Ukraine goes to war … with Western donors

Ukrainian Finance Minister Sergii Marchenko has clearly expressed his country’s position.

“To win wars, strong armies must be backed by strong economies,” he said after talks stalled. “Ukraine has shown remarkable resilience in the face of Russia’s full-scale invasion, but it is a fragile balance that depends on the continued consistent, substantial support from partners. Timely debt restructuring is a critical part of that support.”

A committee of bondholders said it was “determined to work with Ukraine to structure a transaction that could gain the necessary support from market participants,” but warned that the debt restructuring proposed by Kyiv “significantly exceeded market expectations.”

According to the latest government data, Ukraine owes international bondholders a total of $20 billion, spread across 11 dollar-denominated bonds and two euro-denominated ones. When outstanding interest is included, the total rises to almost $24 billion, according to calculations by JPMorgan published in April.

The talks are being led by some of the West’s most experienced sovereign debt negotiators. Marchenko, a slim, square-jawed doctor, and his colleagues in the Finance Ministry are being advised by a team from Rothschild’s Paris office.

The specialists there are also involved in attempts to restructure Sri Lanka’s $12 billion in foreign debt as the country struggles with its worst economic crisis since independence from Britain in 1948. They have also helped Ukraine enforce its current two-year bond payment freeze, which expires at the end of this month.

The creditors have enlisted the expertise of London-based bankers PJT Partners, a firm well known to the Ukrainian government following Russia’s annexation of Crimea in 2014.

The following year, with the Ukrainian economy still reeling from the aftershocks, PJT persuaded another group of major foreign bond investors to accept a 20 percent haircut by including a so-called “value restoration instrument” – essentially IOUs tied to the strength of future economic growth.

A decade later, this agreement serves as a blueprint for current discussions.

Kyiv is asking bondholders to accept drastic cuts in their loans of up to 60 percent, which would reduce the debt by as much as $12 billion. The government says significant debt relief is essential to defeat the Kremlin and rebuild Ukraine after the war ends. A generous deal is not only in its own interest, it claims, but also in the interest of the entire West.