Tag: Ukraine
The wrinkles in aid to Ukraine
Columbia University Financial Law Visiting Scholar Jeremy Pam, who did sovereign debt restructuring (including for Iraq) at Cleary Gottlieb and then went off to Baghdad for the Treasury Department and Kabul for the State Department, kindly offers some clarification of points I raised on Tuesday about assistance to Ukraine. He writes:
1. Here’s some insight on the accounting for loan guarantees generally, from an April 2013 CRS report on US Foreign Aid to Israel:
Since 1972, the United States has extended loan guarantees to Israel to assist with housing shortages, Israel’s absorption of new immigrants from the former Soviet Union and Ethiopia, and its economic recovery following the 2000-2003 recession that was sparked by a Palestinian uprising (known as the second intifada). Loan guarantees are a form of indirect U.S. assistance to Israel, since they enable Israel to borrow from commercial sources at lower rates. Congress directs that subsidies be set aside in a U.S. Treasury account for possible default. These subsidies, which are a percentage of the total loan (based in part on the credit rating of the borrowing country; in the case of the loan guarantees in the 1990s, the subsidy amount was 4.1%), have come from the U.S. or the Israeli government.
2. Here‘s a subtle discussion by Simon Johnson and Peter Boone on both the political and policy dynamics of IMF assistance to Ukraine and the larger problems caused by pressure on both the West and Russia to provide large, relatively unconditioned aid to Ukraine.
3. The questionable international law doctrine of “odious debt” seems unlikely to be of much help to Ukraine, particularly as given the numbers that Johnson and Boone provide about Ukraine’s concrete debts (to Russia and to other creditors) that have been coming due it seems reasonable to assume that Russia’s late-in-the-game subscription to $3 billion in Yanukovich-era sovereign bonds mostly went to keeping the ship of state afloat after the EU/IMF deal fell through.
4. Boone and Johnson do not suggest any easy solutions. A quick bailout will just defer needed reforms (they’d previously written here about the economic and political need for a more Western-oriented Ukraine to bite the bullet on ending the gas subsidies enabled by the agreement with Russia to discount gas — in part for the extension of the lease to Sevastopol! Putin described the gas bill discount for the naval base extension as “exorbitant”, saying “there’s no military base in the world that costs this much money.”
On the other hand, a “disorderly” debt default is always scary. The best solution implied might be what we used to call an “orderly” debt restructuring, but the problem with that is that there are not that many people around anymore (both inside the official sector and outside) with the skills and experience to do it well. This is what I take to be one of the real lessons of the Iraq debt deal — unless there is a new appreciation of the value of such skills and experience, we may not look upon its like again….
So if I understand correctly, the Congress prefers loan guarantees because only a small fraction shows up on the books. It is not clear to me yet whether guarantees are really an effective way of producing more money for Ukraine, though I suppose without them no one would ante up. Little of the aid is likely to arrive quickly, especially if the EU and US insist on needed reforms. Debt reduction will be difficult because a lot of the money is owed to Russia, putting the West in the awkward position of getting Putin his money. Default could make a messy situation worse. Lots of wrinkles in aid to Ukraine.
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Grading assistance to Ukraine
Larry Summers, not my favorite public persona but a savvy economist to be sure, offers sage advice on aid for Ukraine. But he fails to consider how we are likely to measure up to his “lessons for the design of support programs,” so here are my guesstimates (the proposals in bold are his, the rest is mine):
1. Immediate impact is essential. While Congress has acted quickly to approve $1 billion in loan guarantees and the European Union has in principle approved $15 billion, the International Monetary Fund has not yet acted. Odds are it will take time, not only for the IMF to extract reform promises from Ukraine but also for the bureaucratic arrangements to be made by the EU and US. And the total amount is likely to fall far short of the $35 billion Ukraine says it needs.
2. Avoid “Potemkin money.” I wonder if loan guarantees fall in the category of Potemkin money, as I imagine it is difficult to know how much new money they make available. Perhaps a reader or two who are expert can enlighten me. EU money is rarely quick in my experience. IMF money is real but takes time to get approved. Months rather than weeks before they write a check. Potemkin-like in the meanwhile.
3. Be realistic about debts. Summers wants us to consider rescheduling or restructuring, which is something often done after a revolution (but never quick–it often takes years). Relief from official and private sector debt is often in the 35-60% range. Uniquely Iraq got 80% off its official debt at the Paris Club. Post-Communist Poland got 40% off. But of course much of Ukraine’s debt is owed to Russia, which is unlikely to be cooperative in any effort to reduce, reschedule or restructure. The usual consensus is not likely to be available, unless we strike a deal with Moscow that is likely to be inimical to Ukraine’s interest in Crimea.
