Russian Creditor Offers Kyiv to Invest Its Debts in Ukraine's Economy Some officials in Kyiv are calling Ukraine's external debt collision the "2000 problem." However, this problem is likely to aggravate...

Russian creditor offers Kyiv to invest its debts in the Ukrainian economy

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Some officials in Kyiv are calling the conflict with Ukraine's external debt the "2000 problem." However, most likely, this problem will burden the Ukrainian economy for a longer period. Ukraine's gold and foreign exchange reserves are depleted, and only new external borrowings can become serious sources of their replenishment, which will increase sovereign debt, but will not remove the threat of bankruptcy in the future.

To better understand the current situation, let's turn to the numbers. Currently, the total amount of Ukrainian external debt is $12.5 billion. In the coming year, Ukraine must pay 3.1 billion dollars to creditors to service it. At the same time, its foreign exchange reserves at the end of 1999 amounted to 1.1 billion dollars, and the state budget deficit - 1.5 billion hryvnia (260 million dollars). The expected proceeds from the privatization of Ukrtelecom, as well as a number of energy companies and other facilities, will be able to replenish the budget by 2.5 million hryvnia ($440 million), which is clearly not enough to make payments. With these data at their disposal, foreign experts at the end of last year bluntly said that it would be more profitable for Ukraine to declare a default than to pay its debts. Such a conclusion, in particular, was made by the eminent rating agency Moody's Investors Service. His opinion was supported by the director of the Center for International Development at Harvard University, Jeffrey Sachs, who bluntly stated that “the Ukrainian government is ruined and will most likely be forced to either default, or postpone the payment of foreign debts, or resort to new borrowings.”

One of his prophecies has already come true. Last week, Kiev admitted its inability to make even very small payments on Eurobonds (about $18 million), and soon the Ministry of Finance of Ukraine announced the completion of preparation of proposals for the exchange of Ukrainian Eurobonds for new bonds with longer circulation periods. Such a technique is not new in international practice, and, as a rule, creditors do this so that their debt obligations do not go into default, that is, they do not turn into a loss on the balance sheet.

But even if Kiev's creditors agree to exchange $1.9 billion worth of Eurobonds maturing in 2000-2001 for new securities with maturities of 3 to 7 years, the Ukrainian Finance Ministry will still have to put money into the budget for them. service. Meanwhile, Eurobond holders are far from the only creditors of Ukraine. Kyiv also needs to service many other debt instruments, including those held by Russian creditors, which account for 22% of debt claims on Ukraine.

According to Ukrainian Prime Minister Viktor Yushchenko, now the Ukrainian government "emphasizes negotiations with all creditors" and wants to demonstrate that "Ukraine is absolutely responsible for its obligations, asking for understanding in the situation that will arise in 2000." The first foreign creditor to demonstrate such understanding and put forward counter proposals to Kyiv was the National Reserve Bank (Moscow). Already at the end of last year, he proposed to the Ukrainian Ministry of Finance his program for restructuring the debt on state external loan bonds (OGVZ or "Gazpromovka"), issued in 1995 on account of Ukraine's debt for gas to RAO "Gazprom" for a total nominal amount of 1.4 billion dollars (8% of Ukraine's external debt). NRB currently owns a $500 million OGVZ stake and, together with its clientele, can respond to negotiations for approximately $750 million. The total amount of Ukraine's payments to pay off the OGVZ in 2000-2001 is about $300 million, of which more than $200 million went to the NRB. A lot of money, even for a very large commercial bank. Therefore, the NRB decided to show flexibility and, not waiting for the worst case scenario, proposed to the Ukrainian government to convert part of its OGVZ into hryvnia at a discount and then invest the hryvnia funds received from the redemption of these securities in Ukrainian industry and construction.

The total amount of such investments can reach $100 million.

According to NRB President Alexander Lebedev, "the proposed mechanism will be transparent." According to the banker, he has already submitted to the Ukrainian government "a draft schedule for the transfer of hryvnias to pay off" Gazpromovka ", as well as a scheme for a special procedure for monitoring the use of these funds so that they do not have a negative impact on the foreign exchange market or do not lead to an increase in inflation ".

