Understanding Russian Involvement in the Ukraine

People listening to the USA government and its corporate news media tend to have a very distorted view of the Russian involvement in the Ukraine. I found an interesting story that clarifies what happened in what you may find to be an odd place. Michael Hudson wrote a book that was published in 2015, Killing The Host: How Financial Parasites and Debt Bondage Destroy the Global Economy.

I’ll try to quote enough of one chapter to give you the picture about the Ukraine without quoting too much to violate Hudson’s copyright.

The point is that the European Union with the collusion of the USA was trying to raid the Ukrainian economy, and Russia was trying to prevent the raid. The nefarious tricks that our side used finally caused Russia to take action to protect itself. In actual fact, our side’s successful raid on the Ukraine has made a shambles of the Ukraine’s economy.

The most imaginative recent rationales for annulling sovereign debts have been thought up not by Argentina, Greece or Ireland, but by U.S. strategists seeking to enable Ukraine to avoid paying the bonds it has issued or debts run up for gas imported from Russia. In the wake of the New Cold War confrontation in mid-2014 after Crimea voted heavily in a popular referendum to be re-absorbed by Russia, the Peterson Institute for International Economics floated a proposal by former Treasury official Anna Gelpern to deprive Russia of a means for enforcing its loan to Ukraine. “A single measure can free up $3 billion for Ukraine,” she proposed. Britain’s Parliament could pass a law declaring the $3 billion bond negotiated by Russia’s sovereign wealth fund to be “foreign aid,” not a real commercial loan contract worthy of legal enforcement.

This would be a thunderclap shaking international debt markets. Its principle would be logically applicable to U.S. claims “foreign aid,” which includes loans to pay back American bankers and other creditors, as well as World Bank “aid” loans. The bonds held by Russia’s sovereign wealth fund were denominated in euros under strict “London” rules. Furthermore, the fund required at least an AA rating for bond investments. Ukraine’s B+ rating was below this level, so Russia acted in a prudent way to add financial protection by making the bonds payable on demand if Ukraine’s overall debt rose above a fairly modest 60 percent of its GDP. Unlike general-purpose foreign aid, the terms of this loan gives Russia “power to trigger a cascade of defaults under Ukraine’s other bonds and a large block of votes in any future bond restructuring,” Gelpern noted.

As recently as 2013, Ukraine’s public debt amounted to just over 40 percent of the nation’s GDP – some $73 billion, seemingly manageable until the February Maidan coup led to civil war against the Eastern Russian-speaking region. Waging war is expensive, and Ukraine’s hryvnia currency ruptured. A quarter of its exports come from eastern Ukraine, sold mainly to Russia (including military hardware). Kiev sought to end this trade, and spent a year bombing Donbas and Luhansk cities and industry, turning off the electricity to its coal mines, and driving an estimated one million of the region’s civilians to flee into Russia. Ukraine’s exchange rate plunged steadily, raising its debt/GDP ratio far above the 60 percent threshold. That gave Russia the option to make the debt payable immediately, triggering the cross-default clauses it had inserted into the euro-bonds contracted with Ukraine.

Gelpern’s paper accused Russia of seeking to keep Ukraine “on a short leash,” as if this is not precisely what the IMF and most financial investors do. However, “governments do not normally sue one another to collect their debts in national courts.” If this should occur, the pari passu rule prevents some debts from being annulled selectively. That is the problem Gelpern has been describing in the Credit Slips blog with regard to Argentina’s debt negotiations.

Gelpern therefore raises another possibility – that Ukraine may claim that its debt to Russia is “odious,” addressing the situation where “an evil ruler signs contracts that burden future generations long after the ruler is deposed.” “Repudiating all debts incurred under Yanukovich would discourage lending to corrupt leaders,” she concludes.

The double standard here is that instead of labeling Ukraine’s long series of kleptocrats and their corrupt governments “odious,” she singles out only Yanukovich’s tenure, as if his predecessors and successors were not equally venal. An even greater danger in declaring Ukraine’s debt odious is that it may backfire on the United States, given its own long support for military dictatorships, corrupt client states and kleptocracies. U.S. backing for Chile’s military dictatorship following General Pinochet’s 1973 coup led to Operation Condor that installed Argentina’s military dictatorship that ran up that country’s foreign debt. Would a successful Ukrainian claim that its debt was odious open the legal floodgates for broad Latin American and Third World debt annulments?

Ukraine’s sale of bonds to Russia’s sovereign debt fund, as well as its contracts for gas purchases were negotiated by a democratically elected government, at low concessionary rates that subsidized industrial and household consumption. If this debt is deemed odious, what of the EU’s insistence that Greece remove its Parliamentary leader Papandreou in 2011 to prevent a public referendum from taking place regarding the ECB loan? Loans made in the face of evident public opposition may be deemed to have been imposed without proper democratic consent.

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