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    March 31, 2015

    Ukraine’s default postponed until June


    By Yurasumy

    Translated from Russian by J.Hawk

    During Yushchenko’s rule it seemed that Ukraine’s economy not only fell into a chasm, but that it reached the bottom, and it was not possible to fall lower. But “there are no obstacles for patriots”—the insufficiently poisoned president’s team which became part of the Junta in their entirety proved that it is possible to reach the level of perfection in destroying one’s country and, having reached the bottom, started to dig.

    Still, in the opinion of the former boss to Yatsenyuk, Avakov, & Co, the self-burial process is not proceeding as well as it could, and that Ukraine cannot be finished off with IMF credits alone. “The best sanctions against Putin is help to Ukraine. Investments of up to 200, 300, 400 billion dollars. Marshall Plan. How do we attract investors to Ukraine? Not with IMF credits. We should offer our resources: bridges across the Dnepr, the Black Sea Shelf, the Dnepr Riviera”—this sort of advice is being distributed by a former president with whom  the West wanted nothing to do by the end of his term, and whose popularity had fallen to an absolute European minimum, namely the level of statistical error at 1.4%.

    Yushchenko is not embarrassed by the fact that Marshall Plan was implemented in the defeated Nazi Germany by an occupation administration. Nobody invested money in Germany that was losing the war. Just as nobody in the world will buy Dnepr bridges which may be blown up by the retreating descendants of ancient Ukrs. By the way, the very proposal to sell off the still surviving infrastructure and land is very telling—all of those pseudo-revolutionaries might as well spit on their Motherland. They are not merely prepared to destroy the state—they have already succeeded at that task. They are also willing to give away absolutely everything in exchange for a few cookies.

    Although, being the former head of the National Bank, Yushchenko wholly correctly said on Shuster Live that “$17.5 billion is a tiny sum for Ukraine. We are not even talking about European countries. This is slightly more than Ukraine’s annual current account deficit. And this is going to be spread over four years. We are like a Jew haggling over eggs. We won’t have enough to give change.”

    It’s true. The IMF-allocated funds are not enough to save the already dead economy of the remnants of Ukraine. But that was never the IMF’s goal. “Beware of Greeks bearing gifts!”. The conditions attached to the credits clearly indicate the desire to lengthen the agony and not to save the patient. The Junta’s Ministry of Finance Press Secretary Marchak said: “Money is starting to arrive into NBU accounts, it will all be here today. Once we get all five billion dollars, $2.8 billion will be earmarked for servicing foreign debt.”

    In other words, nearly 60% of the tranche will be returned to Western creditors before “Ukrainian partners” even get a chance to put their fingers on it. In actuality, this is merely a deferred interest payment which will only slightly delay death.

    What is more, the tranche comes with conditions that will inevitably destroy the regime and create conditions preventing the next tranche (another $5 billion) from being disbursed.

    Kiev not only had to rewrite its national budget for the year and artificially lower the hryvnya exchange rate to 21 per 1 USD, while the black market exchange rate was 26. It also dealt a death blow to all social programs. Several million retirees had their pensions cut (which did not eliminate the Pension Fund deficit of 80 billion hryvnya), retirement age is being raised (by six months every year), utility costs were sharply raised. For example, the price of gas will increase by a factor of 6.6, to 7188 hryvnya (22 thousand rubles using the official rate) per 1 thousand cubic meters. All the while all gas for consumer use comes from domestic extraction, which costs even according to the official rate under 100 dollars (by comparison, in Russia it is under $40) per 1 thousand cubic meters. This means that one can’t live on the $50 pension which an absolute majority receives. There will be nothing left after the utility payments.

    Likewise the currency market is in a far worse shape than Ukraine’s leader’s speeches suggest. Banks not only sell no more than $100 per individual per day, they also levy a 2% tax for the Pension Fund and a 1.5% tax for military needs (which they are promising to eliminate). As a result, more and more people are turning to the black market which removes hard currency from circulation.

    What is saddest is the fact that the exchange rate is artificially fixed through administrative measures. Most of importer applications to buy currency are denied by the NBU without explanation, and the needs of the currency buyers are limited by the volume of currency made available by the NBU. Importers have not been able to buy currency for over a month and their  aggregate demand, again under the official data which underestimates the problem, exceeds $1.5 billion.

    In practice, the entire left-over first IMF tranche would have been bought out by the importers on the first day. “If they were to be let out on to the market with their bids to buy currency, the market would crash,” admits Igor Lvov, the Deputy Chair of the Finansy i Kredit Bank. The fact that importers were left without foreign currency means that they will not be able to buy not only food and consumer goods, but also foreign parts for domestic assembly plants, seeds and farm equipment, spare parts, and much else. This will in turn lead to further drop in manufacturing, more unemployed, and a greater burden on the budget—the unemployed also have to be paid.

    There is another crucial point. IMF demands debt restructurization before it decides whether to approve the second tranche. This year Ukraine has to pay $5 billion for Eurobonds, including $3 billion to Russia, which already officially announced that it has the right to demand an early debt payment due to a contract violation (debt to GDP ratio), but it has not done so. “On the other hand, we expect $3 billion in December, as promised.” This caused the moderate optimism from mid-March to turn into unhealthy pessimism of the end of month, when the Minister of Finance of Ukraine said there might not be a second tranche.

    Other credits are also not willing to meet Ukraine halfway. According to Financial Times, there is a pool of Ukrainian bond holders who are ready for hard negotiations with Kiev. Considering that Ukraine must pay out $11.2 billion on its bonds, even two IMF tranches will not be enough. Now that gold and currency reserves have been exhausted, the treasury is empty, and hard currency is used to procure weapons, IMF-provided billions cannot save UkRuine’s economy. They only allow foreign debt servicing without declaring a default.

    If the bondholders were acting in unison with Russia, which could unilaterally demand an immediate $3 billion payment, it would force Kiev to renounce the contract, which in turn would mean a default. China could do the same, since it also must be returned the earlier credits. The similarity of views by very different players on whom Ukraine’s default depends means that the key world players have reached a consensus, perhaps for different reasons, to prolong Junta’s agony until at least June.

    One of the binding IMF requirements is the decrease of expenditures on foreign debt servicing. If negotiations with creditors are not completed by the start of summer, Kiev will not receive a second tranche. Without the second tranche the internal conflicts within the Junta, which are so far held in check by the need to abide by the outwardly legitimate triad of president-government-parliament, will tear the regime from within (Kolomoysky was but the first warning). It will become clear in May exactly how the supported from outside regime will be destroyed.
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