Streetwise Professor

December 17, 2013

Winner’s Curse

Filed under: Economics,History,Politics,Russia — The Professor @ 10:04 pm

I mentioned this in the earlier post, but it deserves a post of its own. The more I think about it, the more astounded I am at the folly of using Russia’s national welfare fund to buy Ukrainian government debt.  The purpose of this fund is to provide a cushion in the Russian state budget in the event of a decline in economic activity and government revenues, most likely due to a decline in the price of oil.  For all of its dysfunctions in property rights, the rule of law, etc., Russia earned high marks for its relatively prudent fiscal policy, largely due to the guidance of Alexei Kudrin.  The reserve funds were a big part of that, building up when times were good and available to be tapped when things went sour.  In recent years, Putin’s need to buy support has undermined this prudent policy.  Now all prudence is out the window.

For as I noted earlier today, this “investment” is rife with wrong-way risk.  Due to the same tight connection between the Ukrainian economy and the Russian one that compelled Yanukovych to submit to Putin, there will be a strong positive correlation between the price of these bonds and the performance of the Russian economy.  If the Russian economy tanks (due to an oil price decline, for instance), Ukraine’s economy will tank right along with it.  More severely in fact.  And when its economy tanks, the price of its bonds will tank too.

This is exactly what you don’t want in a “rainy day” investment.  Preferably you’d like something negatively correlated, but at the very least, you’d like something only weakly correlated  But instead Putin has invested one-sixth of the national welfare fund in a highly correlated investment that will perform badly just when Russia would need the money.  This is financial insanity.  Kudrin must be stroking out.

But that means that this fits in perfectly with Putin’s obsession with Ukraine.  So he’s “won” the Ukraine (assuming, of course, that Clockwork Orange doesn’t strike again).  But what has he won?  An economic basket case, a cesspool of corruption, and a dysfunctional Sovok state.  He’s spent $15 billion (plus another $5 billion in gas price cuts), but he’ll spend a lot more.  Because this will not address Ukraine’s fundamental economic problems.  Yanukovych will be back for more, and more, and more.

And why is Putin committing such a blunder?  Because of his delusions of grandeur. His desire to reverse the collapse of the USSR, which he considers history’s greatest geopolitical tragedy.  His obsession with gathering again the Russian lands.  And the Russian obsession with Ukraine.  They truly believe it to be naturally subordinate to Russia.  Not a real country, as Putin said to Bush.  To Putin, and to most Russians, an independent Ukraine is a monstrosity.

Insane.  Utterly insane.

You’ll read about this being the latest in Putin’s run of political and diplomatic triumphs.  With a few more such triumphs, Russia will be undone. He has won the bidding war with the EU (not that it was much of a contest).  But he-and Russia-will suffer the winner’s curse.

Be careful what you ask for, Vlad.  Be very careful.

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  1. SWP, my hat is off to you – your latest posts show that you have this whole situation down cold.

    Absolutely excellent, and absolutely correct.

    I like the analogy to the Don, and I like the phrase “Russia is selling drugs, and the EU was selling rehab.”

    The people want rehab, the students and the people joining them sincerely and desperately want rehab.

    They have seen that the other path leads nowhere.

    Yanuchesceu already owes the IMF – did Putler not see that?

    And where will the $15 billion go?

    Or does Putler not care about the “application of loan proceeds”?

    Comment by elmer — December 17, 2013 @ 11:13 pm

  2. I don’t get this praise for Kudrin’s rainy day reserve funds. With male life expectancy at Bangladeshian levels and 1/5 of the population living in unsustainable monograds, among innumerable other systemic problems, wouldn’t it have been better to use at least some of that money to build social infrastructure? Even if we take into account, Russia being Russia, that most of that money would have dissapeared somewhere along the way?

