Ukraine is becoming a case of throwing money down a rabbit hole. Every few months there is an announcement of more money from the U.S. , E.U. or International Monetary Fund flowing into what has become one of the saddest economic stories in the world.
This latest funding round for Ukraine is a case of European investors no longer knowing what to do with their money.
On Tuesday, the European Commission disbursed a loan of 250 million euros ($268 million) to beleaguered Ukraine. This is not a new loan. It is the last disbursement under the first Macro-Financial Assistance (MFA) operation for Ukraine, which amounts to a total of 610 million euros. It got the money from a private placement. It is unclear who lent the facility the cash. Whoever they are, they are not interested in making money off their loans.
As of March, the National Bank of Ukraine has only $9 billion in reserves. The IMF alone is lending the country around $17.5 billion. The country is barely solvent. Standard & Poor's said the country is in a virtual default.
The objective of the MFA program is to address Ukraine's urgent financing needs, while supporting Ukraine's economic stabilization and reform agenda under prime minister Arseniy Yatsenyuk. Yats, as he is known in circle U.S. State Department circles, has seen his popularity slide over the past year. Just 40% of Ukrainians support him, according to a state poll.
The crisis is attracting the interest of foreign banks, who want to get in on the Yatsenyuk fire sale of state assets. The central bank's spokesman Serhii Kruhlyk said "now is the right time to invest in Ukraine."
"Foreign investors are following with keen interest the reform process in our country and are willing to invest in the Ukrainian economy, including in its banking sector," he said in a statement dated April 16. Primary investments will come from the IMF and World Bank, along with European Bank for Reconstruction and Development based in London. The EBRD was founded during the break up of the Soviet Union to help finance Warsaw Pact nations left behind from a retreating Russia.
A Ukrainian delegation was in Washington this week to participate in the Annual Meetings of the Boards of Governors of the IMF and the World Bank. The Ukrainian delegation met with officials from both the IMF and World Bank to discuss the economic crisis which began in earnest in February 2014 following the ouster of pro-Russia president Viktor Yanukovych by extra-legal means.
"Nobody knows what is happening in Ukraine. Word on the street is that whatever money the IMF gives to them, the government will steal some of it," says Marlen Kurzkhov, a Ukrainian-American lawyer at Gusrae Kaplan in New York. "I can't see anyone wanting to put money to work there."
European Commission Vice-President Valdis Dombrovskis, a Latvian politician responsible for the Euro and Social Dialogue, said, "Europe stands together with Ukraine during these difficult times, both politically and financially. Ukraine is making great efforts to reform the country's economy and governance in order to strengthen its competitiveness and bring it closer to the EU's rules and values, while we support the country in its fight for independence and territorial integrity."
The European Commision raised the funding for Tuesday's disbursement on financial markets through a private placement on April 14, 2015. They issued a 260 million euro bond due 2025. It might as well be philanthropy. The bond buyers, unnamed by the E.C., have to deal with a 10 year grace period (no interest payments) and then deal with an overall yield of 0.519%. They would have done better putting it in a U.S. Treasury bond, but then again private placements are a regulatory black hole and Ukraine is the event horizon.
Of these funds, the 250 million lent to Ukraine on Tuesday are all effectively the same terms, offering a long maturity at a very attractive interest rate...for Ukraine borrowers. And maybe for Germans and Dutch investors dealing with negative yielding debt at home.
The remaining 10 million euros have been used to finance an MFA loan to Georgia, another former Soviet state that has run amok of the Kremlin's good graces.
The MFA operation for Ukraine was implemented last year in the full amount of 610 million euros. Prior to Tuesday's payment, the Commission had made two disbursements already. Some 100 million euros were handed over to Kyiv on May 20, 2014 and another 260 million euros found its way to Ukraine on November 12, 2014.
Nearly two billion euros have been provided to Ukraine's government since the weeks after Russia annexed the Crimean peninsula in the Black Sea.
But wait, Yats! There's more where that came from.
A third MFA operation of 1.8 billion euros, which the Commission proposed on January 8, was approved by the European Parliament and the Council on April 15. It will be implemented as soon as agreement has been reached between the E.U. and Ukraine on a Memorandum of Understanding specifying the policy program accompanying the assistance, the Commission said in a statement this week.
That nearly $2 billion package is expected to hit Ukraine by mid-2015.
The MFA facility is a E.U. crisis-response instrument available to E.U. neighbors. It is similar to the European Financial Stability Mechanism which was used to save Portugal and Ireland from balance of payments problems a few years ago.
For the remainder of 2015, the E.U. intends to borrow up to 6.5 billion euros for these two instruments, and it will turn to the capital markets for the money. If you're an institutional investor looking for a tax write-off, this may be the place to go to fill in the capital loss fields in next year's tax returns.
