OPINION: Frontline state refugee bonds can finance Ukraine influx

OPINION: Frontline state refugee bonds can finance Ukraine influx
Poland, Hungary, Romania and smaller locations are established investment grade rated or borderline prime credits.
By Gary Kleiman of Kleiman Intl Consultants Inc March 15, 2022

The wartime exodus of hundreds of thousands of Ukrainian refugees so far to immediate neighbours Poland, Romania and Hungary is unprecedented in the past decade as displacement within Europe but follows a familiar pattern clear when the continent last tried to absorb 1mn fleeing Syria’s carnage. According to the United Nations, 80% of the global population of 80mn on the move is from one emerging or low-income economy to another. In the 10-year Syrian tragedy Turkey hosting 3mn is the main destination, followed by Jordan and Lebanon. 2mn Venezuelans are in Colombia and spread throughout the Andean region, and Pakistan with the same number has taken in another wave from Afghanistan the past six months. 

In the 2015 saga Central Europe and the Balkans were way stations on the path further west, though there were asylum seekers who wished to stay. They were instead refused entry and diverted as EU migration policy was poorly defined with no enforcement mechanism for shared resettlement, and these economies in the aftermath of the global financial and Eurozone debt crises lacked fiscal firepower on their own to handle humanitarian, infrastructure and employment needs. Brussels considered using the supranational balance sheet to issue refugee bonds with proceeds split among members, but the scheme gained little traction. Pre-pandemic, Germany in particular spurned a collective EU bond, but since then billions of euros were borrowed this way for the recovery fund. An obvious alternative, adapting the local and external bonds already in mainstream emerging market investor portfolios, was considered but never tried. The Ukraine case repeats these hallmarks, and pilot transactions are long overdue that can raise billions of dollars in long-term private finance quickly, as opposed to chronically underfunded UN appeals and indirect, slow on the ground official lender operations. 

Poland, Hungary, Romania and smaller locations are established investment grade rated or borderline prime credits. Poland’s Ukrainian community was millions before the Russia bombardment, with dedicated employment-family migration schemes, and the close relationship was also reflected in financial market terms. The Warsaw stock exchange has a sub-index of Ukrainian company listings from agriculture to e-commerce, as cross-border broker ties date from the earliest days of post-communist securities market development. In the early 2000s the country was a pioneer in private pension funds and tried to present the model to its neighbour, which adapted a diluted version. 

During the COVID-19 outbreak, the central bank, with sophisticated government bond markets and a strong currency at its disposal, was able to adapt advanced economy-style quantitative easing in fiscal and monetary policy with a 5% of GDP programme. It can readily repurpose normal sovereign bond issuance locally and externally for the refugee emergency. An indicative structure was described in a publication last year from the Canada-based World Refugee Council, “Emerging Market Finance Application: A Roadmap”. A discount would be tied to detailed reporting on proceeds use verified by outside parties like relief agencies in place, and where feasible cash flows could be identified from users able to pay for housing and utilities. A wide range of conventional retail and institutional investors have Polish bonds in their portfolios, and the instrument would still have a competitive return along with novelty value. ESG or impact investors would naturally be attracted to the issue as an entrant in the social-sustainable category.

A dedicated public equity fund could also be designed building on the existing Ukrainian platform to channel money to companies willing to hire refugees, or design specific products and services or tech applications to smooth immediate adjustment and integration. Development lenders are already experimenting with a so-called refugee lens to measure outcomes for cash as they do for gender with small scale micro-enterprise and finance support. Scale and duplicability that can translate to big business bottom lines are lacking as in a regular mutual fund or even themed ETF, again with socially responsible investors hopping on the bandwagon.

Hungary’s Prime Minister Viktor Orban is facing a united opposition for the first time in a too close to call election in April, and reversed course on his longtime anti-migrant hard line in accepting Ukrainians. Without diverting into the xenophobic rationale behind previous obstruction, his original reservations in 2015 were heavily budget-specific, as the banking system was also scarred from the foreign currency mortgage lending debacle. That issue has been overcome, and the local bond market so far this year has been a nonresident favourite amid aggressive rate hikes to tackle near double-digit inflation. Refugee versions could also be introduced at this juncture, and instead of the perennial sparring with the EU during the poll period common ground could be struck in a guarantee or credit enhancement from Brussels.

Romania, Slovakia, the Czech Republic and even Moldova, eying a return to sovereign bond markets after a pro-West business friendly government took power, offer ample scope for rolling out an array of displacement-related capital market instruments from the existing base. In the unprecedented outpouring of welcome, the long obsolete mould of managing this combination humanitarian-economic development quandary can also be shattered. Commercial debt and equity markets can help fill funding and policy gaps, and rally bank and fund manager interests to public purpose with the same vigour as seen in the outrage at the shock of original BRIC-member Russia’s cross-border attack.

Gary Kleiman is senior partner at Kleiman Intl Consultants, Inc.