15. December 2023


In November 2023, the Ukrainian government adopted its budget for 2024. Around USD 40 billion in external support is needed to keep state functions running. Financing could also be made more difficult by the resumption of debt servicing to private pre-war bondholders (“legacy bondholders”).

When the debt moratorium ends in 2024

Shortly after Russia’s attack in February 2022, holders of Eurobonds with a total volume of around 20 billion US dollars granted Ukraine a debt moratorium alongside official bilateral creditors.

This moratorium allowed Ukraine to suspend its payments to bondholders for two years. The moratorium expires in September 2024. This means that debt service payments of at least USD 4 billion will be due in 2024 alone; between 2024 and 2027, almost USD 15 billion will be due. Unlike the official bilateral creditors, who extended the first moratorium to 2027 well before it expired, the private investors stuck to the 2024 date for the time being.

According to media reports, the Ukrainian government intends to present an initial proposal for the further handling of the legacy bonds at the beginning of 2024. It must do this in the context of an ongoing IMF program, which is linked to both debt restructuring with investors in 2024 and debt restructuring with official bilateral creditors by 2027 at the latest. Official bilateral creditors in turn expect Ukraine to ensure that the private sector provides comparable concessions to their own (not yet negotiated) relief.

Media reports indicate that Ukraine is toying with the idea of returning to the international capital markets as quickly as possible in order to mobilize fresh money. It is also doing so against the backdrop of possible political changes in key partner countries and an increasingly difficult environment for financial support. Discussions between Ukrainian civil society and the Ukrainian private sector also revealed an attitude that investors should be treated with care and should not be treated “too unfriendly” so that they do not turn their backs on Ukraine. By “unfriendly”, we mean expecting them to grant debt relief. It is true that, in view of the market-based procedures for debt restructuring and therefore the lack of legal protection for debtors, rapid agreements with private creditors are often reached when the debt relief negotiated is low. The higher the debt relief required or the more ambitious the debt restructuring, the longer the negotiations take and the higher the risk for holdouts. So in order to get the matter over with quickly and on the assumption of coming one step closer to future market access, it may be the case that the debt restructuring in 2024 is correspondingly investor-friendly.

Lack of incentives to agree to debt restructuring

The legacy bondholders (i.e. the holders of the pre-war bonds) are initially interested in reaching an agreement as early as possible in the war in order to recover as much as possible. This is also due to the fact that the proportion of claims that would be excluded from a future restructuring is increasing. These include, in particular, multilateral claims both before the war and from support during the war, which are always excluded from debt restructuring, as well as financial support from bilateral donors during the war. Against this backdrop, holders of pre-war bonds must expect that their claims will be touched first in a debt restructuring.

The ongoing bilateral and multilateral support also improves Ukraine’s repayment capacity – even if the support is clearly intended (and necessary) for defense and reconstruction purposes and not for the repayment of legacy debt. Even if public bilateral creditors and the IMF have no interest in their support to Ukraine flowing into debt servicing to the legacy bondholders, they may not let Ukraine fall. It is unlikely that the IMF will terminate its financing program, nor that the G7 states will terminate their support on the basis of insufficient involvement of the legacy bondholders in a debt restructuring. This means that bondholders have little incentive to agree to an ambitious restructuring. This is also reflected in the fact that due to the steady inflow of aid money, which has boosted Ukraine’s foreign currency reserves, bond prices have risen by more than 50 percent since June 2023, making Ukrainian bonds one of the best performers on the global fixed-income markets.

Even if the legacy bondholders were theoretically prepared to agree to greater concessions, there is a lack of clarity as to what the debt restructuring would have to look like in order to meet the requirements of the official creditors with regard to comparability of treatment. Normally, there is first an agreement with the Paris Club (in Ukraine’s case with the Group of Creditors of Ukraine), on the basis of which the debtor must negotiate comparable concessions with the private sector. In Ukraine’s case, however, it is the other way around: while the suspension of debt servicing to the bondholders expires in 2024, there will only be a debt restructuring with the Group of Creditors towards the end of the IMF program, i.e. several years later. If it is not clear how much other creditors are prepared to concede, there is no reason to make extensive “advance payments”. In addition, a lot can happen in the years between 2024 and 2027 in the midst of a war situation that can hardly be factored into a reliable debt sustainability analysis. This ranges from the question of whether external support – as calculated by the IMF in its forecasts – will even materialize to a sufficient extent, to the unpredictable further course of the war.

