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Ukraine Is a Mess, But It’s Still No Greece
Ukraine may be about to default -- but it's still determined to get its financial house in order.
Greece isn’t the only European country teetering on the brink of default. In just a few weeks, Ukraine will probably also be forced to announce that it can’t pay some of its debts to private foreign creditors. A few weeks ago, the Ukrainian parliament passed a law authorizing the government to suspend payments to private foreign creditors. If its creditors don’t agree to a proposed debt restructuring, Ukraine’s government is likely to use that option.
On the face of it, the two situations might appear rather similar — but a closer look reveals stark differences. The Greek default (and looming financial catastrophe) represents a panic-driven, populist rejection of any attempt to come to a negotiated deal with an increasingly skeptical Europe. Ukraine’s impending failure to pay its creditors, on the other hand, comes off as a regrettable but manageable bump in the road on the way to financial health.
The debts in question are owed by Ukraine not be to the IMF or the European Central Bank, but to a group of private creditors. In fact, the IMF has joined the government in Kiev in contending that the country’s debt burden (95 percent of the country’s GDP) is unsustainable and that the private creditors should agree to halve the outstanding debt.
Unsurprisingly, that suggestion has so far found little sympathy among the so-called “committee of creditors” set up to negotiate with Ukrainian officials. The committee includes representatives of Franklin Templeton and three other investment firms holding Ukraine’s government bonds that they bought at high yields in the period from 2005 to 2013. Most of the debt was purchased under President Viktor Yanukovych, when his government was busy buying off popular support with handouts.
This week, thanks to mediation by the IMF, the Ukrainian government and the committee are set to finally start talks about restructuring the debt. But it’s quite possible that the talks will fail to produce an agreement by July 24, when Ukraine is due to make its next $120 million payment to private bondholders. Ukraine’s government is unwilling to tap into its modest reserves (just $9 billion, covering barely three months of imports) to clear this payment for fear of weakening its ability to intervene in the foreign exchange market and prop up the shaky hryvnia.
On the face of things, Ukraine’s dire economic situation seems like a logical breeding ground for a Greek-style populist insurgency against foreign creditors. For the past year, real disposable income has fallen by 24 percent. Inflation is soaring (46 percent on an annual basis) and wages are lagging far behind. The official unemployment rate now hovers around 10 percent, the highest rate in the past 15 years. However — despite a projected 9 percent contraction of the country’s GDP this year — there are no signs that the government is planning to backtrack on its macroeconomic reform commitments.
In studied contrast to the current government in Athens, Kiev is bending over backwards to emphasize its desire to reform its way back to financial health. “Ukraine is not Greece,” announced the deputy chairman of Ukraine’s central bank, adding that his country is diligently sticking to the demands of international financial institutions. On a recent visit to Washington, a deputy finance minister was blunter: Ukraine, he said, is demonstrating its “goodwill” to pursue reform, unlike the (sneer) “populists” in Athens.
Crucially, Ukrainian politicians are bringing this message to domestic audiences as well. When asked about the looming default, most Ukrainian lawmakers who support the government coalition downplay or shrug off the risks. Many are quick to point out that, even if Ukraine stiffs its private creditors, it will still have crucial IMF financing to get by. This limited “technical” default, they insist, does not represent a wholesale rejection of Ukraine’s need to get its financial house in order. For the most part, Ukrainians are buying the message.
To be sure, many in Ukraine are clearly aggrieved — and given the current level of economic pain, it could hardly be otherwise. The latest polls show that two-thirds of Ukrainians believe that the country’s economy is moving in the wrong direction. Support for Prime Minister Arseniy Yatseniuk, who had notoriously called his Cabinet a “kamikaze government”, has plummeted since parliamentary election last fall. Still, unlike in Greece, this dissatisfaction does not seem to translate into a backlash against foreign creditors proper. A March poll revealed that more Ukrainians see the IMF positively than not.
Populist political forces have been doing their best to grab their slice of the electoral pie ahead of local elections this fall by openly or implicitly criticizing the IMF-mandated reforms. Oleg Lyashko, a leader of the “Radical party,” has lambasted the inevitable hikes in the price of natural gas. Former Prime Minister Yulia Tymoshenko has stirred outrage over the depreciation of the hryvnia. Even the remnants of Yanukovych’s “Party of Regions,” whose mismanagement of the country’s economy paved the way to the current economic crisis, are exploiting popular grievances. But recent polls show that approval ratings for each of these parties remain in the single digits. Tired as they are of the ongoing war with Russia and their country’s economic turmoil, Ukrainians are wary of those who propose quick fixes to complicated problems.
Instead, many Ukrainians are more apt to side with officials who talk plainly and honestly about the country’s economic problems rather than dispensing Syriza-style populist promises. Finance Minister Natalie Jaresko, a Chicago-born Ukrainian American, is perhaps one of the few officials to have understood this. Though she has been a firm defender of fiscal austerity, Jaresko is one of the few ministers to have escaped biting criticism in the Ukrainian media and social networks.
That credibility is coming in handy as policymakers and commentators begin to discuss the consequences of a possible default. In marked contrast to her January denials, Jaresko has now conceded that a default is “theoretically possible” if Ukraine fails to reach an agreement on restructuring its debt. At the same time, she assured Ukrainians that such a default would not affect either the country’s banking system or their deposits. The fact that she used a televised interview to offer this reassurance directly to the public marked a major departure from her previous communications strategy, which relied mainly on visits to investor conferences and expert discussions.
The government’s efforts to pursue a conversation with voters, rather than exploit populist sentiments, seem to be bearing fruit. A recent online poll, conducted just three days after Jaresko’s interview, revealed a nearly equal split in views about the probability of a default. Yet — again, in striking contrast to Greece — that uncertainty is not causing panic on the streets. Ukrainians are not rushing to buy foreign currency to hedge their bets (so far, at least). Nor has there been a run on the banks. Commercial banks are actually reporting a slight increase in deposits opened in June. Amid all the difficult challenges the country is facing, a default on foreign payments will not make Ukrainians rally against the government.
In the photo, protesters burn tires during a rally supporting a law on the restructuring of foreign currency loans in Kiev on May 21, 2015.
Photo credit: YURIY KIRNICHNY/AFP/Getty Images
Correction: An earlier version of this article misstated the number of investment firms making up the committee of creditors. The correct number is four, not five. Also, the article originally misidentified the tie period during which Ukrainian government bonds were purchased by the creditors. They were bought between 2005 and 2013, not solely during President Yanukovych’s time in office (2010 to 2014).