The benefits of the proposed deal for Ukraine are obvious. Hryvnias (mind you, not dollars) allocated for the repayment of OGVZ remain in Ukraine. Against them, foreign debt is surrendered at a discount. Moreover, the hryvnias received by the NRB are invested in the Ukrainian economy, which avoids strain on the budget. At the same time, the efficiency of servicing Ukraine's external debt increases, since the currency that should have been used to service OGVZs also remains in Ukraine and can be used to pay off debts to Western creditors.

Finally, if the Ukrainian government accepts the NRB proposal, it will make it easier for itself to negotiate with other creditors. This approach will have a positive impact on the quotes of Ukrainian currency bonds and notes. In a word, there are many advantages for Ukraine from the implementation of the scheme proposed by the NRB. And it seems that Kyiv understands this. Of course, the National Reserve Bank will not be left out. It is clear that in this case he does not act as a benefactor, a sort of kind uncle who, out of noble motives, refuses to pay OGVZ payments in foreign currency. What is his interest? The logic of the leadership of the NRB is easy to understand if one takes into account the fact that this major creditor of Kyiv has long-term strategic interests in Ukraine and is nurturing appropriate investment projects. Incidentally, this is also confirmed by the NRB's intention to set up its own bank in Ukraine. Consequently, the National Reserve is by no means interested in the escalation of the threat of default into a default. With such a turn of events, the NRB, which has a significant package of Ukrainian securities on its balance sheet, including, in addition to OGVZ, Eurobonds, will write down a round sum at a loss. That is why the Russian creditor bank is trying to help Kyiv reduce the burden of external debt, respecting its own interests and securing itself in case of an undesirable outcome of the case. The bank's management believes that it is much better to convert debt claims into ownership than to passively wait for the restructuring of Ukrainian external debt and the subsequent exchange of current debt instruments for new securities with new maturities. In addition, investment activities are fully consistent with the NRB strategy in Ukraine. According to the recognition of the first deputy chairman of the NRB, Yuri Kudimov, the bank's management "proceeds in its proposals solely from the interests of the banking business." "We believe that the investment will bring us more income than another installment plan."

According to the financier, in parallel, the NRB “simplifies the task for Ukraine when exchanging current debt instruments for new securities, the payments for which it will still have to put into the budget.” Exchanging part of the debt claims for property today will ease the problem tomorrow.

Thus, converting part of the OGVZ into hryvnias with subsequent investment in the Ukrainian economy will benefit both Ukraine and the NRB. In confirmation of the seriousness of their intentions, the bank's management has prepared a detailed list of investment projects in which it plans to invest funds from the repayment of "gazpromovka". In particular, NRB's interests include shipbuilding (fulfillment of orders from Russian shipowners at shipyards in Kyiv, Kherson, Kerch, and Nikolaev), as well as large construction projects in Kiev and Crimea. In total, the NRB plans to invest in construction in Ukraine within 6-9 months an amount equivalent to 15-20 million dollars. Income from the operation of facilities or their sale can bring more profit to the bank than debt payments.

But NRB makes its main bet on shipbuilding. According to the calculations of its management, the sale of ships built at Ukrainian shipyards to Russian shipowners will allow the bank to return a large part of the Ukrainian debt in cash. Agree, the proposed model of a partial solution to the problem of Ukraine's external debt is reasonable and very productive. It does not leave anyone at a loss, on the contrary, it promises mutual benefit and, according to Ukrainian observers, can become the basis for restructuring Kyiv's debts. Such bilateral transactions, prior to the announcement of general restructuring conditions for all loans, have become international practice and can be carried out in agreement with the IMF. According to the NRB, the IMF should approve this scheme, since it simplifies the debt problem for Ukraine, which is fully consistent with the objectives of the fund. According to A. Lebedev, the projects proposed by the NRB have already been discussed with the IMF. The banker said that the bank's management held preliminary talks with Ukrainian President Leonid Kuchma, as well as with members of the Ukrainian government, and received approval of their proposals.

Currently, intensive negotiations are underway between the Ministry of Finance of Ukraine and the NRB, during which the parties detail the terms of the transaction and stipulate mutual guarantees.

In the meantime, the initiative of the National Reserve Bank remains the only one of its kind, although, I think, it is it that can help Ukraine get out of an extremely difficult situation. If Kyiv does not take advantage of the proposed recipe, then, most likely, this will not increase its chances of avoiding a default in the future.