Ukraine’s Odious Debts
A case for repudiation.
Apr 14, 2014, Vol. 19, No. 29 • By IRWIN M. STELZER
It is a decade since America confronted the question of just how much financial assistance to provide Iraq, then burdened with billions in debt incurred by the Saddam Hussein regime. Now we face a similar problem in Ukraine, the important difference being that Iraq’s huge but mismanaged oil reserves gave it some prospect of repaying loans sooner rather than later, whereas the tapped-out Ukrainian economy has a long way to go before it will be financially viable. That day will be hastened if the government elected in May takes one giant step towards financial solvency and repudiates the billions in debt incurred by ousted president Viktor Yanukovych and the kleptocratic regimes preceding his—among the most corrupt in the world according to Transparency International—that have brought Ukraine to the edge of ruin. Debt repudiation will have to be part of any sensible program to reconstruct Ukraine’s economy.
White House protester, February 2014
Well over 2,000 years ago Aristotle wrote what might serve as the opening line for any policymaker wrestling
So would a current-day policy wonk, his copy of The Politics tucked under his arm, tell the president of the new, democratic Ukraine government that Aristotle advises that he forget about past debts and devote the country’s current cash flow to meeting the needs of its impoverished masses and to reconstruction? Not quite. My Hudson Institute colleague Ken Weinstein, whose understanding of philosophers’ musings far exceeds that of this mere economist, tells me that Aristotle intended to provoke a discussion, rather than provide a clear guide to policy.
That discussion must include an inclination to support the sanctity of contract, while coping with the feeling that Ukraine’s 44 million people should not have their futures blighted by debts incurred by kleptocrats. In a sense, the case for repudiation is weaker than it was with Iraq, which did not elect the crowd that drowned the country in red ink, as did Ukrainian voters. Still, the case for repudiation, for wiping away the debts that funded the lifestyles of a handful of government officials and their private-sector counterparts, seems overwhelming, at least to American taxpayers who are being asked to fund repayment of the cost of palaces, zoos, and whatever else struck the fancies of the now-deposed gang of public- and private-sector cronies.
Such debts are known by students of the subject as “dettes odieuses”—odious debts, a concept developed by Alexander Nahum Sack, a minister in czarist Russia and, after the revolution, a professor of law in Paris. Sack argued (and I draw heavily here on my earlier piece in these pages, “Forgive Them His Debts,” April 21, 2003) that when a government changes hands, the liability for public debt remains intact, with one important exception:
I leave to the lawyers the question of the current validity of this thesis, but confess that this economist finds the argument persuasive. The pile of Ukraine’s IOUs, “dettes de régime” Sack would call them, should not be repaid by the U.S. taxpayer, or allowed to interfere with the reconstruction of Ukraine’s economy. Needless to say, the eraser should be applied to the nation’s balance sheet simultaneously with an all-out effort to recapture the assets stolen by past regimes and their friendly oligarchs. That will require the cooperation of what we like to call our international partners, some of whom are less concerned than we are as to the origin of the deposits and investments that are squirreled away in their banks or invested in their real estate and companies. Equally important, it will be up to the new government in Kiev to set up a growth-friendly tax system, establish the rule of law and the sanctity of private property, and welcome investment capital from entrepreneurs around the world that are desperate for new opportunities and would be delighted to develop Ukraine’s vast mineral deposits.
Ukraine is faced with the following choices. It can use some of the proceeds of the $27 billion bailout the IMF is organizing to pay its creditors, including the $3 billion it owes Russia. Or it can repudiate the “odious debt” left behind by previous regimes. After all, the nation’s citizens never had an opportunity to approve the use of the proceeds, and the creditors had to know that they were lending to a regime that just might not be around when its IOUs came due.
Repudiation might make it a bit more difficult for the new government to borrow on international capital markets, but access to international capital markets should not be out of the question for a reform-minded government. International lenders have in the past made funds available to governments that have hardly demonstrated overwhelming concern for honoring their past obligations. A tabulation of defaults and restructurings (wiping out debts by negotiation) between 1976 and 2004 by Federico Sturzenegger and Jeromin Zettelmeyer, of the Kennedy School and the International Monetary Fund respectively, shows 8 in Europe, including Ukraine in 2000, 23 in Latin America, 27 in Africa, and 7 in Asia and the Middle East. There have been more such renegings since 2004.
Perhaps now is the time for Ukraine’s creditors to consider the policy prescription that John Maynard Keynes offered over 80 years ago when advocating revisions to the Treaty of Versailles. After advising Germany’s creditors that their “prospects of securing more than a fraction of this . . . [debt] are remote” (a view since challenged by some historians), he argued that Britain “will gain more in honour, prestige, and wealth by employing a prudent generosity to preserve the equilibrium of commerce and the well-being of Europe, than by attempting to exact a hateful and crushing tribute.” If ever there were a time when the equilibrium and well-being of Europe could use some preserving, now is that time.
American voters have made it clear that they believe Ukraine is none of our business, that they do not care to pay for infrastructure construction in a far-away country of which we know nothing when our own country is overburdened with debt and in need of some infrastructure upgrading of its own, not to mention facing the burgeoning costs of Obamacare. The European Union will come to Ukraine’s rescue with cash rather than rhetoric only if each member country agrees to a bailout, and many are not in search of another Greece. The International Monetary Fund is demanding reforms that will result in further depreciation of the hryvna, which will increase the burden of dollar-denominated debt, and an end to the huge subsidies natural gas consumers receive—suffering to follow. That makes the case for the “three Rs” compelling: repudiate odious debt, repatriate stolen funds, and reform the economy, with special attention to paring the pervasive, meddling, and corrupt bureaucracy.
That just might enable it to have some cash available for its defense, not a bad thing given that its putative allies are so frightened of antagonizing Vladimir Putin that America won’t make arms available to the ill-equipped Ukrainian military (Obama offered MREs, Meals Ready to Eat); Great Britain, Ukraine’s sovereignty co-guarantor, is reluctant to frighten off oligarch cash; and Germany, the de facto leader of the EU, worries about its energy supplies and export markets. By one estimate Ukraine has 6,000 battle-ready but ill-equipped ground troops to match against Russia’s 845,000 soldiers equipped with outdated weapons, but lots of them.
Shorn of the world’s third-largest strategic nuclear arsenal and other weapons it surrendered in return for a treaty in which we, Britain, and Russia seemed to guarantee its territorial integrity (Obama reaffirmed the 1994 Budapest Memorandum in 2009), Ukraine is reduced to depending on the kindness of strangers. If nervous nations, noting the tenderness with which North Korea, Iran, Pakistan, and Russia are treated by what is called “the international community,” need another reason to consider arming themselves with nukes rather than relying on America & Co., they have it in Ukraine.
Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of -economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).
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