The Ukrainian government in Kyiv has officially asked its international creditors, which include Western governments and many of the world’s largest financial institutions, to freeze debt payments. The proposed timeline is currently two years, with Kyiv seeking to focus its financial resources on the war effort.
Ukraine currently owes around $20 billion to international creditors. However, because of the sharp drop in economic activity caused by Russia’s invasion, as well as the massive deficit which the Ukrainian government is running as war rages on, it’s becoming increasingly difficult for Ukraine to fulfil its debt obligations. The World Bank has forecasted that Ukraine’s economy will shrink by 45.1% this year. Alexander Rodnyansky, Economic Advisor to President Zelensky, also told DisruptionBanking that Ukraine is currently running a budget deficit of between five and seven billion dollars every month.
Kyiv is understandably keen to avoiding a hard default – which would ravage Ukraine’s credit rating and make it more difficult and expensive for the country to access cash on international capital markets. This would be problematic not only for the ongoing war effort, some of which is being funded by borrowing, but also for any rebuilding of Ukraine after the war. Oleg Ustenko, another Economic Advisor to Zelensky, has predicted that the total price of the war could easily have surpassed $1 trillion already. The difficult task of rebuilding Ukraine will need to be financed by large amounts of borrowing, and that will be tougher should the country default on its debts.
As a result, Kyiv has proposed that, while all bond interest payments should be deferred, it would offer lenders additional payments once the freeze ends. Creditors including the United States, Canada, France, Germany, Japan, and Great Britain have already agreed to this proposal and have encouraged private institutions to do the same. Sergii Marchenko, Ukraine’s Finance Minister, has indicated that the plan has also been supported by major investment funds including BlackRock and Fidelity.
The International Monetary Fund (IMF) commented on the proposal: “in general, voluntary pre-emptive agreements would be net positive for the outlook.”
Ustenko told DisruptionBanking that the government had taken every possible step to continue paying its debts throughout the war. He said that the “assumption” at the start of the war was that debts would still be serviced, particularly as Kyiv believed it would be “pretty short.” But as the war drags on, and the deficit gets larger, this has proved untenable. Ustenko noted that “it’s kind of unfair [to service debts in wartime because] we are receiving budgetary support from our allies, but using this money to service international debts that are in private hands.”
While this move should come as a relief for Kyiv and its beleaguered finances, its impact will be relatively small. Estimates indicate that the debt freeze would save Ukraine around $5 billion over the course of the two-year deferral period. The money saved over two years is therefore equivalent to only one month’s deficit.
The value of Ukrainian bonds has slumped by about 80% since Russian troops began gathering at the border in February. There’s clearly a need for Kyiv to finance the war without relying on international creditors. Support from allies is more important than ever, if Ukraine is to sustain its war-effort without incurring more and more debt.
Author: Harry Clynch