    Comment by Harald — December 18, 2013 @ 12:49 am

  3. Personally, I wonder if we are not witnessing the unfolding of a Machiavellian plot formulated deep within the Pindossky GosDep USA, jointly with the baronially-selected finest minds of the wise and mighty Consilium (aka EU FAC – careful how you pronounce it!), along with assorted, perfidious MI…(fill in a number) mandarins who, assisted by top Hollywood scriptwriters in order to ensure continuity, have conspired to cause events in the Ukraine to become of such concern to the father of the Russian (and, by natural extension, Ukrainian) nation that he could not do otherwise than to expend these funds in a way likely to be highly detrimental to his own country — and thus ultimately to WIN (as they would see it), or be to blame (as Moscow would see it) in an even more cunning deployment of the Reagan Star Wars Strategy.
    This is obviously only Part A of the plot, with Part B, the wonderfully wicked western conspiracy to cause oil prices to drop, yet to be deployed.

    Comment by DaveS — December 18, 2013 @ 5:10 am

  4. @Harald. The funds are for macro stabilization, rather than old age insurance (which as you note is sort of a joke when so many don’t live to old age). Arguably the macro stabilization aspect makes it easier for Russia to borrow and they can actually support more spending on infrastructure, etc. If you think that macro stabilization is not positive NPV, it would be better to lower taxes and let individuals and businesses invest (or consume) more, rather than feeding the corruption that plagues Russian infrastructure projects. These are wealth destroyers.

    The ProfessorComment by The Professor — December 18, 2013 @ 8:49 am

  5. The Wall Street Journal is calling it the Putin Crony Rescue Fund.

    Comment by elmer — December 18, 2013 @ 9:23 am

  6. SWP nirvana- it looks like Moscow Exchange is raising funds, and you have a change to comment on the convolution of russia and financial innovation. Enjoy.

    Comment by scott — December 18, 2013 @ 11:11 am

  7. @ Perfesser – re @Harald agree but a couple of points. You are truing to think Rationally as opposed to relatively – that is how it relates to the big P. Below is the responses of KIM ILL Pukin.

    “It would be better to lower taxes if the fund isn’t NPV positive…” What in God’s name are you talking about? Anyone who is anyone doesn’t pay taxes, or if they do it is a pre agreed to amount of tribute that is in violation of the Law so the payers can be locked up at (my) will. As for the Narod, the only question is that when we piss on them, will we let them wash after.

    “The funds are for macro stabilization….” Who cares if the debt is bad, no one is cutting my pay and I didn’t buy any of this crap paper from my personal $50mmm wealth (which came from the very careful budgeting of my household expenses, of course). In fact the 2 year term allows me to drama queen, er, I mean, emperor it every 6 months or so to ratchet up the pressure and show how poor little Russia is being taken by those evilllll westerners and lazy Ukrainian slobs – even though we are much smarter than anyone else. How is this possible? These evil bastards abused our Christ like forbearance and charity.

    “With male life expectancy at Bangladeshian levels and 1/5 of the population living in unsustainable monograds …. I am not going to die quickly (look at my manly physique) and no one I care about lives in those hell holes. Besides keeping ’em poor and stupid works like a charm, so far.

    “rather than feeding the corruption that plagues Russian infrastructure projects. These are wealth destroyers….” Alright, that is the frozen (Siberian) limit. My wealth isn’t destroyed. We can still beat the tar out of Armenia, Georgia, Turkmenistan and maybe Finland (if they don’t act together). What the hell do you want from me? To make my people happy? Let them develop? why the hell would I do that? If they could do this themselves, I would be denying them the wonderfulness of ME.

    How can you be so cruel and selfish, you commie bastards?

    Comment by Sotos — December 18, 2013 @ 12:20 pm

  8. Putin doesn’t care about the economics. He is thinking long term geopolitics. In his mind, now is not the time to be cheap. For the West, Ukraine would be nice. For Putin, Ukraine is essential. Without Ukraine, Russia’s strategy of a revived Eurasian bloc fails. It is a no brainer choice for him. All of the negatives of the deal, as SWP laid out, don’t acually hurt Putin. It may hurt ordinary Russians in the future, but not him. Potential damage may limit Putin’s ability to conduct foreign policy, but he likely thinks if he doesn’t have Ukraine anyway, what would it matter?

