BRUSSELS — Ukraine and its private creditors have struck a deal to push back debt repayments, giving the war-torn country crucial breathing space as it struggles with the economic devastation of Russia’s invasion.
Under the deal, some of the world’s top investment funds — including BlackRock, Amundi and Amia Capital — will effectively write off a large part of $23.4 billion in claims by exchanging their current bonds for new ones, which run for as much as 12 years. The new bonds are structured so as to defer over 90 percent of what was due over the next four years well into the future.
“The deal will result in net savings on debt servicing of $11.4 billion over the next 3 years and $22.75 billion until 2033.” Ukraine’s Finance Ministry wrote in a statement seen by POLITICO. “This will free up vital financial resources, which can be redirected towards defense and social spending.”
The two sides were under pressure to reach an agreement because a moratorium on foreign debt payments announced immediately after Russia’s invasion two years ago was set to expire at the start of August. A default would have badly complicated Ukraine’s relationship with Western governments and with the International Monetary Fund, whose assistance is vital to Ukraine for carrying on the defense of its territory.
Burden-sharing compromise
The deal is so far an “Agreement in Principle” that needs to be ratified by two-thirds of bondholders to enter into legal force. Under it, Ukraine’s private creditors will write off as much as 60 percent of the principal due to them.
However, the “haircut” could end up being as little as 37 percent, if Ukraine’s economy does markedly better than is expected at present (in other words, if the war ends and allows a measure of reconstruction). That’s due to clauses in the new bond terms that link repayments to Ukrainian GDP from 2028 onward.
The agreement represents one pillar of a complex strategy to share the burden of keeping the Ukrainian state alive, after Russian President Vladimir Putin launched the biggest land war — and the biggest land grab — in Europe since World War II.
The bulk of that burden is currently being borne by Western donors, who have pledged some $50 billion in aid this year. In addition, western governments are looking for new ways to step up financial support to Ukraine without tapping into their own taxpayers’ money. G7 finance ministers will meet on Wednesday to finalize the loan of another $50 billion to Ukraine, using the profits from frozen Russian assets.
But Kyiv has also had to bring its pound of flesh. Last week, the government introduced legislation to the Verkhovna Rada that would raise taxes on an already hard-pressed population by 140 billion hryvnia ($3.4 billion).
Ukraine’s government is currently diverting the bulk of its domestic revenue towards military needs, while using Western cash to pay for current spending on items such as pensions and public-sector salaries. Its own tax base has been hollowed out by the loss of much of its territory, the incessant attacks on its industrial and economic infrastructure and, most of all, by the loss of its people. Ukraine had a registered civilian labor force of 11.5 million in 2021; it has now shrunk to nine million, according to Deputy Minister of Economy Tetyana Berezhna.
Leaving something on the table
The deal requires bondholders to surrender their existing bonds in return for two new series of paper, dubbed Bond A and Bond B. Under the terms of the new series, Ukraine will have to pay only $200 million in interest between 2024 and 2025 — with the first tranche due in February 2025. Before the deal, it was looking at total repayments of $5 billion within the next 12 months.
Ukraine will only have to pay interest until 2029, when it will have to start amortizing Bond A. Amortization payments for Bond B start a year later. Both series run through 2036, and the repayments step up, the longer they run.
“With this agreement they get three additional years in order to think about what is going to happen,” said Germán López Espinosa, a professor at the IESE business school in Madrid. “We hope that in three years the war will be over but nobody knows.”
Veronika Melkozerova contributed reporting.