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Ukraine Update: I Stand in Awe at the Apathy

Posterity may thank me for keeping a running tab on Ukraine. It is a classic case of utter implosion. Finance does not like nor follow implosions. It’s just not in financial DNA to do anything but detest something in smoking ruin. Anyone stuck in a pain trade is trying to avoid mention of it, and anyone not in the pain trade has absolutely no desire to single-handedly stand in the path of a run-away train. There are no supermen in finance. All the heroes get killed.

So with as little sentimentality as I can muster—while admitting some rough sympathy about Ukraine’s dire plight and cynicism about all pledges of assistance—I am documenting the financial snapshot of a collapsing country. A few weeks ago, I noted the USD sovereign yield curve had stabilized. How brief was that spell of calmness: IMF delays on bridge funding and assurances of western assistance that never materialized broke the front end of the curve. Finance doesn’t hate liars. It hates countries, businesses, and people that depend on lies.

Below is a classic picture of coming default (note the inverted curve).

Note that the leadership team in Kiev is the finest in place seen since the Berlin Wall fell. So why is credit pricing in such national demolition? My read is infused with political incorrectness centered on the IMF and their patrons.

Conditions have deteriorated to the point that damage crept into local currency markets, which so far have been insulated by occasional national bank QE and cheap funding rates. However, FX markets shut down due to restriction in FX purchases form the central bank. Yes, by this I mean capital controls. The domestic money market curve bear flattened as the national bank had to raise short rates to 30% to defend the currency. This will squeeze banks, and in so doing dry up domestic credit.

These difficulties notwithstanding, I reiterate my prior thesis: Ukrainian sovereignty proxied bby its central government debt is going through an existential crisis. Real money is standing back from this ruin because they don’t know whether meaningful western assistance 1) will actually come and 2) that assistance will be sufficient to guarantee the country won’t be absorbed by Vlad Putin.

Credit markets view this assistance is needed more by the Ukrainian government than corporate sector, shown below. Kyiv municipal debt is trading a bit rich (though in line) with the sovereign, which is kinda rare to see in debt markets. Privatbank (the biggest bank in Ukraine) does look like utter garbage, but this is due to the end of relatively cheap funding costs they received courtesy of the NBU, and capital controls which will really hurt them. MHP, the best corporate in Ukraine, trades rich to all of them, which is super rare. MHP did sell off, but this is the product of creditors discounting the risk of restructuring and extended maturities for just about all corporate credit. This happened with FerroExpo, and iron producer, and it has eveyone spooked.

This is a unique cocktail. MHP, the least politically supported name in the Ukrainian credit universe, is rich to all other names including government debt. This tells you the extent of the trouble. The central bank is played out in terms of external FX support and the less connected to national structures a company is the better. MHP has an organic source of USD and euros due to exports which gives it natural strength.

Credit offers a bifurcated view of the overall situation. What Ukrainians see is on the left: a difference in political stance: voters in blue have different wants than voters in the western parts of the country. Putin sees what is on the right: anything not the color of an egg yolk in this map is his—because well, they speak Russian as a native language. To that maniac it means they MUST want to be integrated into his regime and not be a part of Ukraine. Given that he is a vampire, he has no problems attacking, annexing, and lying his way to those ends. I told you finance doesn’t hate a liar.

So the bond market is telling me that MHP will fare better than the rest. Privatbank is essentially working without a net. Kyiv isn’t going anywhere and its debt will default or not based conditional on a sovereign event. National debt may not be as national as much as provincial or perhaps more accurately vassal debt.

So why would the Western authorities, who have done so much indignant jaw-boning, let Ukraine go ahead and default? Possibly it is politics. A certain Mr. Hasenstab has cut deals with risky sovereigns that cut the IMF out of the action. And this may be just the way to burn Mr. Hasenstab for those end-arounds on IMF conditional loans of which Ukraine took advantage. This was just a few years ago, and it made Hasenstab look like a hero. Remember what I said about heroes and how much markets love to hang them on the nearest tree?

Maybe it isn’t apathy at work. Maybe it is just plain pettiness. To wit: Hasenstab may be getting some pay-back here. After all, if you are the IMF, you can’t let the private sector cut you out of your core business. So if the IMF guys with the bridge financing are playing games over some past insults: don’t hate the player, hate the game. Markets don’t care about petty, vindictiveness if you are bankrolled by some big dogs.

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