    However, Putin must be thinking that this essentially seals the deal for him. But what happens if the opposition wins the February 2015 presidential elections and possibly rules in coalition with pro-EU caucus of the PoR or dismisses parliament for an early election? 14 months is not a long time. Putin either thinks this wins the election for Yanukovych, is completely ignorant of the threat, or intends to make sure the opposition can’t win in 2015.

    Comment by Chris — December 18, 2013 @ 12:46 pm

  9. @Chris. That’s sort of exactly my point. If he cared about economics, and economic growth, he’d have done many things differently. And now he is reaping what he sowed. Russian growth is virtually non-existent.

    Re geopolitics . . . again, that’s kind of my point. What’s the point of a “revived Eurasian bloc”? Does he want a Eurasian bloc as a means of achieving any other purpose, or just as an end to itself? I think the answer is clearly the latter, and that’s what is so grandiose and idiotic and pathetic. It’s an attempt to capture some imagined past glory. Empire for empire’s sake. Wanting a bigger dung heap to rule over. Glory Days could be his theme song.

    The ProfessorComment by The Professor — December 18, 2013 @ 4:43 pm

  10. “But what happens if the opposition wins the February 2015 presidential elections and possibly rules in coalition with pro-EU caucus of the PoR or dismisses parliament for an early election?”

    Ahh, but you see – what is the term of the bonds? 1 year? 2 years? 30 years?

    And the “gas price cuts” – how often does the price get reviewed? under what circumstances (such as the opposition taking over?

    And what are the other currently-secret parts of the deal?

    Comment by elmer — December 18, 2013 @ 4:53 pm

  11. Street:

    All interesting armchair quarterbacking. Entertaining but useless. You nailed it in your simple, but accurate analysis.

    The contributors (but NOT you) forgot 2 minor points:

    1) Barack Hussein Oedipus requested ‘Flexibility’ from Medvedev (ONLY as an intermediary). In any trade, whether in an open & unfettered market or in a back alley, something is exchanged; even in a fleecing. The currency granted was likewise obtained, a mutual exchange of ‘Flexibility.’ The pat on the wrist sealed the deal. Nod/nod, wink/wink.

    2) As a Crony, Thug, Gangster, Political ‘Leader,’ or cult hero, Putin will use his ‘currency’ as he sees fit. What did you THINK he was going to offer Yanukovych?!?! His hard-won SuperBowl ring? Russia’s version of a capital account or Social Security (lock box) ‘trust fund’ is merely an accounting gimmick to be used as the autark sees fit. See how your President uses Air Force 1 as a personal vacation taxi-cab?


    Comment by Vlad — December 18, 2013 @ 9:00 pm

  12. “Without mentioning opposition leader Alexei Navalny by name, Putin appeared to question the size of the activist’s penis, saying of getting into politics: “You can loose your trousers. It’s good if you have something to show, and if you have nothing…” before trailing off.”

    I was aware that Putin has something of a Small Man Complex, but to let it show this much is a bit unedifying.

    Comment by Green as Grass — December 19, 2013 @ 7:21 am

  13. @SWP, I don’t think he simply wants power for power’s sake (althought that mentality is part of it – he does seeem to view international politics as a zero-sum game). It’s that Putin really sees Russia as being different and separate from the West, and he believes the West – especially the USA – is predatory and means to destroy Russia. Some of this is due to Putin’s KGB background, some of this is due to what he saw happened to Russian interests during the Yeltsin years, and some of this is what he saw the Bush administration do. When Putin offered him help after 9/11, I think he expected some kind of quid pro quo. Instead, Bush just ignored him and proceeded with a variety of policies Putin didn’t like. I think that was what decisively turned him against the West. Putin truly believes the West has it out for Russia, and that Western values like the market, liberalism, and democracy are simply means to subvert and destroy rival nations.

