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Restructuring and a long road ahead


Why it is important to use a time resource that restructuring gives to Ukrainian economy

On Thursday Parliament adopted an important decision – it voted for restructuring agreement of Ukrainian debt that was offered by the Ministry of Finance and the creditors' committee. The voting was successful, gathering more than 300 votes. The road to completion of the restructuring is now open.

Thanks to the good news Ukrainian Eurobonds due in July 2017 continued to rise, reaching the highest price in the last 10 months, 77.05 cents per $ 1 of nominal value.

The real advantages of the agreement with creditors

Sovereign debt restructuring will help to reduce the overall debt burden. We can expect a certain stabilizing effect for the Ukrainian currency and the positive effect for the Ukrainian "securities". Direct "mechanical" pressure on the national budget of the country will be weakened and it will be easier to manage liquidity and to coordinate cash flows.

We must consider that the "base plate" of Ukrainian economy will be significantly different in 2021 and 2025. There is a time for economic jump, diversification and modernization of the country's export potential, systemic reforms, recovery of the banking sector and privatization of inefficient and heavy state-owned enterprises. This time reserve can be estimated in two stages of five years each. Effective implementation of the above activities will form makroplatform for the future of the Ukrainian economy. Considering the IMF "Extended Funding" program IMF and grace period of three years, there are a lot of positive aspects. With the right approach, the GDP growth rate of 3-4% after 2025 will be part of a very optimistic economic scenario.

The theory of capital time value is also a powerful argument in support of the agreement. Write-off of $ 3.8 billion and no need to maintain this amount today and in the coming years is more important than compensation payments to creditors in 2025, 2030, 2035, for example. It should also be added that, thanks to this agreement, Ukraine will be able to return to the foreign capital markets in the next two years. It eventually will play a positive role for our country and for for the expedient "increasing of credit leverage" for development.

Technical difficulties and risks

Now it remains for us to complete all the legal and technical aspects – which means that we have to make a technical defaults soon, at the end of the month, and again in October. As for the $ 3 billion in Eurobonds billion held by the Russian Federation we can say that the eastern neighbor will not get better conditions than the creditors' committee under the leadership of Franklin Templeton. When the restructuring operation is completed with the creditors' committee and other stakeholders, "argument cross-default" will be offset and Russia will be in the absolute minority.

It will be much easier for Ukrainian side to achieve the desired result, when the Russian is isolated from other creditors. In fact, there is no reason to worry, as the Ukrainian side has the unprecedented support of the IMF and other international financial institutions and partners.

The statement of the law firm Shearman & Sterling LLP that its clients hold 25% of Eurobonds due on September 23, 2015 (total repayment of $ 500 million), and they need to negotiate with the creditors' committee and Franklin Templeton for a review of the replacement process of old securities for new ones, illustrates the internal conflict among the total mass of Ukraine creditors.

Any delay in the negotiation process profitable for bond holders with repayment in the nearest future. This group of creditors with short-term positions will suffer the most, because for them the new dates will be in the longer term perspective than for ones whose original repayment was, for example, in 2017. These players will do anything to delay or break the process, so Ukraine will be forced to carry out its external obligations. Nevertheless, there is real hope that Franklin Templeton will defend the position of the creditors' committee – as the deal is a win-win for the majority of the parties.

Is the restructuring solution to all problems of the Ukrainian economy?

The restructuring does not solve the systemic problems of the Ukrainian economy. Ukraine receives little break and a number of stabilizing factors. Without systemic reforms inside and without the solution of many "urgent" issues in the country export nomenclature we will not be able to provide a stable growth dynamics of GDP.

Do not expect that after the completion of the restructuring there will be an immediate positive effect on the Ukrainian economy. Most likely, in 2016 we will not restore production and exports significantly. After all, the Ukrainian economy will continue to be under the influence of the slowdown in the world economy and the collapse of prices for key Ukrainian export goods.

At the same time we must understand that the devaluation wars in Asia (in China, Malaysia, Thailand, Taiwan and South Korea) can essentially "cut" Ukrainian exports. European markets still remain extremely difficult for Ukrainian manufacturers for reasons of technical and phytosanitary standards.

And not only receipt of currency and trade balance (and accordingly,the balance of payments and the stability of the national currency) depend on the dynamics but also the dynamics of industrial production, transport, services and the revenue part of the "exhausted" the state budget.

We can assume that it will take at least another 1-1.5 years to stabilize general macroenviroment and to launch processes of export diversification. Considering the the need of inflation rate stabilization for the organic growth of domestic consumption (for increasing of retail trade), the need of toxic assets reducing in the banking system (otherwise there will be no lending resumption) and the need of entrepreneurship and investment stimulation, the Ukrainian economy has a very difficult road ahead.


Now it is crucial to take advantage of all the positive instruments and levers offered by restructuring agreement. All payments on the body that come by the IMF "Extended Funding" program will be postponed after 2019.

Write-off of $ 3.8 billion and a reduction of "mechanical pressure" on the budget will significantly simplify the coordination of payments. This means that the Cabinet of Ministers has a chance to do real systemic reforms and aims to perform all the "beacons" of the IMF "Extended Funding" program.

The agreement is as good as it can be. Speculations can be long and hard (not to mention how much one can speculate on derivatives tied to the GDP growth and the growth of a variety of scenarios, the Ukrainian economy). We need to reject all populism and politics and to begin the hard way of the country's reconstruction and development of the Ukrainian economy.

Date: 18.09.2015


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