Left in the Lurch

Ukraine bond traders kicked and screamed

Expectations relate to expectations and the prevailing bias can validate itself almost indefinitely. This is apropos of expectations of the future exchange rate policy of the National Bank of Ukraine. One caveat to keep in mind, however: To the extent that exchange rates are dominated by speculative capital transfers, they are purely reflexive. In the current situation, it’s difficult to sympathize with would-be buyers of Ukrainian government junk bonds, so we shouldn’t even try.

The unexpected resignation of National Bank of Ukraine Governor Yakov Smolii late on Wednesday night led the sovereign to pull its much-anticipated $1.75bn, 12-year dollar bond and a related offer to buy back notes due 2021 and 2022. The offer was priced on July 1. 

No one likes being left in the lurch, and experts fear for the sovereign's access to institutional funding and capital markets in the future.

“Yesterday, an important event took place - it was a bit shocking. It ruined the deal of the decade. I’m not afraid of saying this, because the profitability at which we could borrow yesterday was last seen in 2007 and 2011,” Finance Minister Serhiy Marchenko said on the pro-government 1+1 TV channel on July 2.

Marchenko said Smolii’s resignation was an extraordinary event for investors, so the placement had to be canceled.

"There are many questions. We had to stop the placement. And we cancelled it this morning. It was a balanced decision, taking into account the factors we faced,” he said.

Bleyzer Foundation Executive Director Oleh Ustenko knows a lot about the sort of graft that hobbles economic development by allowing well-connected insiders to profit from investment at the expense of genuine growth. It’s his job when he’s not moonlighting as Zelensky’s advisor on the country’s macroeconomic mess.

"I think that the main problem that Smolii had, as well as the leadership of the National Bank, was not a matter of real political pressure, as Smolii said in his resignation letter, mistakenly assuming that an insufficiently effective communication policy is real political pressure being put on him. I see no problems in the fact that the expert community and parliament deputies and, in large measure, players in the banking sector themselves, primarily commercial banks, wanted clear positions on the part of the National Bank with explanations of what is happening, what steps it is taking," Presidential Advisor Oleh Ustenko messaged in video clip posted to the Dom YouTube channel.

Ustenko said Ukraine’s central bank continued to rely on a communication policy related to "the old ten-year-old paradigm under which you seem to explain, but you explain only when you want it."

“No one is irreplaceable,” Ustenko said. “I think that the president will not waste the time of market players, experts, and representatives of the financial sector and will quickly submit a new candidate to head the central bank to parliament.”

Both Marchenko and Ustenko failed to identify the Eurobond traders left in the lurch by Smolii’s resignation. But that’s another story.

(to be continued)