March 16, 2014 (TSR) – While the US, the EU and the IMF are looking for a way to help the illegitimate Ukrainian “government” avoid a default, financial experts have discovered that provisions attached to Ukraine‘s Eurobonds will ensure that at least 3 billion dollars from any western aid package will go into Russia‘s coffers.
In a letter sent to Financial Times, Mitu Gulati, a law professor at Duke University, explained that the bond contract under which Russia lent Ukraine 3 billion dollars in December 2013 has a special provision regarding the issuer’s level of indebtedness: “So long as the Notes remain outstanding the Issuer shall ensure that the volume of the total state debt and state guaranteed debt should not at any time exceed an amount equal to 60 percent of the annual nominal gross domestic product of Ukraine.”
When the bonds were emitted, the debt level was at 40 percent so, this provision seems a sensible way to force the Ukrainian government to avoid taking on excessive debt. However, given the current circumstances, any significant bail-out package received by the so-called “government” in Kiev from the US or the IMF will take the debt level over the critical 60 percent threshold, giving Moscow the right to use the “acceleration procedure” and demand immediate repayment of 3 billion dollars. Of course, some commentators would jump to the conclusion that the provision has been incorporated into the bond contract in a disingenuous manner, significantly reducing Kiev’s options for getting new loans. However, it should be noted that this provision, although exotic for bond contracts, is actually an exact quote of Article 18 of Ukraine’s own Budget Codex.
According to calculations made by Standard Bank’s analyst Timothy Ash, quoted by RBK news agency, a loan as small as 10 billion dollars could bring the overall debt level into “dangerous proximity” to the 60 percent threshold. If those estimations are correct, then any bailout package for Ukraine will actually result in a direct payment to Russia, equal to at least 5 billion dollars, because Ukraine will have to pay 2 billion dollars in gas debts and 3 billion dollars as an “accelerated payment” for its bonds. So far, the combined short-term help available for Ukraine from the US, the EU and the World Bank amounts to 4 billion dollars, however no actual transfers have been made yet. It remains to be seen if the Western powers and their financial institutions will find sufficient funds to save the Ukrainian junta from imminent economic collapse.