Ukraine plans to take the first step in restructuring its foreign sovereign debt as the government seeks to preserve cash for a drawn-out war with Russia.
The finance ministry will ask foreign private creditors on Wednesday to agree to a postponement of debt repayments, according to people familiar with the process. Ukraine’s Economic Truth newspaper reported on Tuesday that the cabinet had approved a request for a two-year repayment moratorium on $3 billion in outstanding Eurobonds. A rescheduling would amount to a Ukrainian default.
This decision marks a U-turn for Kyiv. Since Russia’s full-scale invasion began on February 24, it has insisted on fully meeting its obligations to maintain international investor confidence and market access, despite pressure from some official creditors to delay payments.
Since February, Ukraine has paid about $1 billion in repayments and interest to external creditors while appealing to its allies for financial assistance to close a budget shortfall of $5 billion a month.
Although Western financial support has increased since May, Kyiv still relies on the central bank to buy its debt by selling foreign exchange reserves or printing money, at the risk of setting off an inflationary spiral.
Speaking to the Financial Times in Kyiv a day before the restructuring was announced, Ukraine’s Finance Minister Sergii Marchenko said it was “very risky” for the country to rely on the central bank to monetize its debts for much longer.
He also urged the IMF to accept a new multi-billion dollar bailout for Kyiv.
“We are ready for such a discussion,” Marchenko said. “I believe that the IMF is also open to such a discussion. I believe we can go faster. We have to figure out what we have to do in 2023.” Marchenko declined to comment on a potential default.
A restructuring appeared likely after energy company Naftogaz last week became the first public entity to seek to restructure its debt. Naftogaz did not need to do so, but was instructed by the government, according to people familiar with the decision-making process.
Kyiv’s turnaround was also flagged by Oleg Ustenko, economic adviser to President Volodymyr Zelenskyy, who told news media RBC Ukraine on July 9 that a debt service deferral was deserved.
“When the war lasts for the fifth month in a row, when it is not clear when it will end, then it is illogical to worry that you will not be able to enter the foreign capital debt markets for the l next year or even in two years,” Ustenko said.
Marchenko said Ukraine’s fiscal crisis was “pretty stable.” The country still needed $5 billion a month to make up its shortfall. Western donors and international financial institutions provided $4.4 billion but would send ‘less than $4 billion’ in July, in part because of EU delays in disbursing an aid package promised 9 billion euros.
Marchenko said that while it was normal for the National Bank of Ukraine to temporarily monetize government debt during wartime, it would not be viable any longer.
“It’s risky if it’s long-term or large-scale. In 2023, we must avoid money printing by the NBU,” he said.
Marchenko said the government needed to cut spending to get the deficit under control, but it was hard to find savings when the bulk of spending was on social benefits, the military and debt interest.
Economists have warned that Ukraine is heading for a financial crisis unless it cuts the deficit and devalues its currency, the hryvnia.
In an article published earlier this month, former central bank deputy governor Oleg Churiy and Berkeley economics professor Yuriy Gorodnichenko said macroeconomic policy was unsustainable with fiscal tightening, devaluation and higher tariffs on imports.
Ukraine’s foreign exchange reserves could become “dangerously low” if the NBU continues its foreign exchange interventions to maintain the level of the hryvnia and repayments of foreign debt.
Marchenko said he would not comment on exchange rate policy, but said the government was “looking into possible additional import tariffs” to help preserve foreign currencies.