the saved money on the development of the country (or their pocket, which is also typical of Ukrainian officials); others, on the contrary, associate a default with a loss of sovereignty and definitive impoverishment.

Although, it must be said, Kiev has a “plan B” – from whom can it still obtain finance and cover the gaps in credit payments?

ZELENSKY’S CHINESE GAMBIT

There is hope for rapprochement with Asian countries. President Vladimir Zelensky said in April: as soon as the world quarantine stops, he will make an official visit to China and India. Recently, news leaked that Ukraine intends to abolish the visa regime for these two countries.

And in pre-coronavirus times, it was interesting to observe the behavior of Ukrainian delegations during visits to China: despite the demolition of monuments to Lenin in Ukraine itself, especially in its western regions, in China, Ukrainian officials were happy to be photographed against the background of Communist flags. In general, they emphasised that “we all come from the USSR”, a country that is ideologically close to today’s China.

There are certain results. At the end of 2019, the red dragon became the largest trading partner of Ukraine, replacing Russia. Ukraine’s exports to China are estimated at $3.59 billion; Chinese exports to Ukraine are estimated at $9.19 billion. In total, over the past year, Ukraine’s exports to China increased by 63.3%, and imports from there — by almost 21%.

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Further, over the past five years, Ukraine has increased grain exports to China by 20-fold. Now, due to the aggravation between China and the United States, it has a chance to become the main supplier of corn to the Middle Kingdom.

BUT THE SHACKLES ARE STRONG?

In general, the plan is good: plug the credit holes with the help of the yuan. But Zelensky, despite all his charisma, is still failing here. The United States prevents him from being friends with Beijing. The most characteristic example — in early 2020, the sale of the engine-building enterprise “Motor Sich” failed. China wanted to buy it (along with its technologies), but under severe pressure from Washington, the deal was disrupted by the Antimonopoly Committee of Ukraine, because the Americans threatened to block military assistance to Kiev.

The result: relations with Moscow, despite flirtations at the beginning of Zelensky’s presidency, have not been built, and western patrons are ready to give money only on bonded terms with elements of external governance. Perhaps, in this situation, a default is indeed the very move that will allow the Ukrainian authorities to turn the tide in a seemingly hopeless geopolitical game and opt for rapprochement with Moscow, Berlin, and Beijing?


Edvard Chesnokov

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