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On the verge of default: What scenario will Ukraine choose?

Author : Oleksiy Kushch

A simple comparison of the reserves of the National Bank and medium-term liabilities shows that Ukraine is on the verge of default. In this situation, the country has several options for action
22:48, 29 January 2018

rusvesna.su

According to the National Bank of Ukraine, in 2018-2020, Ukraine needs to return $16 billion to its creditors. This amount is slightly less than current currency reserves of the National Bank, which in November last year, amounted to 18.9 billion dollars. That is, our international reserves barely cover medium-term obligations (up to 3 years), but do not forget that due to the model of economic development used by the state, Ukraine lives in a negative trade balance: imports exceed exports by at least $ 5 billion a year. We will add here the need to conduct currency interventions to sell foreign currency on the domestic market to deter an avalanche devaluation of the hryvnia and understand that the formed currency reserves of the National Bank are nothing. It must also be remembered that the specific weight of net foreign exchange reserves (gross minus liabilities) is significantly lower than the overall figure, which is quite logical given all of the above.

And the structure of our reserves raises many questions.

In January-November of last year, the National Bank's gold and currency reserves increased from $15.5 billion to $18.9 billion, which seems to be quite good. Such a sharp jump in terms of obtaining only one tranche of the IMF for $1 billion happened because of mass buying up of currency in the domestic market last summer. At the same time, the amount of currency and deposits, that is, the most liquid part of the reserves, decreased from 1.5 billion dollars to 1.3 billion dollars, the value of gold reserves practically did not change and fluctuates around the 1 billion mark but the portfolio of securities rose sharply from $10.2 billion to $14.2 billion. It was in the securities of foreign issuers in which the National Bank invested $4 billion that it took from the domestic foreign exchange market last summer.

The liquidity of the securities portfolio of the bank can only be guessed, especially since a significant part of it was formed before the global crisis of 2008, after which many issuers disappeared from the stock market radar. In any case, the liquidity of the securities portfolio is significantly lower than the liquidity of the currency and deposits - this is understandable even for the first-year student.

Thus, even a simple comparison of the reserves of the National Bank and medium-term liabilities shows that the country is on the verge of default. Back in 2014, a limited circle of Euro-romanticists naively believed that Ukraine, taking advantage of the opportunities of free trade zone with the EU, will conduct rapid and effective structural reforms in 2014-2015 - and we will have a golden key in the form of high rates of economic growth in our pocket. But over the past four years, we have not seen any quick or effective reforms.

The choices that Ukraine is facing are quite simple:

    to attract foreign investment, to change the trade balance and to build up reserves of the National Bank;
    to attract new loans and to refinance old debts at their expense;
    to declare a default or another restructuring (technical default).

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The first option is not suitable - there is simply no time left. The dynamics of foreign direct investment (FDI) in equity is appalling: in 2017, the volume of FDI did not exceed $ 1.5 billion, while only the withdrawal of dividends abroad by foreign companies amounted to $1.8 billion last year.

The second option is realistic, but only if the government gives investors not the notorious Marshall plan of how to receive the money from foreign donors on the construction of roads and other infrastructure, but a real economic success plan. The third option will be considered somewhat later.

The amount of public debt (direct and guaranteed) exceeded UAH 2 trillion, or $76.3 billion, as of the end of November. Considering that GDP will reach about $100 billion in the last year, the debt-to-GDP ratio is 76%.

External direct debt is $38.5 billion, or 50%, external guaranteed - $10.6 billion (14%), in total state should return to external creditors about $49 billion (64%). The internal direct and guaranteed debt has reached 27.3 billion dollars in equivalent at the current exchange rate, or 36%.

The amount of domestic debt mainly consists of state debt to the National Bank and state banks, which bought a significant package of domestic loan bonds. Moreover, the portfolio of the NBU was recently restructured (the procedure of re-profiling) - the repayment terms of government bonds were significantly prolonged. Thus, the government has postponed the payment for ineffective management in 2014-2015 on the shoulders of future generations.

Only for the period from 2013, the domestic debt of the country increased from 257 billion UAH to 717 billion UAH or 2.8 times!

As for external debt, compared with 2013, it grew from $28 billion to $ 38.5billion, that is, by more than $10 billion, and taking into account the write-off of part of the debt in accordance with the terms of restructuring for 13 billion dollars.

Thus, the next 20 years Ukraine will have to pay external debts. The problem of the external debt of our country lies not in its magnitude, there is nothing critical, but in a dense payment calendar (especially in the period of 2018-2020), in a delayed-action mine in the form of the so-called restoration of the value of creditors' debts.

Sooner or later our society will have to consider the Icelandic scenario when the majority of the inhabitants of this country refused to give a significant part of external debts to external creditors in a referendum and adopted a new social constitution developed by ordinary delegates from the people. Today Iceland is a prosperous, socially-oriented state, where society perceives itself as a single organism. But if Iceland fulfilled all the claims of creditors, it would turn into "Atlantic Somalia".

Non-governmental organization Tax Justice Network estimated the amount of capital withdrawn from the country for the period from 1991 to 2011, at $165.2 billion. Now, this amount probably exceeded $200 billion. A good option for creditors: Ukraine refuses to pay its obligations from 2019, but allows to confiscate in favor of the owners of our debts all illegally withdrawn from the country's capitals, recognizing them as funds obtained by criminal means. The exchange of $49 billion in public debt for $ 200 billion of money stolen from us is like a bird in your hand, anyway, as practice shows, taking even Lazarenko's money back is problematic, not to mention the numerous followers of the runaway prime minister. The corresponding settlement agreement can be secured by a decision of the Royal Court of London. And it will be quite simple to find these illegal assets - the Kroll detective agency will do this in one year. Not a bad debut idea to ensure the growth of the country according to the Icelandic, and not to the Somali scenario of development.

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