Martin Wolf
A man murders his parents and then begs for the
mercy of the court as a poor orphan. This is a definition of barefaced cheek.
We have a new one. On a flimsy pretext, a country seizes some of a neighbour’s
territory and foments a civil war in the rest. But it also insists that if a
debt incurred by its ruined victim is not paid in full, it will veto the
international assistance its actions have made vital. This is how Russia is
behaving towards Ukraine. That, too, is barefaced cheek. It is also blackmail.
Such behaviour is hardly surprising. It must not succeed.
The story is worse even than this. The loan in
question — a bond with a face value of $3bn issued in December 2013 — was intended to
sweeten the decision by Viktor Yanukovich, the subsequently ousted president,
to reject an association agreement with the EU. Today, Russia apparently wants
the international community to fund repayment in full of money advanced to
cajole Ukraine into making an unnecessary choice of Russia over Europe. In
reality, however, Russia wants to veto a planned $17.5bn
loan from the International Monetary Fund aimed at
helping the country it has sought to ruin. Legally, the IMF may not lend to a
country if it is in arrears on an official loan. Russia is arguing that the
bond, which it bought on terms favourable to Ukraine, was such a concessional
loan. In effect, it wishes to use the leverage of this loan, to prevent its
victim from being helped.
So what is to be done?
A starting point is to reject the justifications
Russia feels and the reasons it advances for its hostility towards the current
government of Ukraine.
Vladimir Putin, the Russian president, seems to
think that gangsters may stay in power for as long as they wish and use
whatever methods they desire. We have no reason to agree. Russian propaganda
suggests that the government in Kiev is a bunch of fascists. But meeting Petro
Poroshenko, Ukraine’s president, makes clear that this is another “big lie”.
Russia argues that, if Ukraine became closer to
the west, its own security would be threatened. But the west poses no military
danger to this nuclear-armed country, while Russia is such a threat to its own
neighbours. Many Russians seem to believe that history gives them ownership of
Ukraine. We cannot accept such a claim. The Russian government believes it is
entitled to seize territory by force. The west must reject this doctrine. The
current Russian government despises western beliefs that individuals have
political rights and that governments exist to serve and obey the people. The
west must not concur.
While rejecting such Russian attitudes, the west
should seek a modus vivendi with it on all big issues, including, not least,
Ukraine. But it should do so without sacrificing Ukraine itself.
The current government of Ukraine inherited a
dreadful legacy of more than two decades of gross corruption and incompetence.
Ukraine had been more a carcass to be plundered than a country. Now it has
suffered both invasion and civil war. Nevertheless, despite a devastating
economic shock, it has made some progress. The freed-up exchange rate has
stabilised. The external deficit has shrunk. And
significant reform is now under way. (See charts.)
However, an important contributor to further
progress is debt relief. In August, after tough negotiations, Ukraine reached a
deal with its private creditors on $18bn of debt to private parties. The face value of the bonds is to be reduced
by 20 per cent and maturities are to be extended significantly. This agreement
should, when implemented, postpone Ukraine’s cash outflows by $11.5bn of
principal payments between 2015 and 2018.
Ukraine argues that Russia’s bond should be
regarded as a commercial debt, to be treated in the same way as other such
debts. Russia insists its bond must be paid in full in December 2015, when due,
as an official debt. Adam Lerrick of the American Enterprise Institute has
suggested what seems an intelligent compromise. In essence, the plan is to
compensate Russia for the favourable terms offered in the original loan (a rate
of 5 per cent against a market yield of 12 per cent on two-year bonds at that
time) and then treat the loan in the same way as other commercial debts.
For Ukraine, this compromise would have a
minimal impact on debt sustainability. For Russia, this need mean no writedown
in the nominal amount of the loan, as it insists, and an increase in the
interest rate it receives from 5 per cent to 6.5 per cent — but a maturity
extension of four to 12 years.
If Russia wanted a reasonable deal, it would
accept this proposal, which meets its ostensible demands, notably a refusal to
accept a writedown of face value. Almost certainly, it has no interest in any
deal and so will reject it. That would at least clarify its true objectives,
which are, almost certainly, to halt IMF loans and so foil Ukraine’s recovery.
If so, the west must not let Russia succeed. A
way needs to be found to lend the money Ukraine desperately needs. Russia
cannot be allowed both to ruin Ukraine and hold a veto over efforts to rescue
it. It should be made clear that such unco-operative behaviour merits further
tightening of sanctions.
The Russian president may be difficult. But he
is rational. No doubt he would prefer a docile Russian satellite to an
independent Ukraine, and a ruined Ukraine to a prosperous democratic and
pre-western one. But the west should make clear that a price is to be paid for
Russia’s obstacles to efforts at creating a functioning Ukraine. Above all, it must be determined to provide help.
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