Ukraine’s default would be a victory for Putin

14 July, 11:06 AM
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Feels like Ukraine is going to sink into default here as an afterthought. Because no one thought through the consequences to the full. 

Naftogaz Ukraine, the state gas company, seems to want to pay a $350-odd million maturity due over the next few days and this seems set to start in motion a chain of events that likely then will see the sovereign default on $1.4bn in liabilities due in September.

Our read is Naftogaz management wants to pay, as they think a default will make their task of finding finance to purchase critical gas imports thru the winter that much more difficult. Someone in government seems to be pushing for non-payment.

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Ukraine’s default would be a win for Putin. He would argue that the default reflects the fact that in the end the West is not committed enough to Ukraine to write enough cheques to keep Ukraine current. If Ukraine defaults he may well be right. 

A default would also likely undermine broader macro-financial stability in Ukraine. It’s hard to see the Finance Ministry securing any financing in the market - even locally. Debt defaults often come hand in hand with currency collapse and banking crisis. That likely will be the fear and we could see accelerated capital flight. More pressure on the hryvnia and likely critical FX reserve loss by the NBU.

Remember here that Ukraine remains at war - does it want a full-blown default, currency, and banking crisis when its focus should be on the war? I doubt it.

And with the war ongoing, it’s hard to see when Ukraine will be able to negotiate to come out of default. No macro framework can be constructed to produce a DSA to create a framework for a debt restructuring process while war is ongoing.

The assumption then will be that Ukraine will remain in default for an extended time with zero resulting market access. Any hope for speedy private sector involvement in a Ukraine reconstruction effort will likely be dashed. The private sector will be slow to come to the table while Ukraine remains in default.

So any decision now on default will have long-running consequences.

And why should Ukraine be forced into default for no fault of its own?

This is Putin’s war - so why should Ukraine suffer from high borrowing costs, limited market access and limited market financing for years to come?

Putin should pay, and with $400bn plus in frozen Russian assets sitting in Western bank accounts. These assets are in the control of Western governments, and they should be deployed quickly to underpin Ukraine’s debts, financing and reconstruction.

 It seems perverse that Ukraine will fall into default when monies are there to cover its financing needs. Freeing these funds should take months, some stop-gap should be found to bridge the gap between Ukraine’s needs now and access to these funds.

It would be unfortunate if for the sake of some short-term bridge financing Ukraine fell into default with bad long-run consequences just because policymakers lacked focus and speed of endeavor.

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