Ukraine’s Odious Debts
A case for repudiation.
Apr 14, 2014, Vol. 19, No. 29 • By IRWIN M. STELZER
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).
Recent Blog Posts