Ukraine faces not only defeat in the war against Russia, but also a significant financial challenge from Western creditors: The two-year moratorium on $20 billion in government bonds expires on August 1.
Creditors froze Kiev’s debt payments in the months following Russia’s invasion in February 2022.
And Ukraine could default in August if it fails to pay within a 10-day grace period.
Ukrainian Finance Minister Serhii Marchenko expressed confidence that an agreement would be reached before the deadline.
Ukraine wants to maintain good relations with private investors and therefore faces the following options: renegotiate the debt structure or extend the moratorium to avoid national default. Analysts at JPMorgan Chase & Co. believe that it is possible to extend the moratorium for a few months, but not for another two years.
Negotiations with private creditors to restructure the debt ended without an agreement on June 14, with bondholders rejecting the level of repayment proposed by Kiev.
Ukraine asked for a haircut of up to 60 cents on the dollar, while bondholders were prepared to absorb only 22.5% losses.
Creditors of Ukraine
The window for restructuring Ukraine’s debt has become increasingly narrow, as the country needs it to continue receiving funds from the IMF bailout program and restore private finance flows for reconstruction.
Ukraine has also proposed deferring payment obligations and offered to exchange outstanding obligations for new debt maturing in 2040.
Ukraine’s creditor base is fragmented, with a trading committee accounting for only about 20% of outstanding debt. This group includes Amundi SA, BlackRock Inc., Pimco and Amia Capital LLP.
Ukraine says it is also working with creditors outside the committee.
Consent is critical because holders of at least two-thirds of the outstanding debt must reach an agreement that is binding on all creditors, with a minimum 50% stake required for each obligation.
The committee of investors representing about 20% of the bonds suggested the cut be a little above 22%.
However, the IMF estimates that it is far from the main targets for the amount of public debt. “Strong militaries must be supported by strong economies to win wars,” says the Ukrainian finance minister, admitting that the war with Russia could be lost not only due to a lack of ammunition, but also due to economic failure. “As we approach the August 1 deadline, we must urge our bondholders to continue productive and good-faith negotiations on more substantial debt relief that can meet the IMF’s objectives,” Marchenko added.
The debt restructuring talks also reflect deep investor uncertainty about the course of the war and how much debt Ukraine’s economy will be able to bear.
All about the war
After all, Ukraine’s economic situation is miserable.
Almost all of its domestic revenues go to financing the war.
Financial support for social services comes from the European Union, the United States and the International Monetary Fund.
The IMF plays a key role, as the $15.6 billion loan granted to the country in March 2023 – the first for a nation at war – sets the standard for sustainable debt repayment.
The $61 billion U.S. aid package approved in April includes $7.8 billion for the federal budget.
The finance minister says this aid will cover this year’s budget, but warns of a potential “additional” deficit of up to $12 billion in 2025 if the war continues.
However, the outlook for Ukraine’s economic strength remains uncertain and depends on the escalation of the war. GDP is still 25 percent below its pre-Russian level.
Russian attacks on critical infrastructure have increased, while the government has cut its growth forecast for this year to 3.5% from a previous 4.6%.