There was a great bit of reporting over the weekend by John Dizard of the Financial Times on how Russia continues to out-play the West in Ukraine. This time around, it’s in the creative use of binding financial instruments—a strategy Dizard reports is being studied carefully by Pentagon analysts for future crises.It all comes down to very enforceable legal contracts which, if broken, could send Ukraine’s economy down the toilet in a hurry:
Take, for example, what the Americans now call “the booby-trap bond”, a $3bn bond issued by Ukraine to Russian holders a year ago, which is due in December 2015. It is not only enforceable under English law, but was registered on an Irish exchange. It has cross default clauses that are triggered if Ukraine misses a payment to any other entity controlled or majority owned by Russia. That includes a $1.6bn payment to Gazprom due at the end of this month. Oh, and Russia can call a default (which triggers a further default on the rest of Ukraine’s roughly $16bn bonded foreign debt) if the country’s debt to GDP ratio rises above 60 per cent – due, perhaps, to extortive Russian gas prices and a Russian-backed invasion and insurgency.
Thanks to a deep devaluation of the Ukrainian hryvnia, as well as the greater impoverishment of the population, Ukraine’s current goods and services account is probably close to balancing. However, its debt service burden is beyond the capacity of its foreign exchange reserves and forex earning capacity over the visible future.So the western countries can either grit their teeth and put up much of the money needed to pay off Ukraine’s maturing debts to Russia, whatever the fairness of the contracts behind them, or watch the economy collapse completely. If such a disaster happens, the US, Europe, the IMF and the other multilaterals will have to compete with Russia to offer humanitarian aid packages, which could be even more expensive.
Vladimir Putin’s crooked crew still seems to be at least a jump ahead of its Western opponents. It’s a good thing Russia is a weak and declining power overall. If Putin’s Russia were a serious world power contender, we would be in a lot more trouble. As it is, Putin continues to punch well above his weight, as his slow moving and cumbersome Western opponents play Elmer Fudd to the Kremlin’s Bugs Bunny.