Wednesday, May 7, 2014

Will IMF loan to Ukraine go to Russia?

It will be interesting to watch the trail of how the money moves in the Ukraine. Just after the IMF released a statement saying its loan might have to be re calculated due to ongoing issues in Eastern Ukraine, today it is announced that a first payment of over $3 billion of the loan has been issued.

This raises some questions. 

Why was the loan payment made if the IMF was not sure about the problems with eastern Ukraine? Those problems are not resolved. If anything they seem even more confused and unstable.

Per the article linked above, Russia wants $3.5 billion it says is overdue for natural gas deliveries already made to the Ukraine. Will this new loan money go to Russia to pay for gas?

In addition, where is the new loan money going to go overall? The Ukraine has lots of old debt already. This article says the new loans will go to pay some of the old loans? Who owns those loans? I have seen reports that some of the old debt is actually old IMF loans. If true, this means the new debt goes to keep the Ukraine from defaulting on old debt to the IMF? If they can't pay the old debt, how will they pay the new debt?

This whole topic is a muddled mess in our view. It is not clear if the new loans are going to be enough. It is not clear if the country breaks down into civil war how the new debts will get paid.
It is not clear who the Ukraine already owes and who will get paid on old debt. And what if a major war breaks out? How will any of this new debt ever get paid?

It is hard to understand how the IMF can start sending this kind of money over there with so many unknowns and risks. And if a big chunk of the money goes to pay off Russia how will that go over in the US?

Still a big mess in our view. And nowhere near close to being resolved.

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