Ukraine’s Bonding Bonds
I’m normally pretty skeptical of claims of “economic warfare” – of which the Holy Grail has to be the claims that China could “call in our debt” and render America prostrate. However, this definitely doesn’t apply when one party is much larger and wealthier than the other, like with Russia and Ukraine. Felix Salmon relates the strange tale of Russia’s exotic loan to Ukraine, which given current hostilities Ukraine is quite unlikely to ever pay back. What’s so strange about it?
“The loan was not, technically, a bilateral loan from Russia to Ukraine. Instead, it was structured as a private-sector eurobond.
There are a lot of other Ukrainian eurobonds out there that look similar to the ones Russia is holding, so not paying the ones Russia is holding will have larger implications for all of Ukraine’s debt, causing prices to fall and interest rates to rise. What’s more, Russia could sell its bonds to the market… That may make a court less likely to invalidate the debt, and Ukraine less willing to do so, if it is held by a private investor, especially a non-Russian one.
Russia has structured this loan as a poison pill – it can wreck Ukraine’s fiscal situation pretty handily by forcing it into default. Unfortunately for Ukraine, principled neutrality between the West and Russia doesn’t seem like it’s in the cards. Ukraine isn’t on the verge of government default today but it’s pretty darn close. Russia moving to market-based gas prices will destroy government finances, and probably the economy as well. Ukraine will need huge amounts of money, and no matter what it will come with serious strings attached. If the money comes from Russia, that means a new regime. If the money comes from the West, that means wrenching structural change and continuing hostility with Russia.
But the Ukrainian government simply has to go hat in hand to new masters. And the West better be very cautious, because there is no way to get just a little involved.