This means that completely different parameters may (have to) apply to the debt restructuring of official creditors. Above all, investors are concerned that they could miss out on a more positive scenario, from which the public creditors would then benefit, while they would have to accept higher losses. In other debtor countries that are not in a war situation, changes in the macroeconomic environment have already led to delays and creditor blockades in the course of debt restructuring.

How tenable is the assumption of rapid market access?

It is highly unlikely that the particularly cautious approach to investors and the presentation as a reliable, market-friendly debtor will restore market access for Ukraine during the war. Private creditors had already begun to reduce their exposure to Ukraine before the aggression. Ukraine would also have to pay around 15 percent on newly issued bonds today. Other countries in crisis have also had to learn that promises made by capital market lenders (that if countries only behave well during the crisis and do not expect too much from them, they can count on support) are not tenable: In 2011, for example, highly indebted Greece was promised, on the basis of the so-called Vienna Initiative, that German banks would not reduce their exposure to Greece – immediately afterwards, their exposure was reduced to around half. Countries in the Global South were prevented from including their private creditors in the G20 debt moratorium DSSI in order not to lose their well-deserved market access – which they had not only lost already a while ago, but which did not return as a result (due to their debt situation, mind you, not due to a lack of “good behavior”).

Now, the particularly friendly treatment of investors in 2024 may also be about some “credit of trust” to ensure that Ukraine can count on the restoration of favorable market access after the end of the war. However, it is much more likely that potential investors will be less interested in whether legacy bondholders were treated with kid gloves after the war. Rather, the decisive factors for market access will be a) sufficient opportunities due to the upswing in the context of reconstruction, and b) that the new investors will not have to compete with the legacy bondholders for scarce foreign currency, i.e. that they will have to expect the value of their investment to be diminished by a high legacy debt service.

What does this mean for a debt restructuring strategy?

Ukraine could push for an extension of the private creditors’ debt moratorium until 2027 and for negotiations with both creditor groups at the same time, also to ensure comparability of treatment. However, bondholders are already showing little willingness to agree to debt restructuring in the war situation without receiving public guarantees on the restructured claims, for example from the G7 partners. Instead, the Ukrainian government could put the following strategic options on the table:

  1. stretch the old debt so far into the future that they cannot compete with potential new bondholders for debt service in the post-war period and thus facilitate the hoped-for market access after the end of the war,
  2. In view of the high uncertainties associated with the war situation, a debt moratorium on all claims until the end of the war and then debt restructuring after the war in a comprehensive procedure.

In particular b) is also being discussed by some investors themselves in order to deal with the special war situation (see here).

However, Ukrainian private sector experts fear that if the moratorium is extended, the affected investors could sell their claims to vulture funds, which may then take legal action. In their view, it would therefore be better to restructure debt directly (and „carefully”). However – Ukraine could also be sued in the event of a possible debt restructuring in 2024, in which individual investors – depending on how ambitious the debt restructuring is – do not want to participate. In both cases, the US and the UK could take legislative action to protect Ukraine and well-intentioned creditors from lawsuits by vulture funds or uncooperative creditors.

Bondholders should have to bear their own risk

While some well-intentioned investors are putting forward far-reaching proposals for dealing with the legacy bonds, other arguments are less supportive. For example, there is the idea that the mobilization of frozen Russian assets should be included in the debt sustainability analysis, as this would improve Ukraine’s future funding prospects (and reduce creditor losses). The argument is put forward on the basis that the poor Western pensioners who have invested his pension in Ukraine in good faith should not be asked to pay for Russian crimes. Although the G7 countries’ ability to mobilize Russian oligarchs’ money to finance Ukraine’s reconstruction is indeed part of an important debate, it must be kept separate from the restructuring of pre-war debts. Legacy bonds are high-yield bonds. Their holders have deliberately opted for a speculative investment whose coupon compensates for this risk. A debt restructuring would mean having to bear this risk – and rightly so. It is not because of the destruction caused by Russia that legacy bondholders have to restructure, but because of the country’s financial and macroeconomic situation caused by the war.

And apart from the fact that it is currently impossible to say with certainty how much frozen assets can be mobilized at all – and thus inclusion in a debt sustainability analysis would be just as speculative as with other factors – the funds should be used for the reconstruction of the country, not for the compensation of pre-war claims. If the investors are successful with their argument, it is rather the Ukrainian citizens who will have to pay for the fact that current debt restructuring mechanisms, in the case of unsustainable debt situations, rather strengthen the survival of the (financially) fittest than leading to a fresh start of the debtor.