    It is an old trope that has been used against the West (Britain, France, and America in particular) for a century now. It is a fringe political view in the West, but does have many adherents elsewhere. One may think it irrational, crazy, or ridiculous, but I think it explains why Putin is doing what he does. Putin thinks if he doesn’t rally the eastern Slavs in one protective cocoon, then the things that make Russia unique will disappear and the culture will collapse. In his mind, he’s defending the homeland from existential danger, and if that means taking some economic hits (which won’t directly affect him, only the little people), then fine.

    Economic well being is important to Putin, but he has other values ahead of it.

    Comment by Chris — December 19, 2013 @ 11:52 am

  14. well, here’s an interesting tidbit

    “Russian law does not currently permit the country’s ‘rainy day’ pension fund to invest in other nation’s bonds, especially those having a low rating such as Ukraine’s. It is by no means certain that such transactions will take place, and if they do, on what terms.

    As for the gas deal, Ukraine will have to purchase much larger quantities that it currently does, and the price may be re-evaluated every three months.

    Conclusion: The deals struck by the presidents of Russia and Ukraine are mere window-dressing…neither side will stick to their side of the bargain and fresh circumstances will necessitate their reassessment.”

    Comment by elmer — December 19, 2013 @ 10:01 pm

  15. @Chris. The Slavophiles vs. the Westernizers all over again. Consistent Russian historical theme. A combination of messianic sense of importance and destiny, and a deep insecurity and recognition of weakness.

    @elmer. Obama disregards laws he doesn’t like. Putin should have no problem doing so.

    The ProfessorComment by The Professor — December 19, 2013 @ 11:38 pm

  16. @elmer-Yanukovych is like a cornered rat.

    The ProfessorComment by The Professor — December 19, 2013 @ 11:38 pm

  17. Putin’s narrow geopolitical motivations are simple-

    pursuant to that is the sub directive (more appropriately consistent with his KGB background)-
    Minimize US influence

    One mistake is to assume Vova is a master chess player when he is really a simple checkers player

    His domestic strategy is encapsualated by-
    Bread, circus, and American idiots.

    Yanukovich has the right criminal record and has amply demonstrated his absolute and total lack of ethics on the pro side. His cons are limited to no time in the St Peterburg’s mayors office and no damn time in the dojo.

    Comment by pahoben — December 20, 2013 @ 1:05 am

  18. Argentina clearly showed the problem with owning sovereign debt – if the borrower defaults, the lender can’t seize any collateral to satisfy the obligation. What is Putin’s move if Ukraine defaults? He could cut off gas, but what other leverage does he have in the case of Ukrainian default on the debt held by Russia?

    Comment by Charles — December 20, 2013 @ 10:34 am

  19. I will resist the urge to pig-pile on Putin. But if I was Ukraine, and my prospective marriage partners were Putin or Brussels… I would consider bachelorhood as the only option. I would rather tell the bond market to go suck a thumb, than take a $15 billion bribe and have army tanks on my border, or spend 15 years in endless Brussels meetings. Ukraine gets what they deserve at the moment, and Putin has had all these easy layups in the last year (snowden, syria and now Ukraine). It is downright depressing to see Putin in the lucky royal pulpit.

    Comment by scott — December 20, 2013 @ 10:55 am

  20. 5 minute primer on Ukraine (from Statfor)

    Comment by scott — December 20, 2013 @ 10:56 am

  21. > The name “Ukraine” literally translates as “on the edge.”

    The name Ukraine literally translates as “carved out” (piece of land). The rest of the “primer” must be no less informed (right out of Great Soviet Encyclopaedia).

    Comment by Ivan — December 20, 2013 @ 3:27 pm

  22. @pahoben. I don’t disagree that’s Putin’s motivation. My point is that motivation is fucking insane. My current dung pile isn’t big enough! I have to add more dung!

