Ukraine shifts gear with debt deals as war takes toll on finances

Kyiv last week secured preliminary agreements with bondholders and a group of western governments to push back debt repayments for two years from August 1 after calls to allies to meet the shortfall went largely unheeded.

The agreements, which if signed would free up about $6bn, and were coupled with a 25 per cent devaluation of the hryvnia, ease the immediate pressure on Ukraine to honour its obligations to foreign creditors. In the view of some, they also better reflect the financial circumstances in which the war-ravaged country finds itself. “There was bewilderment among some investors as to why Ukraine had not done this already,” one foreign banker said after last week’s announcement.

The sharp drop in the pegged exchange rate was designed to slow the rapid depletion of Ukraine’s foreign currency reserves. Citizens who have fled abroad have been using hryvnia bank cards to withdraw $1.5bn a month from the country at an artificially cheap rate, said Maria Repko of the Centre for Economic Strategy, a think-tank in Kyiv.

But, with the restructuring providing cover for little more than a month of government spending, economists caution that Ukraine remains under severe financial strain. The war has forced Kyiv to up its monthly military spending from $250mn February to $3.3bn in May.

The government, which has already imposed severe spending cuts on everyday services to cover its military bill, could be forced to take even more drastic action.

Kyiv’s room for manoeuvre is extremely tight. With all but the most essential spending cut to the bone, and VAT and customs duties on imports — suspended after Russia’s invasion — now reinstated, there are no easy options. Any further taxes on businesses would — according to Repko — risk tipping them into bankruptcy, deepening the humanitarian crisis.

If sustained at its current levels, the massive rise in military spending would mean the government ran out of funds again in the autumn, she warned.

Without foreign financial support, Repko said Ukraine would “go into a spiral and the military effort will be impossible to maintain”.

The article was published in Financial Times.