Country Focus Ukraine: Debt Cancellation for a Fresh Start After the War

Ukraine had long been a heavily indebted country. Then, Russia attacked in February 2022. This was an external shock of the largest possible magnitude, causing not only immense suffering to the people. The Ukrainian economy was also hit hard, key infrastructure was destroyed and the livelihoods of many people in Ukraine were wiped out.

According to the International Monetary Fund (IMF), Ukraine will lack almost 120 billion US dollars between 2024 and the first half of 2027 (30 billion US dollars more than estimated two years ago) to defend itself during the war and maintain the functioning of the Ukrainian state. Ukraine is therefore dependent on support from abroad. Some part of this assistance comes as loans from public donors, that is, allied countries. However, the majority (around 70 percent) is provided by multilateral creditors. Between the start of the war and the end of 2024, Ukraine’s public external debt to multilateral creditors increased more than fivefold. EU institutions in particular hold significant claims against Ukraine.

It is already clear that the state’s economic and fiscal situation will be unsustainable even after the end of the war. The World Bank estimates that reconstruction costs over the next ten years will amount to at least 587 billion US dollars.

A self-determined Ukraine after the war needs debt cancellation

Regardless of the outcome of the war and the timing of its end, two predictions can currently be made for the debt situation in the post-war period:

  1. In view of the massive destruction, Ukraine will not be in a position to resume its debt service properly and in full.There will be no return to ‘normal’ debtor-creditor relations. Ukraine will neither be able to honour its pre-war payment obligations nor repay the new loans granted during the war.
  2. The international community’s current procedures for resolving debt crises are not sufficient for an appropriate debt settlement for Ukraine.This applies in particular to the sharp rise in debt owed to multilateral creditors, because these enjoy de facto exempt creditor status and therefore grant little or no debt relief.

Self-determined reconstruction and the economic recovery of an independent Ukrainian state after the end of the war will depend crucially on whether the national debt can be reduced to a sustainable level and whether the necessary room for manoeuvre for recovery and reconstruction is taken into account. However, the current debt restructuring procedures cannot guarantee this. The case of Ukraine therefore requires a reassessment of the international debt architecture.

The question of how to deal with debt is already central during the war

However, the issue of debt cancellation does not only play a major role after the war, but already now. For as long as the war continues and in view of the high financing deficit, high debt service payments can severely hamper the country’s ability to act.

Shortly after Russia’s attack, some creditors (among them private investors and some of the bilateral public creditors, including Paris Club members) granted Ukraine a debt moratorium on its pre-war claims. This allowed Ukraine to suspend payments to some of its creditors for the time being. The public bilateral creditors quickly decided to extend their moratorium until 2027 and at the same time commited to restructuring their claims on Ukraine thereafter. 

However, unlike public creditors, private creditors did not extend their moratorium, which expired in August 2024. As a condition for its loan program, the International Monetary Fund demanded that Ukraine restructure its pre-war debt to private creditors. In July 2024, the majority of Ukraine’s pre-war bonds were subjected to a 37 percent haircut – significantly lower than what the Ukrainian government, many official creditors, and civil society organizations had requested. According to calculations by erlassjahr.de, the effective haircut is actually only 25%. Moreover, an additional debt restructuring was achieved at the end of 2025 with holders of so-called GDP warrants, which converted them into conventional Eurobonds. However, due to problematic contract clauses and a lack of debt relief, erlassjahr.de also considers this debt restructuring to be insufficient.

Private investors are acting similarly to those in other over-indebted countries: they are trying to minimise their losses at the expense of the debtor country’s debt sustainability. This occurs despite the fact that they have granted their loans at high interest rates – and have therefore already been compensated for the risk of default.

Those who end up paying for this are the citizens of Ukraine. They are the victims of an inefficient system that fails to involve creditors in debt cancellation in a sufficiently binding and comprehensive manner. In addition, due to the restructuring of pre-war bonds, Ukraine will have to pay private creditors 1 billion US dollars in interest payments over the next few years – most likely to be financed by Western financial support. Private creditors are consequently pocketing millions in profits while the war is in full swing and the Ukrainian population is suffering. Taxpayers in partner countries also bear the costs, because incomplete restructuring channels public support toward servicing private creditor claims.

DEMANDS

In the debates that are already taking place about the reconstruction of Ukraine, the question of how to deal with the debt crisis has so far only been mentioned in passing – although the debt situation will massively hinder the reconstruction of the country. Within the framework of this country focus and in cooperation with international partners, erlassjahr.de aims to ensure that the need to adress this issue is recognised and that the topic of debt relief is brought into the political debate. Far-reaching and extraordinary debt relief will ultimately be the decisive prerequisite for the country’s economic recovery.

Key points from the perspective of erlassjahr.de:

  • As long as the war continues, ongoing debt service payments to bilateral public creditors should be automatically suspended – and additionally to multilateral creditors, especially in the case of negative net transfers during the war.

  • After the war, a comprehensive settlement of foreign debt must be found, which must include substantial debt cancellations.This can be done, for example, within the framework of a debt conference that includes all creditors and all claims. The goal should be to ensure debt sustainability, while allowing for the necessary investments for reconstruction – for example, by taking a low post-war debt service as a basis.

  • At the same time, regulatory or legal steps should be taken at both the international and the national levelto prevent (private) creditors from recovering their claims in national courts. The G7 countries in particular have a special responsibility to block this practice by legal means.

 

Ultimately, it is also important that the considerations and decisions made specifically about Ukraine should also have an impact on global structural reforms and the handling of other country cases. This is because innovative and progressive reforms in the resolution of debt crises have been rare to date. Debt restructuring processes, whether coordinated frameworks or individual negotiations, are still characterised by overly narrow creditor interests. A fair, sustainable solution to the debt situation in post-war Ukraine that is tailored to the needs of the population could therefore also send a positive signal to other countries.

 

FURTHER INFORMATION