Since Russia’s invasion in February 2022, Ukraine has been in a debt moratorium that expires on August 1, 2024. On July 22, 2024, however, the Ukrainian government unexpectedly reached an agreement with the steering committee of its international bondholders, which includes prominent investors such as BlackRock, PIMCO, and Amundi. Although significantly higher debt relief had been negotiated previously, this agreement is being publicly hailed as a success for Ukraine. On closer inspection, however, the deal turns out to be heavily in favor of the investors: the 60 percent haircut previously approved by the IMF has been reduced to just 37 percent, creating new challenges for Ukraine.
A questionable haircut
Ukraine’s old bonds comprise nominal claims of $23.4 billion, of which $19.7 billion are genuine capital liabilities. The remaining $3.7 billion consists of capitalized interest accrued during the moratorium. This interest is controversial because it accrues from the period following the invasion, when Ukraine was unable to make any debt service payments due to the war.
The deal now provides for the old bonds to be exchanged for new bonds with nominal claims totaling US$14.7 to US$17.6 billion. In public discourse on the deal, there is frequent mention of a 37 percent haircut. However, this figure is misleading beause it includes capitalized interest. Realistically, the haircut amounts to only about 25 percent of the original principal claims. And: If the Ukrainian economy performs better than expected, bondholders could receive additional payments, which would reduce the haircut to as little as 11 percent.
Long-term burdens for Ukraine
Despite the agreement, the financial burden on Ukraine remains considerable. In the next three years alone, Ukraine will have to pay more than USD 1 billion in interest payments to its private creditors. Official bilateral creditors have granted Ukraine a moratorium until the end of 2027, meaning that no debt service payments will be due to official bilateral creditors during this period. In addition, Western countries are currently providing Ukraine with extensive support in the form of new funds. Private creditors such as BlackRock, on the other hand, are not granting Ukraine any new financial resources in view of the highly uncertain current situation. A significant share of the public support that will flow into Ukraine from Germany and other Western countries in the coming years will therefore not benefit the Ukrainian economy, but will finance the interest earnings of private creditors.
According to calculations by erlassjahr.de, the country will also have to make interest and principal payments of between USD 21.3 billion and USD 24.7 billion between 2025 and 2036. This sum significantly exceeds the original loan of $19.7 billion and poses a considerable challenge to the country’s economic recovery and reconstruction.
Moreover, while the agreement gives creditors this advantage of higher payments in the event of better economic performance, on the other hand, this flexibility and protection is not included equally for Ukraine in the event that Ukraine’s economic outcomes fall below projections. Furthermore, the high interest payments commencing in 2025 onwards could constrain resources that are critically required for reconstruction and public expenses for social welfare.
Demands and outlook
erlassjahr.de heavily criticizes the agreement. A signigicantly more extensive haircut than the 60 percent initially proposed by Ukraine would have been necessary to restore the country’s economic viability.
In addition, erlassjahr.de calls on the International Monetary Fund and Western countries such as Germany to take responsibility and support Ukraine politically, financially, and legally in enforcing comprehensive debt relief. The current agreement shows that without binding regulations on the participation of private creditors in debt relief, investors interests will continue to take priority. An international sovereign debt workout mechanism, as provided for in the German federal government’s coalition agreement, would be an important step in this direction.
The agreement may appear to be a success in the short term, but Ukraine still faces considerable economic challenges in the long term. A sustainable solution requires more comprehensive debt relief and stronger support from international institutions and allied countries. Long-term stabilization of Ukraine and a fair new start are possible only through this approach.
Further information
Country focus Ukraine: debt cancellation for a fresh start after the war