The woman who’s trying to save Ukraine

Originally posted here.

Ukraine struck a critical debt deal Thursday with creditors that averts a default and opens to the door to continued international support for its struggling economy.

The agreement is a victory for Ukraine’s American-born finance minister, Natalie Jaresko. For the past five months, the former U.S. diplomat and fund manager has played the starring role in a highly publicized drama of complex negotiations with private holders of Ukrainian bonds led by Franklin Templeton.

Jaresko got half of what she was asking in debt write-off, accepting that investors take a 20 percent haircut on Ukraine’s $18 billion privately-held sovereign debt. On the other side, Templeton’s bond guru Michael Hasenstab had earlier refused to accept any haircut at all.

The debt restructuring satisfies a demand by the International Monetary Fund for continued financing of the war-torn economy.

Although she has lived in Kiev for the better part of the past three decades, Jaresko is a newcomer to Ukrainian politics. Raised by Ukrainian parents in Chicago, she joined the pro-Western government in December, the same day that she took Ukrainian citizenship.

In the wake of a popular uprising in early 2014 that saw a pro-Moscow president flee to Russia and new elections bring into a power president and Parliament, Ukraine’s economy has been devastated by an undeclared war with Russia over Crimea and its eastern territories. Her job has been to try to save the country from a financial collapse.

Hours after Thursday’s deal was announced, I sat down with Jaresko at her offices in a grim Stalinist building. The place looks the same as I remember it from years back, but the vibe is different. It’s hard to hear any language except English. Officials apologize for the country’s red tape.

I start by asking the finance minister why it took her five months to reach this compromise. Below is a condensed version of our exchange.

Jaresko: It is not a compromise from the position of Ukraine. You’re saying it is a compromise because you are looking at the difference between zero and 40 [the size of the negotiated haircut]. But that’s really not the only issue. Our goal was singular — to meet all three of the IMF goals and we met all three of them. We’ve achieved $15.3 billion in bounced payments [additional funds that debt restructuring generates for the government].

How we got there has always been a combination of coupon, haircut and maturity. What combination? That never really was a critical issue. There are a variety of mathematical combinations that would work. ‘Zero’ was never one of them.

Why did it take five months? One — we have a very unique creditor group with one large creditor, Franklin Templeton, which holds approximately $9 billion of $22 billion [the total Ukrainian public debt]. And they had a very strong belief that Ukraine did not have a solvency problem and did not need a haircut, and there’s no debt relief that was necessary. So it took quite a bit of time to convince the market that liquidity was not the only issue and simple re-profiling would never accomplish all three IMF targets.

POLITICO: Was it because of the Greece parallels?

J: The comparison to Greece in my mind is completely not useful.

P: Was it even an issue?

J: It wasn’t really an issue. When they did a debt restructuring in Greece in 2011-12, the debt was held by European banks. It was basically a bailout by the European Central Bank of the euro and the European banking system. We are not a member of the eurozone, nobody’s bailing out the Ukrainian hryvnia, it is just not comparable. What is also not comparable is the amount of support that Greece has got: They have one quarter of our population, but received over $350 billion in support. Ukraine has a full [IMF-led international bailout package] of $40 billion.

P: The first reaction of many analysts to the deal was that it is not complete without Russia, which holds $3 billion in bonds.

J: It doesn’t work that way. All the eurobonds are included [in the debt deal] including so-called Russian debt. The Ad Hoc creditor committee represents only $9 billion out of $22 billion, so there are a lot of creditors who are not in the Ad Hoc group. Whoever the holders of the Russian bond are  today — and you know, it is a tradeable obligation, so I can’t tell you who it is today or tomorrow or who’ll be next week…. If they choose not to participate, and they have the right to choose, they will not have a better deal.

Crimea has been illegally annexed, eastern Ukraine has been invaded and occupied, tens if not hundreds of billions of dollars in assets have been either stolen or removed or destroyed.

P: Do you expect to receive some help from the IMF to close this payment in December?

J: It is too soon to say that. Right now I think everyone, the G7 and the IMF… we hope the Russians… will choose to participate. This is the best possible deal and the most apolitical way to handle this piece of debt. You know there are extremes on both sides of the spectrum. Those in Russia who believe that they have to have a full repayment and not participate in the restructuring. Those in Ukraine who believe they don’t have to repay anything because Crimea has been illegally annexed, eastern Ukraine has been invaded and occupied, tens if not hundreds of billions of dollars in assets have been either stolen or removed or destroyed. There are lawsuits pending in all different kinds of courts for all different kinds of damages.

P: A crucial condition for the deal to succeed is the ability of the Ukrainian government to jumpstart the economy in a year or two. After going for haircuts or postponing payments, you have to try harder now to sell the country to investors.

J: Just the opposite — it is easier. Had we not met the collaborative agreement, had we been forced to use the moratorium, that might put us off in time from the expected return to markets in 2017. But the fact is that now we have this agreement and we’ve provided a recovery mechanism which puts the creditors on the same win-win situation with Ukraine. We are all now commonly incentivized to see Ukraine returning to growth, because the creditors don’t get any returns on those warrants [debt instruments tied to future economic growth] if we don’t return to growth.

P: It is good risk management, but don’t you think it is going to affect the trust of investors in the long-term?

J: I don’t think we could have had a more positive outcome. Especially from the perspective of attraction of investments, which is different from attracting debt, because Ukraine needs a lot of equity investments instead.

