Kiev: Minus $2.5 billion in foreign reserves


Kiev: Minus $2.5 billion in foreign reserves

By Fritzmorgen

Translated from Russian by J.Hawk

It’s possible to end up with a minus on your account when using a mobile phone, even of the contract makes no provision for it. Once robots realize and block your number, you will have a small debt on your account. Or a big debt, as happened in the case of idiots who go “roaming” abroad and then realize upon returning to Russia that they surfed the internet to the tune of tens of thousands of dollars.

I am often asked why Ukraine has not declared a default, and why the hryvnya course has stabilized at 22 to a dollar, even though the experts collectively predicted that Ukraine will collapse economically already in early Spring.

I’ll answer as follows. Ukraine actually ran out of money in February or March. However, the “mobile operators” have not yet “turned it off”, and it is continuing to rack up debt. It’s easy to forecast the future. Either Ukraine finds several billion dollars somewhere in order to replenish its account, or the bureaucratic wheels will turn and Ukraine will be forced into default.

Let’s look at loyal Ukrainian media. It plainly expresses Kiev’s position: Kiev can’t pay Yanukovych-era debts to damn Russia, and therefore will have to default:

“Negotiations with creditors are ongoing with a great deal of friction. The greatest resistance comes from the biggest holders of debt, first and foremost Franklin Templeton fund which owns $6.5 billion of Ukraine’s debt. Founded in 1992 in New York before moving to San Matteo, CA, the fund also organized a club of creditors who coordinate their actions. Altogether they own 50% of Ukraine’s foreign debt and have taken a hardline position during their negotiations with Ukraine’s Ministry of Finance.

Another major Ukrainian securities holder is the US Blackrock fund, which manages assets worth $4.5 trillion (with a “t”), which makes it the largest investment fund in the world, as well as PIMCO, Fidelity, and Stone Harbor.”

I highlighted the names of funds who want their money back form Ukraine. Ukraine’s main problem is that these funds are owned by hereditary profitmakers, extremely cruel and cynical professionals who have dedicated their lives to perfecting the skill of squeezing money out of wayward debtors. Kiev has about as much chance of outplaying or outwitting these guys as Luxembourg defeating the soccer world champions.

I’ll go further: Washington has no ability to pressure these funds. They are too old and powerful to succumb to political pressure. The funds want to make their money, and I don’t see another force on the planet capable of forcing them to relent.

In principle, nobody needs Ukraine’s default. That’s why Ukraine still has not defaulted, even though the creditors already have the right to force it into default. But on the other hand nobody wants to pay Ukraine’s debts either. Neither the US nor the EU want to print a few tens of billions to save Kiev.

Since there is no money, sooner or later Ukraine’s bluff will be called.

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Russia will not forgive Ukraine’s three billion dollar debt, we have no reason to do that. Western investors, in turn, absolutely don’t want to be taken for a ride: if Russia is not going to write of its debt, then the investment funds will want their last cent back.

The situation looks like a dead end, and Kiev’s back-and-forth with Western funds shows that nobody is even trying to conduct substantive talks. And here’s a telling piece of news: IMF decided to send its mission to Ukraine two weeks earlier than planned:

One wants to know, why the hurry in the talks with a wayward debtor? To declare its default faster. It looks as if IMF is not trying to pry the creditors away from Ukraine’s threat but rather the opposite, it is placing its foot on Ukraine’s neck to help the creditors strangle it faster…

I’ll add that Ukraine’s gold and currency reserves stand at minus $2.4 billion:

The whole which our West-trusting neighbors are digging for themselves is getting deeper with every month. Let’s not forget that in the event of default, the hryvnya course will depend solely on the level of reserves, nothing else. If reserves are in the minus, the hryvnya may well repeat the trajectory of the Zimbabwe dollar and collapse not by a few times, but by a few orders of magnitude.

In conclusion

Default is not something that can be predicted down to a week. However, now that Kiev is already in the minus, sooner or later someone will turn off its mobile phone. It might happen already in May. It’s possible that Kiev will balance on the edge for another few weeks or even months or, if it is very lucky, will make it to the end of 2015. Kiev was also lucky to have a warm winter: maybe it will get lucky here too.

But postponing the default until 2016 is out of the question. I don’t see where Kiev is going to get $3 billion to return them to Russia.

J.Hawk’s Comment: I think there is a little bit more to the story, which would explain why IMF’s foot is on Kiev’s neck. The whole point is to get Kiev to privatize or, even better, simply turn over state-owned enterprises, not to mention “the pipeline”, to the investment funds. Now, Kiev can do it the easy way (through orderly privatization) or the hard way (through default).  So I wouldn’t say that it’s in nobody’s interest to see Kiev default. If that were the case, the West would be throwing money at Ukraine right now. It’s just that default is the proverbial “final argument” to make Kiev do what its Western creditors have always wanted it to do, namely deliver Ukraine’s economy to them lock, stock, and barrel.

I also suspect one of the reasons for Kerry going to Sochi was to gain assurance from Putin that Russia would not take advantage of the political turmoil wrought by the default by, say, expanding Novorossia a bit eastward. That would be a political defeat for the West that would not be compensated by Ukraine’s default and fire sale (and the resulting civil war in Ukraine would render any Ukrainian properties worthless). But now that “Novorossia project is closed”, the default can at long last be given the green light.

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