Kiev, Moscow, Bonds and Haircuts, by Raúl Ilargi Meijer

The US and EU have accused Russia of invading Ukraine. Plumbing new depths of stupidity and arrogance, they expect Russia to play “nice,” giving the financially strapped country it supposedly invaded a break on $3 billion worth of Ukrainian bonds it holds. That way, the Ukrainian government can get additional loans so it will have the wherewithal to continue making war against ethnic Russians in east Ukraine, perhaps with US military assistance. Russia, not surprisingly, is saying “nyet,” it wants payment in full. Surprisingly, it has so far not exercised its right to accelerate payment from Ukraine on the bonds, but they may change if the Ukraine obtains US armaments.  From  Raúl Ilargi Meijer at automaticearth.com:

When money managers talk outside their narrow field, nonsense is guaranteed to ensue. No better example than this Bloomberg piece on Ukraine’s ‘debt restructuring’ plans, which are as much a political tool as they are anything else at all. Ukraine’s American Finance Minister has announced a broad restructuring plan with a wide range of severe haircuts for creditors, and she – well, obviously – wishes to include Russia in the group of creditors who are about to get their heads shaved.

And despite all obvious angles to the issue that are not purely economical, Bloomberg presents a whole array of finance professionals who are free to spout their entirely irrelevant opinions on the topic. If you didn’t know any better, you’d be inclined to think that perhaps Russia is indeed just another creditor to Kiev.

Putin Plays Wildcard as Ukraine Bond Restructuring Talks Begin

As Ukraine begins bond-restructuring talks, it finds itself face-to-face with a familiar foe: Russia. President Vladimir Putin bought $3 billion of Ukrainian bonds in late 2013. The cash was meant to support an ally, then-President Yanukovych.

That is, for starters, a far too narrow way of putting it. Russia simply wanted to make sure Ukraine would remain a stable nation, both politically and economically, because A) it didn’t want a failed state on its borders and B) it wanted to ensure a smooth transfer of its gas sales to Europe through the Ukraine pipeline systems. Whether that would be achieved through Yanukovych or someone else was a secondary issue. Putin was never a big fan of the former president, but at least he kept the gas flowing.

While his government fell just two months later, Russia was left with the securities. Now, those holdings take on an added importance as Putin’s stance on the debt talks could affect the terms that all other bondholders get in the restructuring. Russia, which is Ukraine’s second-biggest bondholder, has maintained that it won’t take part in any restructuring deal. Here are the three most likely tacks – as seen by money managers and analysts – that Putin’s government could pursue.

Here’s the biggest issue here, one which Bloomberg conveniently omits. Not only was Russia left with the securities after the Maidan coup (or revolution if you must), but the money provided through them to Ukraine began to be used to organize and fund various battalions and other groups, thrown together into a Kiev ‘army’, that started aiming for and at the Russian speaking population in East Ukraine. 6000 of them did not survive this.

The same would have happened in Crimea (Moscow is convinced of this) had not Putin made it part of Russia before that could happen. Do note that one of the very first decrees issued by US installed PM Yatsenyuk and his ‘cabinet’ was one that banned Russian to be used as an official language by millions of people who speak only Russian. That Yats withdrew the decree within a week didn’t matter anymore, the game was on right then and there.

Ukraine, after gaining a lifeline from the IMF, included Russia’s bond among the 29 securities and enterprise loans it seeks to renegotiate with creditors before June. Finance Minister Natalie Jaresko has promised not to give any creditor special treatment. The revamp will include a reduction in the coupon, an extension in maturities as well as a cut in the face value, she said.

Russian Deputy Finance Minister Sergey Storchak said March 17 that the nation isn’t taking part in the debt negotiations because it’s an “official” creditor, not a private bondholder. If the Kremlin maintains this view, it would be “negative” for private bondholders as “other investors will be more tempted to hold out as well,” according to Marco Ruijer at ING. He predicts a 45% chance of a hold out, while Michael Ganske at Rogge in London says it’s 70%.

Here’s where we get into la-la land, with money managers speaking out on things they don’t know anything about. Which can then be used to lead up to a goal-seeked conclusion, as we will see. Because of the situation I painted above, Russia cannot and will not take part in the ‘debt negotiations’ the west tries to shove down its throat through Jaresko’s restructuring plans.

If only because as soon as the restructuring has given Kiev some financial breathing space, is will use it to reinforce its troops and go after its Russian speaking compatriots again. It’s a not a finance issue at all, it’s life and death, and that makes percentages thrown around by money guys behind desks in high rises not just futile, but positively inane.

http://www.theautomaticearth.com/2015/03/kiev-moscow-bonds-and-haircuts/

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