P:  Okay, so speaking of selling the country to foreign investors and of you as the Ukrainian fundraiser-in-chief these days, do you also think that Ukrainian war economy is the best investment plan to attract foreign businesses?

J: No, I don’t think that this is what we are doing. With our official creditors, official government and international partners, yes, we are asking for humanitarian support, grant aid, we are asking them for military support and financial support in a form of official credit. With the foreign investment community — that’s not what we are asking for. We are asking them to take a look at the economy that has unfortunately gone through years of recession. But we are amazingly competitive today compared to the last few years and to our neighbors. That competitive advantage is huge for businesses. If you take it together with benefits of DCFTA [the EU and Ukraine signed the Deep and Comprehensive Free Trade Area (DCFTA) on June 27, 2014, as part of their broader Association Agreement], which comes into full force on January 1 [2016] with full and open access to the European markets…. If you take it together with natural, human and intellectual resources, Ukraine is one of the most competitive countries for foreign investment in the region right now.

P: The Ukrainian economy has changed dramatically in the last five years, going from a large industrialized giant to a mostly agrarian type.

J: The portion of the economy that is destroyed by the war in the east, the heavy industries of metallurgy and heavy steel, frankly speaking, were some of the least competitive pieces of the economy. They were extremely valuable to us in terms of trade balance and export. 20 percent of the economy has been destroyed.

P: What kind of investment image or vision do you sell now? It was about heavy industries before, but now what are those investment priorities?

J: We inherited heavy industries from the Soviet Union. Now, when you look at the benefit of peace, we are going to rebuild the Donbass. Local factories that have been unfortunately destroyed, many of them probably will not be rebuilt. Those are not investments from the last 20 years for the most part. That was what we inherited from the Soviet Union. So the balance is clearly changed and now it needs to move more into IT and intelligence.

P: So you see it as an opportunity.

J: Absolutely. Heavy industries were tied to Russia and the former Soviet Union. Now Ukrainian companies are finding new markets, they are using DCFTA to refocus their standards so they are able to export to the EU. And even if you don’t want to export to the EU, being able to do it gives you maybe an access to the Middle East, North Africa, Asia. Our minister of agriculture was just in Egypt; we’ve become one of the largest exporters of agricultural commodities to Egypt.

Now, do we want to be exporting only commodities? That is also, frankly, a part of the Soviet legacy. Our vision is to move to value-added agricultural products, food processing. That doesn’t mean we don’t want to export commodities. No, exporting commodities is good! But that’s the Soviet legacy, like the industrial east was a Soviet legacy. Ukraine’s future lies in human capacity, which is IT, other areas of development based on the highest levels of education. It is a great benefit of inheriting some of those industries from the Soviet Union. But is it where we want to end up five, 10, 20 years from now? No, it is nowhere near that.

If you take it together with natural, human and intellectual resources, Ukraine is one of the most competitive countries for foreign investment in the region right now.

P: Speaking of what Ukraine inherited, let’s look at close trade ties with Russia. It is still a large part of the economy. War or no war, it is still going to be there in coming years. Now, because of international sanctions, some Russian companies are trying to find their way back to Ukraine, expanding trade with eastern Ukraine rebels. Ukrainian companies are also trying to get access to Russian consumers. Do you think that this kind of forced economic cooperation out of desperation and necessity could lead to reconciliation?

J: No, I don’t. The trade situation is getting worse between the two countries, not better. There are more and more non-tariff barriers being placed on Ukrainian exports to Russia by the Russian government. Clearly, there’s a more anti-import environment there, judging from the bulldozed food. I think it is natural to have them as a trading partner and I’m very hopeful when the war is over we can return to normal trade relations, I have no issue with that.

But for Ukraine, though, the numbers will never look the same. One is because a big part of our trade was gas and we will never import 100 percent of gas from Russia again. We will always diversify to the extent possible our gas purchases between the reverse gas from Europe and Russia. Number two, as we’ve done energy reforms by increasing prices and eliminating subsidies to Naftogaz [the country’s gas monopoly], eliminating corruption that used to exist in purchasing from Gazprom, globally gas prices are going down and the usage in Ukraine is going down.

And, coming back to what you’ve said, a large part of the industrial complex that was a major gas user has been destroyed. I don’t know when and if it will be rebuilt. So there are parts of trade that are just historic legacies that most likely are not going to return. I think Russian companies moving back to Ukraine is also an element of DCFTA, that kind of access to the European market is not available to Russian companies back in Russia. It is available if they manufacture in Ukraine.

P: I have one more question that pops up in every conversation about you abroad: your citizenship. You’ve been granted a Ukrainian passport. According to local laws, you have less than two years to decide whether you want to keep your American passport or a new Ukrainian one. What will be behind your future decision?

J: I haven’t thought about it.

P: Too busy?

J: I will always comply with the Ukrainian law.

P: It is a major decision in anyone’s life, isn’t it?

J: Not today. Today it is debt restructuring, tomorrow it is going to be tax reform. The day after, the 2016 budget. And after that — I hope sleep will be my fourth major decision. And then at some point, spending some time with my kids.

So right now I just want to focus on getting as much done as possible and as quickly as possible. You were talking about returning to growth, our goal to return to growth already next year.

We just don’t have time. We need to move, move, move.

Maxim Eristavi is a co-founder of Hromadske International news network, based in Kiev. 

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