4. Honest management is as important as prudent policy. We don’t want the Ukrainians stealing the money we send them, and we should want to recover as much as possible from past abuse. Lots of luck on the latter. Yanukovich and his cronies will have squirreled away a lot of money in difficult to trace places. Some of Ukraine’s wealthy tycoons are prominent supporters of the post-Yanukovich regime. It will not be easy to prevent problems in the future either, as Ukraine clearly lacks the mechanisms required for serious transparency and accountability. Sure we should insist, but it will take legislation and courage to put them in place. Recovery of ill-gotten gains takes years, as does establishment of institutions designed to prevent theft.
5. Countries need to pursue broad polices in a way that benefits Ukraine. There is a pretty good chance the Obama administration will do the right things on the IMF and on energy policy by building the Keystone pipeline and approving natural gas exports. Europe is also likely to do at least some of the right things: continue to pay for the gas it receives through Ukraine, so long as the Russians continue to send it, and help Ukraine develop alternative energy sources for its own use, reducing its dependency on Russia.
The big problems are with immediacy and impact. Ukraine needs a lot of money quickly, much faster than it will get honest management or debt reduction. Washington and Brussels look likely to have won the tug of war for Kiev and any other parts of Ukraine that remain attached to it. They need to do everything they can to avoid financial implosion of their prize.
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Peace Picks March 10 – 14
1. Ukraine on the Brink: A Conversation With Yevgeny Kiselyev
Monday, March 10 | 2:15pm – 4pm
Carnegie Endowment, 1779 Massachusetts Ave NW
The situation in Ukraine remains extremely tense. Each day brings dramatic developments from the region and a marked deterioration in Russia’s relations with the United States and other Western governments.
Renowned television journalist and political analyst Yevgeny Kiselyev will discuss the ongoing crisis in Ukraine. Kiselyev has been a preeminent voice in Russian and Ukrainian media and political circles for more than two decades. Carnegie’s Andrew S. Weiss will moderate the discussion. Read more
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Vladimir Putin and Chris Hayes are wrong
Isidora Kranjcevic of the Belgrade daily Blic asked me this morning to comment on Russian President Putin’s remark:
Generally, I believe that only residents of a given country who have the freedom of will and are in complete safety can and should determine their future. If this right was granted to the Albanians in Kosovo, if this was made possible in many different parts of the world, then nobody has ruled out the right of nations to self-determination, which, as far as I know, is fixed by several UN documents.
What is Putin trying to do here? Read more
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Observers, aid, energy and elections
Much as I am entertained by explanations of Russian behavior based on Western decline and claims that Vladimir Putin is delusional, responding to the seizure of Crimea and threats against the rest of southern and eastern Ukraine requires a finer brush. How can Russia be prevented from occupying other Russian-speaking areas and how might the occupation of Crimea be reversed? Those are the objectives Kiev, Washington and Brussels should be setting.
Kiev is one key to preventing Russia from taking over other Russian-speaking areas of southern and eastern Ukraine. It has already done well to block (with a veto by the speaker of parliament) a law that would have denied Russian the status of an official language in those areas. It has also appointed new governors, including at least two wealthy oligarchs. How well they manage to respond to pro-Russian protests, avoiding violence while reasserting a modicum of Kiev’s authority, will be the primary determinant of whether things get out of hand or continue to calm. Putting in international observers to report on the situation and highlight any abuses is a good idea. Putin already has his hands full in Crimea. He doesn’t really need to take on additional burdens elsewhere in Ukraine, provided Russian speakers aren’t clamoring for intervention to protect them from the depredations of Kiev. Read more
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Putin speaks
President Putin today finally addressed some of the issues Russian behavior in Ukraine has raised. I can find neither video nor transcript so far,* so I am relying on the RT account, which is ample but certainly not complete.
Putin’s main point is that Russia has the right to protect ethnic Russians in Ukraine’s east:
If we see this lawlessness starting in eastern regions, if the people ask us for help – in addition to a plea from a legitimate president, which we already have – then we reserve the right to use all the means we possess to protect those citizens. And we consider it quite legitimate.
Putin makes clear his distaste for deposed Ukrainian President Yanukovich and shows no inclination to restore him to power, but at the same time he thinks his removal was not legitimate:
I strictly object to this form [of transition of power] in Ukraine, and anywhere in the post-Soviet space. This does not help nurturing a culture of law. If someone is allowed to act this way, then everyone is allowed to. And this means chaos. That’s the worst thing that can happen to a country with an unstable economy and an unestablished political system.
So what we’ve got here is a claim to legitimacy based on protection of ethnic Russians and rejection of the overthrow of an elected president. Putin would have us believe that he is at least as justified as the United States was in Afghanistan, Iraq and Libya. Read more
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