Last Thursday Ukraine’s parliament finally approved – with difficulty, in spite of scathing criticism, but almost unanimously, – the four Cabinet-submitted bills needed for restructuring foreign debts. It will be recalled that the proposed rescheduling mechanism stirred up criticism mainly because of Ukraine’s obligation to issue new debt instruments to be paid off within 20 years (2021-40) provided the GDP exceeds $125 billion and the annual economic growth rate is more than 3 percent. The Minister of Finance, Natalie Jaresko, estimates that, in case the annual GDP growth is 6 percent, it will be possible to pay about $50 billion in 20 years under these documents, while the overall GDP is $1 trillion. “If the Ukrainian economy grows by an annual 4 percent in the next 25 years, this will mean that our GDP will equal that of Switzerland. This means that average per-capita wages in Ukraine will reach $1,960. I want to pay creditors a part of Ukraine’s profit if this country is to have the world’s most successful economy,” Premier Arsenii Yatseniuk stated from the rostrum.
MPs took a dim view of these arguments. But one could see even with the naked eye that recent consultations of parliamentary factions with the president and minister of finance had produced a result. Finally, even the harshest critics of this initiative approved the Jaresko-proposed scheme.
For example, the Radical Party leader Oleh Liashko spoke in the language of figures, and his speech in parliament abounded in such phrases as “the agreement might have been better” and “we were telling you about restructuring when we were only beginning to sign the coalition agreement.” “We demand that negotiations with creditors continue, we demand that the conditions we have received be revised in the interests of the Ukrainian state and economy,” Liashko said in conclusion. However, he confined his criticism to words only, and his party’s faction unanimously voted “for.”
“If we do not approve this today, there will be default and a complete collapse of the country’s financial system tomorrow… We will have to vote, with tears in our eyes, for this disgrace and dismiss the government – let the new one immediately revise all these agreements,” said Yulia Tymoshenko, leader of the Fatherland party. But, as it was in the case of Radicals, severe criticism was not an obstacle, and the entire faction, including Tymoshenko, cast their votes for this option.
“In all likelihood, it is not the last restructuring. But I know for sure that if it is not done now, this will not just endanger the future of Ukraine and its financial system – there will be a financial collapse, which we must not allow to happen,” Yatseniuk said in his last attempt to persuade MPs to vote positive.
This put an end to rhetoric from the rostrum, and the MPs pushed the green buttons. As a result, 308 MPs, plus or minus 1-2, said “yes” to the four bills. Only a few people voted against: Viktor Pynzenyk, ex-minister of finance, the Petro Poroshenko Bloc (PPB); Serhii Kaplin, an independent MP; Serhii Taruta, former chief of the Donetsk Oblast Administration; and some other independent deputies.
“No debts are being written off. Ukraine is just having them shaped in new debt instruments which it will have to pay off within 20 years. Depending on the growth rate, the amount increases at a critical pace and, in case of a fast growth, it will exceed the ‘written-off’ amount many times over. It is said that the Ukrainian economy will not be rising so fast. This viewpoint has the right to exist, but who can forecast for the next 25 years? We don’t know what will happen in 2 or 3 years’ time,” Pynzenyk explained.
How was it possible to reach such an unprecedented unanimity, when the coalition is in fact disunited? Representatives of various political camps told The Day that every faction had been shown an easy-to-grasp assessment of what the Ukrainian economy (exchange, inflation and GDP drop rates) would look like if the bills were voted down. The Russian factor was also taken into account. “In other words, we were told to face the fact. It is horrible: they dragged their feet until the last moment, then said there was default on the horizon, and left no time to reshuffle the Cabinet so that it could persuade creditors to offer a different way to restructure debts,” one of the PPB MPs says indignantly.
Serhii Taruta openly told The Day what the majority MPs are afraid to say in public. “The government has carried out the restructuring very badly and taken on higher liabilities than before… With a haircut of $3.6 billion, Ukraine will have to pay $40-50 billion, i.e., 10 times more! The examples of restructuring in other countries confirm that our Cabinet has achieved no success,” he says. In Taruta’s view, it is good that the economy has four years of respite now, but it is critically bad that the agreement with creditors does not set a “ceiling” for new repayments under additional securities. One more criticism is an increased interest rate for servicing the existing debts. “The rate of 7.75 percent per annum is a disgrace for Ukraine and its negotiators… They might have won better conditions,” he believes. In Taruta’s opinion, MPs should have accepted the agreement as far as the haircut is concerned, but they should have rejected the floating of new securities and demanded that the government continue negotiating. “If they had not voted ‘for,’ there would still be no default because negotiations with creditors would go on, and Western support would play a key role in achieving a decision as much in favor of Ukraine as possible,” he says.
On the other hand, one more PPB MP, Ruslan Demchak, deputy chairman of the parliamentary committee for financial policies and banking, explained to The Day that all the “scary” arguments of his colleagues were an exaggeration. Any repayments will be made from the additional profits, not from the losses, he says. Therefore, the extension on debt repayment, which will bring about economic growth in the long run, is better than default. Demchak says he estimated the losses that may follow the issue of these debt instruments and concluded that there would be no catastrophic consequences. “There is such an economic term as ‘aggregate net present value.’ It shows the current worth of the funds we are going to pay in the future. If the annual growth were six percent of the GDP (as it was in 2004, 2005, and 2007), we would have to pay off $52 billion before 2040. This statistics looks sad at first glance only. But the aggregate net present value of these funds is $9.6 billion. If the growth is 5 percent, we will need $33 billion, but the aggregate net present value is $6 billion. With the growth being 4 percent (which is more or less realistic), it is about $9 billion in the ‘living’ money, but in fact this will cost $1.5 billion,” he explained. The MP says this aggregate net present value is calculated with due account of a yearly devaluation of the dollar, which is almost 4 percent. But it is important to remember that repayments will begin in 4 years’ time at a pessimistic forecast and perhaps in 10 years’ time at an optimistic one. “So, on the whole, this is a relief for the economy,” he says.
So what is the conclusion? The economy has received a respite… for 4 years. But the price of it is a matter of dispute. It is not before a few years later that we can really see the pluses and minuses of the parliament-approved restructuring. This is why it is obviously the government that will reap both economic and political benefit from this so far. But will the team that performed this operation remain in office? It’s anybody’s guess. Parliament’s corridors are full of talk about portfolio redistribution – on a limited scale, so far. And what next? No one can guarantee. All the more so that, as The Day was told on condition of anonymity by several representatives of nongovernmental, trade union, and business organizations, there will be a major business forum in early October, where the public will suggest two options of further development: to really carry out economic reforms or to dismiss the current Cabinet and replace it with a caretaker government consisting of those delegated by the public. Forum organizers do not even rule out the possibility of a one-day (at first) nationwide strike if neither of these options is accepted.
