Credit Aspects to the Ukraine / Russia Conflict - Sea Change Letter Summary

Welcome to the tenth (first milestone 🙂 ) Pari Passu newsletter,

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Today, we will learn more about:

1. Credit considerations of the Ukraine-Russia conflict

2. Sea Change - Howard Marks Summary

Credit considerations of the Ukraine-Russia conflict

It recently was the anniversary of when Russian aggression against Ukraine began, so what does the outlook for 2023 look like? Ukraine’s GDP shrank about 33% in 2022, as production and manufacturing remains broadly unchanged GDP will continue to shrink. Despite real exports falling 50%, and all foreign investments stopping, domestic private demand held up surprisingly well. Additionally, beginning in November, blackouts became a frequent major problem which significantly delayed recovery. Fortunately, blackouts have currently not happened for 2 weeks, and if this continues, there is likely to be positive GDP growth. Inflation had peaked at 26.6% at the end of 2022, but decelerated sharply in January, and is likely to be below 20% by the end of 2023.

Despite the significant deterioration of external incomes, Ukraine did not face any macroeconomic instability due to receiving international financial assistance. However, the gap in external accounts widened to record levels as we see continuing deficits in “trade in goods” and “trade in services”. NBU reserves are now back to pre-war levels, maintaining their presence in the FX market to cover imbalances. In addition, one-step hryvnia (national currency of Ukraine) depreciation in late July helped reduce imbalances but not in a sustainable manner.

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