The two sides were under pressure to reach an agreement because a moratorium on foreign debt payments announced immediately after Russia’s invasion two years ago was set to expire at the start of August. A default would have badly complicated Ukraine’s relationship with Western governments and with the International Monetary Fund, whose assistance is vital to Ukraine for carrying on the defense of its territory.
Burden-sharing compromise
The deal is so far an “Agreement in Principle” that needs to be ratified by two-thirds of bondholders to enter into legal force. Under it, Ukraine’s private creditors will write off as much as 60 percent of the principal due to them.
However, the “haircut” could end up being as little as 37 percent, if Ukraine’s economy does markedly better than is expected at present (in other words, if the war ends and allows a measure of reconstruction). That’s due to clauses in the new bond terms that link repayments to Ukrainian GDP from 2028 onward.
The agreement represents one pillar of a complex strategy to share the burden of keeping the Ukrainian state alive, after Russian President Vladimir Putin launched the biggest land war — and the biggest land grab — in Europe since World War II.
The bulk of that burden is currently being borne by Western donors, who have pledged some $50 billion in aid this year. In addition, western governments are looking for new ways to step up financial support to Ukraine without tapping into their own taxpayers’ money. G7 finance ministers will meet on Wednesday to finalize the loan of another $50 billion to Ukraine, using the profits from frozen Russian assets.
But Kyiv has also had to bring its pound of flesh. Last week, the government introduced legislation to the Verkhovna Rada that would raise taxes on an already hard-pressed population by 140 billion hryvnia ($3.4 billion).