Home ›› 27 Sep 2022 ›› Opinion
Russia’s invasion of Ukraine has set in motion a cascade of sovereign debt distress across many developing countries already reeling from the aftershocks of Covid-19. Commodity importers have been hit hard by skyrocketing food and energy prices. Heightened geopolitical risk has also darkened the outlook for many for whom tourism and remittances constituted important streams of revenue.
We all remember how Sri Lanka’s dramatic default in May grabbed international headlines. Yet by March 2023, as many as a dozen developing countries might be unable to service their debts. High indebtedness in countries comprising a whopping 40 per cent of the global economy has reached magnitudes of 250 per cent or more of government revenues. The World Bank has termed this ‘the largest spate of debt crises in developing countries in a generation.’ 53 emerging markets are particularly fragile, with Ukraine, El Salvador, Sri Lanka, Argentina, Pakistan, and Ghana under the most acute pressure. A creative new consensus has to be reached on debt restructuring that brings together all stakeholders without damaging long-term growth prospects. Also, in order not to repeat the mistakes of previous debt crises, a large portion of this debt will just have to be written off entirely.
However, for obvious reasons, no country has a higher mountain of debt to climb than Ukraine. Ukraine’s external debt, public and private, is about $130 billion: half of this debt is owed by the government, and the other half by the private sector. The government also has an internal debt of over $40 billion. It now needs $5 billion each month just to pay its bills, with debt securities- 'war bonds'- of more than $2 billion meeting only a fraction of the cost. Ukraine’s ‘peace time’ debt situation was already unsustainable, ever since the 2014 Russian annexation of Crimea plunged the country into recession. According to the Ukrainian Ministry of Finance, on December 31, 2021, the country had a total of $97.96 billion in guaranteed state debt which accounted for 64.8 per cent of nominal GDP.
So, whither now? Casting about for precedent, we can remember that Ukraine completed a restructuring of $18 billion of privately held debt in late 2015, with a debt maturity extension of 4 years, a higher average interest rate, and creditors accepting an upfront loss of 20 per cent on the face value of the bonds. The deal also included the soi-disant ‘GDP warrants,’ which had coupon payments adjusting in tandem with Ukraine’s rate of economic growth. Unfortunately, this will be very hard to repeat now, with GDP projected to contract 35 per cent this year alone with war damage compounded by the Russian blockade of the Black Sea, which restricted Ukrainian imports in the first half of the year to 24 per cent of median annual capacity.
Of the $34 billion that international supporters have promised to Ukraine since the beginning of the war, it has received only a half. According to September data from the Ukrainian National bank Ukraine has received $18.5 billion with 40 per cent of the amount being grants and 60 per cent repayable loans. While the inflow seems big, covering almost 4 months’ budget deficit, more than $10 billion has to be paid back by Ukraine. A caveat: there could be some confusion regarding the numbers as the money promised to Ukraine as dollar amounts are often in the form of direct lethal aid. Hence, one should diligently subtract these amounts from the ready cash received by Ukraine, to get a better picture of the debt situation. EU officials claim that monies come to Ukraine as simple RFIs (rapid financing instruments) without any credit implications. But previous IMF loans’ annual burden of 2.3-2.6 per cent and the European Central Bank’s 2 per cent tell a different story.
On the bright side, most investors have agreed to freeze payments of both principal debt and interest. In addition, international financial support has allowed Ukraine to shore up its central bank reserves, which reached a reasonably healthy $25.4 billion in August. Also, unlike most developing countries undergoing debt distress now, Ukraine does not have China as a major official bilateral creditor. Thus, reaching an agreement between the Paris Club and private creditors such as BlackRock, Fidelity International, Amia Capital LLP, etc, should be relatively straightforward without too much opacity or onerous repayment conditions. However, IMF conditionality- even if the terms are modified and tailored to Ukraine’s special case- will necessitate strong anti-corruption measures. Pre-war Ukraine ranked 122nd out of 180 countries in Transparency International’s Corruption Perception Index, an image that needs to be shed not just for debt servicing but also to ensure a credible path to eventual EU or even NATO membership.
The United Nations said on the 16th of October that its investigators have found evidence of war crimes committed by Russian forces in Ukraine. Its report highlighted several areas where Russian activities had been particularly harmful, including general, indiscriminate attacks on civilian areas, executions, torture and sexual and gender-based violence. This means that there is also a straightforward case for reparations. In the first round of sanctions, $300 billion in assets of the Russian Central Bank were frozen and about $30 billion in privately held assets of the Russian oligarchy were seized internationally. Extant post-World War II international law provides for a straight path to reallocate these frozen public monies to Ukrainian reconstruction. Seizing private funds, on the other hand, is murkier legal territory and one that would require international consensus to depart from financial orthodoxy. Established price caps on Russian hydrocarbon exports must be complemented (at least by the G7 and EU nations) with a 20 per cent 'war tax' on all Russian exports that can help the war effort to stave off Moscow’s attempts at a neo-colonial land grab. The moral case is increasingly clear, especially in the wake of gruesome evidence accumulating from mass graves in Izium. Yet many such actions have not yet been concretely proposed, targeting a time frame that makes actionable sense.
In an encouraging development, the IMF has recently appointed Gavin Gray, with experience in war-torn Iraq, as its new Ukraine mission chief. Even so, a decision has to be reached very soon that facilitates debt restructuring and financing over and above the measly $1.4 billion emergency loan disbursed in early March. The IMF has also to coordinate with the World Bank and private creditors- who represent 80 per cent of Ukrainian external debt- for a substantial write-down. Indeed, Éric Toussaint, spokesperson for the Committee for the Abolition of Illegitimate Debt (CADTM), makes a strong case for its complete abolition, given legacy effects from the days of post-Cold War ‘shock therapy’ and chronic indebtedness serving the interests of a shadowy, obscenely wealthy Ukrainian elite.
In a joint assessment released by the Government of Ukraine, the European Commission, and the World Bank in cooperation with partners on the 9th of September, estimated that the cost of reconstruction and recovery in Ukraine would amount to $349 billion. With more than 12 million Ukrainians in dire need of humanitarian aid, this is also a question of global solidarity. Having quite recently- and shamefully- failed the Yemenis and the Rohingya, the international community cannot allow this to happen a third time in Ukraine. Resolving Ukraine’s onerous debt crisis given the already delicate global environment will require policy ingenuity not seen since the end of the Second World War. But as the 92-year-old lyric poet from Rzhyshchiv, Lina Kostenko, once wrote, ‘…the uniqueness of every moment seeks the path from pain to a pearl.’ It is amidst the pain and rubble of today’s brutalised Ukraine that the pearl of a new paradigm for addressing acute sovereign debt crises must emerge.
Vitaly Charushin is a Russian pro-democracy activist and a partner at ITEA, an edtech start-up. He has previously worked at the National Democratic Institute in Moscow.
Sahasranshu Dash is an affiliated researcher with the South Asian Institute of Research and Development, Kathmandu, Nepal.
