Ukraine just days away from sovereign default: report

Ukraine has fewer than four weeks to strike a deal with its creditors or risk a default that could seriously harm the economic recovery of the war-ravaged country.

Two years ago, Ukraine’s private foreign bondholders had agreed to suspend debt wartime repayments—a let-off worth around 15 percent of the country’s annual GDP. However, that agreement expires on August 1.

Defaulting on the estimated $20 billion of outstanding private bonds could jeopardize future funding and divert focus from fighting against Russia.

One expert told Newsweek that a default by Ukraine in the coming weeks would be “unlikely” but in the longer term could be “inevitable.”

The International Monetary Fund (IMF) wants an agreement with Ukraine on debt relief soon and while Ukraine’s finance minister Serhiy Marchenko said he expected Kyiv to strike a deal by August 1, such a deal within a month appears unlikely, The Economist reported.

Ukraine had proposed a deal to its creditors to reduce its debt by 60 percent, although creditors have said that 22 percent is more reasonable and that the IMF wants Kyiv to negotiate a write-down, but time is running out. The IMF said Ukraine could nearly make ends meet if it undertook radical restructuring, which bondholders have rejected.

Meanwhile, creditors have raised doubts about the IMF’s analysis, which is months old. If no restructuring deal is reached, Kyiv will have to either arrange an extension of the moratorium expiring on August 1 or default.

“Ukraine has been increasing its liabilities since the start of the conflict, which could become problematic at any time, especially as it is dependent on arms supplies and loans from the West, unlike Russia,” said Grzegorz Drozdz, market analyst at Invest.Conotoxia.com, told Newsweek.

“Ukraine currently does not have the liquidity to service its debt in the coming years,” he said. This is despite Ukraine’s economy rebounding for the first time since the start of the war, growing by 5.3 percent in 2023 after plunging 28.8 percent in the first year of the year.

“The inability to service the debt would not be a problem if more investors could be found to cover it,” added Drozdz.

Ukraine was already in a complex debt situation before the war, restructuring its private debt in 2015, the year after Vladimir Putin annexed Crimea.

Much of the aid from Ukraine’s allies is through war equipment and earmarked funds rather than cash. Drozdz said it was significant that most financial support for Ukraine has been the implementation of previously declared aid, “as new pledges of support have virtually died down.”

“This means that the Western world is losing confidence in Ukraine’s fulfillment of its goals, especially when Donald Trump announces that he will end the conflict in one day.”

The Economist reported creditors have doubts about plans for Ukraine’s long-term reconstruction in the case of victory over Russia, which in itself is not guaranteed.

While restructuring would allow Ukraine to re-enter financial markets at the end of the war and its allies forgive debts, there is uncertainty over when that will happen, the newspaper added.

“It is unlikely that Ukraine will default at the end of July,” Marko Papic, head of BCA access at BCA Research which provides investment analysis, told Newsweek. “It would be a loss of face for the West, even if an official default could actually be a useful exercise with which to restructure Kyiv’s sovereign liabilities.”

However, with the upcoming U.S. elections and the prospect that Donald Trump, who wants to cut aid to Kyiv, might beat Joe Biden, he said “it is likely that Washington D.C. will exert pressure on international institutions—such as the IMF—and private sector bondholders.”

The Ukrainian Ministry of Finance is continuing negotiations with Eurobond holders on restructuring, specifically partial debt cancellation, Ukrainska Pravda reported.

A consortium of foreign bondholders, including BlackRock BLK and Pimco, will urge Ukraine to resume interest payments on its debt next year, it added.

The Financial Times reported last month that another option for Ukraine would be to seek a 40 percent reduction from bondholders “commensurate with market expectations.”

“A Ukraine default may, in the end, be inevitable,” said Papic. “An orderly restructuring of the country’s liabilities is likely the correct path forward.”

“However, in the middle of a war that is as much a PR frontline against Russia as much as it is a literal one, a default would drain the willingness of Western voters to keep underwriting the conflict.”

Newsweek has contacted the Ukrainian finance ministry for comment.