Ukraine - debt relief after use of frozen RU assets
So the starting gun has been fired on negotiations on debt treatment on Ukrainian sovereign debt.
Bondholders are circling around forming various creditor groups.
Debt treatment was required by the IMF as a condition of its $15bn plus EFF for Ukraine. The IMF asked for debt treatment because that’s its MO, it always does that. From what I can make out the Ukrainian side and bilateral creditors and donors are just going with the flow. But the issue of frozen Russian assets makes Ukraine an unusual case.
As per the IMF programme the contribution from debt treatment to cover Ukraine’s $122-140 billion gross financing gap for 2024-27 is around $14.8 billion.
The problems I have with all this are numerous:
First, the IMF presents its macro framework for the period 2023-27 which is the basis for the DSA. But how credible is any macro framework in a war - how can the IMF make any credible longer term macro forecasts when outcomes are so security/war related and in which the Fund has no clue/expertise? Then how can you do any DSA when the macro framework is so uncertain? It’s finger in the air stuff.
Second, why rush with debt treatment? Why not wait for the end of the war when the macro outlook and DSA will be much clearer. Just extend the 24 month debt service suspension agreed in August 2022.
The answer to that is well Ukraine’s financing needs for recovery and reconstruction are huge. The appetite of the Western tax payer to fund Ukraine’s recovery and reconstruction needs (over $400 billion as per the latest World Bank/Kyiv School) are limited and as per the Ukraine Recovery Conference in London the message is the private sector will need to do the heavy lifting and early market access for Ukraine there will be key. So getting ahead with a debt restructuring to clear the decks will put Ukraine on the starting line as soon as the war ends.
I would counter though that even with an early debt treatment, given all the other issues around Ukraine (security risks, governance and rule of law issues, et al) the private sector cannot be expected to do the heavy lifting on what is in reality a Western public good. Western private sector investment into Ukraine in the immediate post war period just won’t touch the sides compared to the financing needs.
Third, even on the financing assurances front the IMF programme lacks credibility. The US pledge of $22bn for the period 23-27 must be in doubt given the difficulties getting the $61 billion Ukraine financing bill thru the House. And if Trump wins the presidency then US funding will drop off a cliff. Are the other G7 states going to step up their financing commitments to make up for the US shortfall? I struggle with that and indeed keeping even the €50bn Eu funding package on track given likely opposition from Orban, Fico, Wilders et al who would be emboldened by a Trump win.
And actually Ukraine’s gross financing needs are not the $122-140 billion only for 2023-27 as suggested by the IMF as this refers only to budget and BOP support. The total cost - military and fiscal - of keeping Ukraine afloat is $100 billion pa in war and likely $50 billion pa in peace. Around half of the current cost is being covered by the US - so is Europe likely then to fill the gap left by the US pulling support under Trump? I doubt it.
Remember here that you cannot just ignore the military costs - if this gap is not filled Ukraine loses on the battlefield and then the macro framework as above, and financing gaps deteriorate significantly.
Fourth - the whole issue of utilising immobilised Russian assets. There is a huge moral and equity issue here.
The IMF makes zero reference to immobilised Russian assets in its latest staff report, why?
Russia is responsible for the war in Ukraine, economic losses, war crimes and genocide. It should pay reparations. The moral argument is irrefutable. And there are over $300 billion in immobilised Russian assets in Western jurisdictions potentially available to fund Ukraine thru the war and then in post war recovery. Why are they not being used first?
All the arguments against using them are weak:
Rule of law? Where was the rule of law when the West accepted the assets of a kleptocratic regime that had already used WMD on the streets of a NATO member, and twice (Litvinenko and Salsbery).
Zelikow et al make a compelling case using the “countermeasures” argument which provides the legal basis for seizing and allocating as yet immobilised Russian assets to Ukraine.
Reserve currency risks? What’s the difference between immobilisation and seizing? The message has already been sent and there is zero evidence that all this has seen pressure on reserve currencies.
The biggest risk to the reserve currency risk of the euro, in particular, is not freezing, seizing and using Russian assets for Ukraine but not using them for this purpose, and then risking a Ukrainian defeat. I wonder how risk perceptions of the euro would be if Russia wins and its tanks head West. The boffins at the ECB and European treasuries just cannot get their heads around security risks, so our leaders need to take the decision away from them. Euroclear, the ECB et al should not be the lead decision makers here (they should not have veto powers), but national security teams.
Russian retaliation, seizing Western assets in Russia? Well it is already happening. But Western companies who invested in Russia made bad calls. Why should Western national security interests be subjugated for the profits of greedy Western companies who took Putin’s forty pieces of silver?
On the equity issue, current Western policy of avoiding seizing and allocating frozen Russian assets for Ukraine means that Western tax payers are footing the bill for Russia. The interests of Russian tax payers are being put above those of Western taxpayers. The property rights of Russia are being put ahead of Western taxpayers. And Western taxpayers are bailing out their own greedy business lobby who were mistakenly invested in Russia. This should be a national scandal in countries like Germany where it’s government is blocking the confiscation of immobilised Russian assets.
Now in pushing for debt relief for Ukraine, before first seizing immobilised Russian assets, Western governments are again in effect taxing their own electorates (taxpayers and pensioners as holders of debt) to the benefit of Russia.
So one take is that by holding out against any debt treatment at present private bond holders are revealing the reality of the unsustainable financing picture as presented by the IMF and Western governments. They will also force our governments into the reality check that immobilised Russian assets have to seized and used to fund Ukraine. Any other scenario risks underfunding Ukraine, Ukraine’s eventual defeat in the war and over the longer term much larger security costs to the West.
And in supporting a debt treatment now bondholders risk ensuring Ukraine never secures the $300 billion plus in immobilised Russian assets. By supporting any debt relief deal they help sustain an unsustainable Western financing model but which increases the risk of eventual Ukrainian defeat.
Yes, holdouts risk the loss of $14.8 billion in debt relief for 2024-27 for Ukraine, but with the potential of improving chances of Ukraine securing the $300 billion plus in as yet immobilised Russian assets. And Ukraine could still secure the $14.8 billion in debt relief once clarity is reached on the allocation of the as yet immobilised Russian assets to Ukraine.
Western governments need a wake up calm and reality check on Ukraine - private creditors could provide the cold water, if not the bucket.
Debt relief for Ukraine, yes. But not as an alternative to using immobilised Russian assets to fund Ukraine. Freeze, seize and use Russian assets for Ukraine, then push for debt relief but then with a financing plan that is credible and sustainable.