    @scott-agreed, for the most part. All I can take solace in is related to the title of the post. If this is winning, what would losing look like? Retaining an ally in the ME that will be a depopulated, razed hell. Achieving dominance over another dysfunctional piece of Sovokia. Snowden is a win, admittedly. One for which we should make him pay dearly, but won’t.

    The ProfessorComment by The Professor — December 20, 2013 @ 6:18 pm

  23. It’s more like “I have to turn more of the neighborhood into dung”. Even around 2000, when you stood at the site of Berlin wall, the results of Russian dominance were pretty obvious. That’s with Europe’s most powerful economy working hard to erase them.

    Comment by Ivan — December 21, 2013 @ 3:00 am

  24. @Prof

    I agreed with your post. Many are starting to assign some kind of stratebic genius to Putin while it is just Neosoviet tripe based on the PR opportunity of the day.

    Putin has carved out the global marketing niche of protecting mankind from stupid evill Americans. It is the usual case of selling some crap product by manipulating psychology.

    In my view the governance of Russia is a manure pile but Russia itself is a different matter. Many Russians also wonder why in the world do we need these satellite dependent states. If Russia were a manure pile then there wouldnt be much interest in it.

    Comment by pahoben — December 22, 2013 @ 11:08 am

  25. If there is any longer term goal to this – and I doubt there is, reflex anti-westernism suffices to explain it – then it will relate to the status of the Crimea. Russians are still seething over Khruschev’s decision to make it part of Ukraine, and that is pretty much the extent to which Russians give a shit about Ukraine.

    Comment by Tim Newman — December 22, 2013 @ 3:08 pm

  26. @Tim
    Yeah you are right that countries with Russian naval ports have recieved special interest. Vessels in his global naval superforce will start launching any day now. I’ll bet he is playing Battleship in his spare time to ready himself for moving his carrier groups around the world.

    Comment by pahoben — December 22, 2013 @ 5:57 pm

  27. I saw Azarov on Russian news enumerating EU’s conditions. He said that legalization of gay marraige was a condition. I personally don’t care what people do in their private lives but how could this issue possibly rise to such importance. It would require reflection to choose between idiot bureaucrats in Belguim or the thief king in Moscow.

    Comment by pahoben — December 22, 2013 @ 6:40 pm

  28. @pahoben. Gay marriage was not a condition. This was Azarov making stuff up, appealing in a Putinesque way to the PoR’s older, more conservative, and largely ethnically Russian elements. This provides a good illustration of Azarov’s (and Yanukovych’s) bad faith.

    Let’s say that it is true, though. What, they just figured that out? They didn’t realize this during the years the agreement was being negotiated? Further evidence of bad faith, in this instance in their negotiations with the Euros. Not that I’m a big fan of the Brussels bureaucrats, but it’s pretty clear that Ukraine was beyond opportunistic in its negotiations with them.

    The ProfessorComment by The Professor — December 22, 2013 @ 7:43 pm

  29. @Professor
    I doubt this group has ever negotiated in good faith ever. If they were negotiating you would have to assume they were only trying to get something ffor nothing Would any rational person ever believe Yanukovich would act in good faith.

    I like the story about the publications that were required for his doctorates. Books are listed in the Ukrainian registry but none can be found and the listed publishers have no record of publication. How some of these people could be the choice of an electorate assuming fair elections is beyond me but it is what it is. The proper response should be don’t give them anything and hurt them when you can.

    Comment by pahoben — December 22, 2013 @ 8:19 pm

  30. Do you notice a common theme. Theses or book publications where the authorship is in question. Seems to be widespread at the moment.

