This is the quiet face of a panic

 The dollar value of the Ukrainian hryvnya, which Yanukovych had propped up at the cost of running the nation’s reserves down to a dangerous level, has fallen by a third.  It is sinking two or three percent per day.  The buy-sell spread, about 3% in normal times, has jumped to 10% (12.20-13.60).  The same has happened with gold; the spread is about 8%.  If you want dollars, you are limited to $1,100 and have to wait forty minutes to get it.

Holding on, hoping for things to improve, is not the best course.  Anybody who has been through a currency crisis knows that currency controls come early.  If you can still get it whatever the cost, take the money and run. 

At some cost to the ruble exchange rate, Putin has destroyed the Ukrainian hryvnya.  He has to look at this as one of the costs of war.  There is no doubt that Russia is at war with Ukraine.  These upstart peasants in “Little Russia” had the effrontry to throw out his hand-picked puppet, Yanukovych.  Moreover, they are even showing signs of wanting a real democracy.  They must be squashed!

Russia has broken its contracts and is demaning an outrageous price for its natural gas.  The Ukrainian government is so far refusing to cave, demanding in exchange at least some compensation for the assets Russia seized in Crimea.  It is not clear whether or not the IMF will come through with a loan, and who would benefit if they did.  It appears that the proceeds would be used to pay off Russia, leaving Ukraine nothing but more debt.  As Russia and Ukraine have shown winter after winter, a Slavic standoff involves both sides digging in, refusing to budge from irrational, unsupportable demands.  It is deja vu all over again.

The rating agencies are betting that Ukraine will default.  Probably a good call, and not a bad idea.  Default by a country like Argentina is an indication of an inability to manage its affairs.  A default by Ukraine is no more than evidence of the extreme pressure placed by Russia, and the thievery of the pro-Russian despots who have controlled the country. 

Even Argentina, despite several defaults over the past three decades, has seemed to be able to find new suckers to buy its national debt.  Ukraine, pushed so forceably into its first default, may not suffer as badly.  Morevoer, given that the whole world order appears on the verge of collapse in the first place, the lack of good credit may not matter.  There may not be money available in any case.

Russia and Ukraine are in something of a game of prisoner’s dilemma.  Russia needs Ukraine to export its gas to Europe.  Europe wants the gas.  If Europe were to support Ukraine, demanding fair prices for all takers including Ukraine, they could have a lot of clout.  Russia has no slack in its budget; it needs the income from gas sales to Europe.  And, it needs Ukraine to transport the gas.  This may be time to growl back at the bear.  It looks like Ukraine may be willing to do just that.  What’s Russia going to do?  Throw them into debtors’ prison? 

If and when the price of gas becomes predictable, Ukraine’s budget can again become somewhat stable.  Maybe then, default or not, they can borrow to meet domestic needs. 

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