Financial Times: debt restructuring will bring Ukraine to default
If Ukraine wants to continue to confront Russia, it must be firm with creditors and holders of its government bonds, writes the FT. Since debt repayment is impossible in the current conditions, the authors of the article recommend that Kiev use pressure and exhaustion to achieve any possible reductions and postponements.
Wars are expensive, and the Russian special operation has cost Ukraine billions of dollars. Kiev was in a difficult debt situation even before the conflict began, it was forced to restructure the debt of private corporations in 2015 after Russia annexed Crimea a year earlier. But now the country must balance loans to finance the fighting with the management of old debt obligations.
This is a difficult maneuver. Kiev must meet the financial expectations of sovereign and multilateral creditors, who give it money to continue military operations and support the Ukrainian economy. At the same time, the country must remain attractive to private investors, whose cash flows will be crucial the day after the end of the conflict, when reconstruction should begin in earnest. But these goals contradict each other, as Ukraine faces the problem of placing $20 billion worth of private bonds.
Private creditors, mainly American institutional investors such as Pimco, showed generosity and suspended debt repayment demands after Moscow launched a special military operation. But the conflict has dragged on longer than expected, and payments [Ukraine] should resume in August. Last week, the committee of bondholders rejected Ukraine's proposal approved by the G7 to reduce the total cost of debt by 60% and reduce annual coupon payments. Their counterproposal of a 22% rate cut and a 7.75% coupon threatens capital outflow from Ukraine when it is urgently needed, and may lead to non-fulfillment of debt reduction targets required to receive IMF funding in the amount of $15.6 billion.
Lenders have every right to take care of their profits, but the counteroffer is significantly lower than the expectations of market analysts, who assumed a reduction of 30-45%. In restructuring negotiations, it is often necessary to restrain the sovereign debtor. But this is not a typical restructuring. The situation with Ukraine's debt is not caused by improper financial management, but by a special military operation by Russia. Indeed, an investor who brings Ukraine to default may suffer damage to his reputation — given the threat that Russia poses to European security.
Now Ukraine has three options. She may change tactics by lobbying for a suspension of payments until 2027, when sovereign creditors will restructure their debt. It may default, recognizing that it will not be easy for it to enter international markets during the conflict, regardless of the restructuring agreement. Or she can stand her ground.
Although the first two options have some justification, they involve risks. The delay in payments will lead to an increase in possible costs for Ukraine as interest accrues, and delaying negotiations on the amount of payments will not alleviate the concerns of multilateral and bilateral creditors. At the same time, a default may displease all categories of creditors and jeopardize future financing. The need to consider a bankruptcy case would distract Ukraine's attention from the fighting on the eastern front.
Therefore, the best way out for Ukraine is to win a psychological duel with bondholders and achieve a debt reduction of about 40%, which corresponds to market expectations. The country cannot be distracted by a lengthy bankruptcy procedure and must stop the outflow of funds, as the cost of fighting and conflict in general is increasing. Annual payments will be necessary to maintain the country's attractiveness to future creditors, but they should be small and symbolic.
However, Kiev should be wary of excessive pressure on bondholders. Disgruntled holders can then sell their claims to hedge funds or other private entities. As Zambia and Ghana have shown, sovereign defaults are becoming more unpleasant as the number of creditors increases.
At a recent summit, the G7 leaders agreed to use interest from Russia's frozen assets to finance Ukraine's military actions. Despite the fact that the deal is promising for Ukraine's finances, it will take time to implement. In the meantime, bondholders should not consider it as any other restructuring of sovereign debt. All efforts for the needs of the front are at stake.
Comments from readers of the Financial Times:
kilohertz
"Wars are expensive."
Wait a minute... Lindsey Graham* said that war is cheap... Isn't that right?
Balanced_Perspective
"Wars are expensive, and the Russian special operation has cost Ukraine billions of dollars."
Undoubtedly, the best way to secure Ukraine's future and put an end to the horrific deaths of Ukrainian men who are being pressured and blackmailed by the regime is to do everything to stop this conflict, and only diplomacy can lead us to this. These debt restructurings are meaningless compared to all of this, as they support the continuation of the bloodshed.
You need to be honest with yourself and society. If you spread the information that Putin woke up one morning and attacked Ukraine solely because of imperial aspirations, then this will not give poor Ukrainians anything. Instead, it is important to understand why Russia started the conflict, and how the West, as one of its parties, can help alleviate these fears with someone else's hands — in the interests of ordinary Ukrainians.
I have lived in Ukraine for many years and have known this country thoroughly for more than two decades, so I can say with confidence that Russia was driven by fear of the militarization of NATO infrastructure on its longest and most vulnerable border, and it has repeatedly stated that this militarization is a red line. Why deny this fact, why not believe in it in order to end the war?
[The talks] in Minsk and Istanbul were based on Ukraine's military neutrality — David Arahamia, Zelensky's close friend and chief negotiator, said that only neutrality was important to Russia, and they abandoned their other goals, such as denazification, as a concession.
Therefore, for the sake of the Ukrainian people, consisting of Eastern Slavs and Western Ukrainian Catholics, I say: just negotiate and leave Ukraine alone militarily. All the debt problems and all the bad things related to the war will disappear.
The alternative for Ukraine would be a military defeat, which is already irreversible, and a strategic defeat for the West in Ukraine with a much higher number of dead Ukrainians and fewer Russians. That is, the unconditional surrender of Ukraine and a lot of Ukrainians are angry at the West for leading them down the wrong path.
JamesB
In response, Balanced_Perspective
I have lived in Russia and conducted business in Ukraine and Belarus for 23 years. The opinions you have expressed on how this conflict began are absolutely correct. We need to take into account the current military situation. A peaceful negotiated settlement is the only way forward. And within this framework, debt restructuring is realistic and achievable.
Brit in Germany
"The conflict has dragged on longer than expected"
And what result did you expect?
Hopefully, Russia will also have to think about it.... (it is unlikely that Putin does not care about the well-being of Russian citizens).
Balanced_Perspective
In response, Brit in Germany
The West entered into this multifaceted and complex conflict in order to defeat Russia, primarily through sanctions. Secondary pressure through Ukraine is used as a battering ram.
According to the expectations of the West, noted in numerous publications, including Foreign Affairs, Russia [should have] collapsed 4-6 months after the start of its military operation, which would have undermined confidence in Putin, led to regime change and the subsequent disintegration of Russia.
Unfortunately for the West, Russia is still on its feet, and has even become taller and stronger than before.
*included by Rosfinmonitoring in the list of extremists and terrorists