    Comment by pahoben — December 22, 2013 @ 8:39 pm

  31. When I think about issues like this there is only one movie I watch for inspiration-300.

    Comment by pahoben — December 22, 2013 @ 9:50 pm

  32. There is only one movie that will provide perspective for these issues-300. I will look for it now.

    Comment by pahoben — December 22, 2013 @ 10:00 pm

  33. SWP, I think you are going to love this:

    Russia gets its money back if Ukraine turns to the EU

    Monday, December 23 2013, 16:10

    Russia can demand the return of its loan to Ukraine if the situation changes, Igor Shuvalov, first Deputy Prime Minister of Russia, told Russia 24 TV-channel. He had been asked about the consequences of Ukraine signing the Association Agreement with the EU after receiving billions of dollars of support from Russia.

    “This loan is given in such a way that we always have the opportunity to demand its return from the Ukrainian government according to harsh judicial procedures. It is not some trivial agreement between two Ministries of Finance, but it is formulated according to a very strict procedure,” Shuvalov emphasized. He also assured viewers that the Russian Federation “fully secured its legal rights”.

    Kudrin says Ukraine could need another tranche in 2 years

    Monday, December 23, 16:11

    Alexey Kudrin, a former Minister of Finance of the Russian Federation and the architect of the National Wealth Fund that issued a loan to Ukraine, supports Russia’s decision to help despite its high cost, Interfax-Ukraine reports.

    “In general, I support the measures to support Ukraine, even though they are quite a bit more expensive for Russia than they could be. We are partially covering the mistakes of the Ukrainian government and the impact of the current political crisis.” Kudrin hopes that the Russian funds “will not be wasted”.

    “If we listen to the official news, we did not set any conditions for Ukraine. We should understand the sources of finance from which the loan will be returned. If this money is going to be wasted, Ukraine will need another tranche in 2 years,” he warned.

    Also, Kudrin is very surprised with the rapid change of course of the Ukrainian government due to its decision to not sign the Association Agreement with the EU. “The Ukrainian economy is stagnating for much longer time than ours. The country conducted negotiations about joining the Association for 4 years in such conditions, though suddenly it decided that this is wrong in 1-2 weeks,” Kudrin said. “It is the full responsibility of the Ukrainian government, which was either wrong or ignored the real economic situation in the country. Stopping these expectations led to protests. They need a pause to mediate the processes within the country,” he said.

    Alexey Kudrin is the author of the National Wealth Fund of Russia that issued a loan to Ukraine. The Fund was originally intended as a pension reserve in Russia in case of a rapid drop in oil prices.

    Comment by elmer — December 23, 2013 @ 4:20 pm

  34. But you’re going to love this even more (excerpt):

    Kyiv Post: President Viktor Yanukovych’s recent agreements in Moscow with Russia’s President Vladimir Putin on the $15 billion loan and a gas discount for Ukraine sound like a good deal. Yet, many in Ukraine worry that it could be just the tip of the iceberg, the rest of which is not to Ukraine’s advantage. What do you think there is to worry about?

    James Sherr: Yanukovych handed his own independence to Vladimir Putin and much of Ukraine’s independence as well.

    KP: How?

    JS: In the critical meetings that took place last month, Putin effectively said to Yanukovych that if he signed the association agreement with the EU he (Putin) would break every bone in his body. And he showed him how he would do it. By that I mean that Putin presented him with the telling details of the work done by [Putin’s advisor] Sergey Glazyiev and others, which targeted the key sectors of Ukraine’s economy vulnerable to Russian influence, including the industrial and financial interests closest to Yanukovych himself. My understanding is that he spoke in direct and brutal language: in language that would normally oblige the president of an independent state to end the meeting and return home. (Ukrainian Prime Minister Mykola) Azarov’s meeting with (Russian Prime Minister Dmitry) Medvedev shortly afterwards was similar: less brutal but even more specific.

