What Argentina And Macri Can Teach Zelensky And Ukraine

Ukrainian assets are on fire. The 10-year Eurobond has returned nearly 30%, the local currency has delivered well over 20% (including carry), and even the obscure GDP warrants have rallied 45% (see Fig. below). This surge is down to the election of a Volodymyr Zelensky, a reform inclined president who although inexperienced holds a strong mandate and parliamentary support. It is a situation similar to the 2015 election of Mauricio Macri in Argentina. But while Zelensky – an actor known for playing a television president – may not be as accomplished as Macri, his odds of success may just be better.

Better to Follow than Lead

Zelensky’s chief advantage is his timing. While Macri started on the backfoot, Zelensky inherits an economy that has already endured much of its pain. Macri’s first-year agenda included devaluing the currency, negotiating a debt deal, and being the first to implement a host of difficult reforms. In contrast, Zelensky inherits a fairly valued exchange rate, a restructured debt profile, and stuttering but not entirely unsuccessful reform process. Moreover, the well-established presence of the IMF provides both international investor confidence and political cover for further structural reform.

Geopolitics, Nationhood, and Reform: Argentina versus Ukraine

In his latest book, American author Jared Diamond describes a framework for evaluating the outcome for countries in crisis. In particular, he identifies several factors based on the following themes:

1. Honest self-appraisal
2. Geopolitical constraints
3. National identity / core values
4. History of dealing with adversity
5. Flexibility
6. Help from others
7. The ability to model other nations who have solved similar crises.

While the framework is hardly predictive, it does provide useful reference points to discuss and compare Argentina and Ukraine.

Argentina – One hundred years of Argentinian financial history are proof that geopolitics isn’t destiny. Despite being relatively free from geopolitical constraints, financial mismanagement and extreme politics have plagued Argentina’s past. For a start, the 30% core Peronista voting block indicates how Peronism has become part of the national identity. Equally, the country’s distrust of government fiat money is so severe that many might only half-jokingly consider it a core national value. Moreover, the previous administration was dogged in its commitment to avoid seeking help, not to model themselves on other Latin American success stories, and generally to avoid flexibility at any cost. While Macri has been successful in overcoming the last of these deficiencies, the first two points go some way toward explaining the difficulties he is now encountering.

Ukraine – While geopolitical constraint is at the heart of Ukraine’s predicament, the related increase in the homogenisation of the country’s national identity might yet prove its greatest strength in creating the unity required to disempower the elites and force through change. Another benefit is that, unlike Argentina, the required reform is populist and unlikely to attract street protestors. Ukraine has also shown a willingness to be flexible, to accept and seek help from the West, and to look for regional models of success stories. Despite its failure, Ukraine’s engagement with Georgian reformer Mikheil Saakashvili is indicative of the latter. While it would be foolhardy to ignore Ukraine’s 2009 and 2015 debt restructures, the country’s history of default is far from as long and infamous as Argentina’s.

A Narrow Window

The odds are stacked in Zelensky’s favour but expectations are high and goodwill can quickly erode. The question is whether he can show the political skill and wisdom necessary to take advantage of this wave and deliver a troubled country from entrenched corruption and civil war or whether, instead, history will judge the market as deluded for placing such hope in an inexperienced television actor.

Gary Licht focuses on emerging and frontier markets, where he has researched and traded a wide collection of countries and asset classes for over 13 years. He also maintains a strong interest in macro, social and development issues.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)