After five months of talks with private creditors and the unpredictable consequence of a debt moratorium looming, Ukrainian Finance Minister Natalie Jaresko triumphantly announced on Aug. 27 that she had achieved a write-down of up to $3.8 billion of the nation’s debt.
In addition to securing a 20 percent write-down on $19 billion worth of government eurobonds, Ukraine obtained a four-year freeze on principal payments from a group of bondholders that own about half the government’s sovereign and sovereign-guaranteed debt.
Chicago native Jaresko managed to get the debt rolled over into nine new bonds that will be repaid in equal amounts each year starting in 2019, with a coupon of 7.75 percent.
“Less of the government’s scarce financial resources will be spent servicing high debt levels taken on by previous governments,” the Finance Ministry said in a statement. “And more will be available for critical social spending and national defense.”
Russia’s 18-month war against Ukraine has caused billions of dollars of damage to infrastructure in easternmost Donetsk and Luhansk oblasts, and has also contributed to ravaging the economy. Inflation spiked to 55 percent in the year through July, during which the hryvnia sunk 42 percent against the U.S. dollar. The war death toll is approaching 7,000, according to the United Nations, and some 1.5 million people have been internally displaced.
The deal secures for Kyiv more than $15 billion in savings over the next four years, excluding coupon payments. The write-down is also a crucial precondition for further unlocking disbursements from the International Monetary Fund-led $40-billion financial bailout program that is to run through 2018.
The IMF appeared comfortable with the debt operation, declaring it meets prior conditions the international lender set for its $17.5 billion contribution to the financing program. Measures also includes Kyiv bringing public and publicly guaranteed debt to less than 71 percent of gross domestic product by 2020 and maintaining the state budget’s financing needs at an average of 10 percent of GDP in 2019-2025.
“We welcome today’s agreement on the terms of the debt exchange offer,” Christine Lagarde, head of the IMF, said in an emailed statement. “The announced parameters of the agreement will help restore debt sustainability and – together with the authorities’ policy reform efforts – will substantively meet the objectives set under the IMF-supported program.”
Kyiv has already received $6.7 billion from the IMF under the current financing program, and expects to get $3.4 billion in the next four months. Central bank reserves currently stand at $10.4 billion, less than half of what was on hand when Russia invaded and annexed Ukraine’s Crimean peninsula in March 2014.
Creditors, who are owed $500 million on an expiring eurobond in less than a month, might get more money back if the economy improves or hits certain benchmarks. Starting in 2021, if GDP rises faster than 3 percent, for example, Kyiv must pay them a portion of the total value of the economic growth on a sliding scale from 15 to 40 percent, depending on how well things improve.
“The resolution of Ukraine’s debt saga looks like a great success for all parties involved,” Anders Aslund, senior fellow at the Atlantic Council, wrote on Aug. 27. “The IMF has changed the rules of the game as it desired. The bondholders will still do well. Ukraine got the necessary debt relief. It has already carried out a major fiscal adjustment and major structural reforms, especially in energy, banking, and pensions.”
But the debt relief plan isn’t finalized yet. Parliament must first approve the measures when it reconvenes on Aug. 31 after the summer break.
And on the creditors’ side, a final agreement requires the approval of 75 percent of bondholders with at least two-thirds of them present at the meeting, according to Bloomberg Business. Ukraine’s debt furthermore contains clauses that mean missing a bond or coupon payment on one loan translates into default on them all.
Most ambiguous is a $3 billion eurobond that the disgraced administration of ex-President Viktor Yanukovych sold to Russia two months before he abandoned office in February 2014.
Moscow had refused to join the debt restructuring talks and its finance minister, Anton Siluanov, said on Aug. 27 that Russia won’t participate.
Russia placed the bonds in its rainy day State Welfare Fund, and Putin has insisted that the security isn’t a private debt. Meanwhile Ukrainian President Petro Poroshenko has called the bond a “bribe” because it was part of a $15 billion loan that Putin offered to Yanukovych after he rejected a landmark political and trade pact with the European Union in November 2013.
Still, “Russia can’t expect under any circumstances to get better (restructuring) conditions than the other creditors,” Prime Minister Arseniy Yatsenyuk tweeted on Aug. 27, meaning at least a $600 million haircut on the nominal value of the security.
The IMF’s vague position further contributes to the security’s uncertain status. It’s not clear whether the Washington D.C.-based lender is classifying the loan as official debt. Also, the international lender hasn’t stated whether it will continue financing Ukraine if Kyiv misses a payment to Russia.
The IMF’s executive board will make a final decision on the Russian bond, according to a conference call Nikolay Gueguiev, the fund’s head of mission in Ukraine, gave on Aug. 4.
Thus far the Kremlin hasn’t demanded early repayment – as it is entitled to do under the loans conditions, since Ukraine’s public debt now exceeds 60 percent of GDP.
“Why should Ukraine pay anything to its aggressor?” the Atlantic Council’s Aslund said. “Ukraine has already raised a number of international law cases against Russia for its illegal annexation of Crimea and its confiscation of state and private property there. An aggressor should pay war reparations, as Iraq was forced to do after it attempted to annex Kuwait in 1990.”
The Russian bond probably won’t be paid back in full, according to Nomura International’s Timothy Ash. “But it remains a complication until Russia finally agrees a way forward… I would expect bondholders to push for assurance in terms of equal treatment with this $3 billion liability to Russia.”
Russia’s Finance Ministry has stated that although the notes are a tradable eurobond, they weren’t issued at the same market conditions. And Russia’s Siluanov has earlier threatened to taking Ukraine to British courts if it misses payments, as the security is governed by English law.
Kyiv Post editor Mark Rachkevych can be reached at [email protected].