    Yanukovych was not prepared for this. Instead of putting up a fight, he folded. What he signed (Dec. 17) are the terms of capitulation. They make it clear that Russia will now pursue a different model of integration with Ukraine. The Customs Union is yesterday’s story. The new framework will be built on interlocking, inter-sectoral integration, in other words Russian co-ownership and co-management of key sectors of Ukraine’s economy. In 2010, Medvedev presented Yanukovych with precisely such a model, embracing shipbuilding, chemicals, and of course, aerospace, the defense complex and energy, which every Ukrainian president has regarded as a mainstay of national independence. All of this was very public at the time. In 2010, Yanukovych rejected it. Now he has accepted it. There are still questions about details and bigger questions about how much can and will be implemented. But the Russians are very happy. Their conclusion is that ‘Ukraine is now ours’. Azarov can still insist that Ukraine won’t join the Customs Union. But that is now irrelevant. The story has moved on.

    Today there are only two centers of power with leverage over Yanukovych: Russia and the EuroMaidan. Yanukovych is more afraid of Russia than of the Maidan. The main reason is understood by everybody: Russia’s influence over Ukraine’s economy.

    This is not the product of natural causes. The priorities and policies of Ukraine’s authorities have pushed Ukraine to the brink of default against all international advice. And there should be no confusion. If Yanukovych had implemented the IMF’s conditions, Ukraine’s economy would not have been in this position.

    What Putin has offered is a rescue package in the form of 1/3 discount on energy and a staged disbursement of $15 billion over three years. The gas discount is likely to prove as evanescent as the 2010 discount. The terms are renewed every quarter, that is by Gazprom and the Kremlin. The $15 billion is not a grant, but the buying up of debt, which remains debt. Out of this sum, the only near certainty is that the first five billion will be disbursed. It could turn out to be $3 billion, because Ukraine is still obliged to pay its existing gas debt. So Russia’s help is contingent upon Ukraine’s good behavior. Putin has every opportunity to turn off the tap if there is bad behavior. Put all of this together, and you can see that Yanukovych is bound hand and foot.

    Everything about these agreements contradicts the notion that, unlike the EU and IMF, who give money with conditions, Russia simply provides ‘brotherly assistance.’ The conditions of the EU and IMF are limited, specific and absolutely open. Their purpose is to make Ukraine’s economy and institutions work better. The conditions that Yanukovych has accepted from Moscow perpetuate weakness and subservience. Nothing in the Moscow accords even addresses the causes of Ukraine’s economic disaster. When Putin turns off the tap, Ukraine will find itself in exactly the position it was in before, probably worse.

    Comment by elmer — December 23, 2013 @ 4:22 pm

  35. @elmer. Thanks. Usually, if you buy a a government bond, you have no right to demand payment. Apparently, the deal-which has not been made public-includes some sort of put provision giving it the right to force Ukraine to buy back the bonds sold to the Russians. The language setting out these “fully secured legal rights” would be entertaining reading, no doubt.

    The embedded option makes the effective interest rate on the bonds substantially higher than the yield at which they were purchased.

    That said, this is very Enron like. Ukraine is writing a put on itself, just like Enron did. That’s the epitome of wrong-way risk. But Shuvalov suggests the Russians have security to protect themselves against that risk.

    But if they have security, that makes the holders of other Ukrainian debt less secure. Yet yields on Ukrainian debt fell with the announcement of the Russian deal. In light of Shuvalov’s statement, the investors might want to rethink that pricing.

    And there’s another issue. Is the deal with the Russians legal? It compromises the rights of other lenders. What are the legal rights of these lenders?

    The ProfessorComment by The Professor — December 24, 2013 @ 1:49 pm

  36. Here is yet another analysis of the deal

    The bonds are supposedly listed on the Irish exchange

    Nominal rate is 5%. Supposedly, the IMF financing would be at 3% – but there were needed reforms attached.

    Gas discounts simply bring the rate down to market price due to previous alleged moves by Ukraine to buy resold gas through the EU, coal substitution and “efficiency measures.”

    The analysis employs your phrase- “EU was offering rehab”. But instead of saying that Putler was offering crack cocaine, the article states that the loan was “free of known strings.”

    So far, apparently only $3 billion has been doled out.

    Comment by elmer — January 1, 2014 @ 11:42 am

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