Ukraine owes billions of dollars to private creditors, and the bill for some of those debts will come due on Aug. 1, when a two-year suspension of Ukraine’s debt payments is scheduled to expire. Even after a restructuring deal was agreed to this week, Ukraine could still find itself in default, adding significant legal and economic troubles at a time of war.
Is Ukraine really on the verge of going bankrupt? Who decides whether Ukraine gets more financial assistance? And how does Donald Trump’s campaign affect evaluations of Ukraine’s financial viability?
Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast that we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: Is Ukraine really on the verge of going bankrupt? And what would happen if it did default—how big a disaster scenario is that?
Adam Tooze: It isn’t, I think, on the point of absolute imminent default, but the money issue is a running sore in what is altogether a very difficult situation for Ukraine at this point. But perhaps we should just step back a little bit to spell out and remind ourselves of the role of money in this conflict, which goes back a long way. I mean, it’s been at the heart of the Ukraine-Russia conflict at least since 2013. Fundamentally, Ukraine is one of the weakest post-Soviet economies. It started out at a level of GDP per capita quite similar to that of Poland in the late ’80s, early ’90s, maybe even slightly ahead of Poland, and has ended up way behind. It’s always been deep in debt, foreign debt. It’s been borrowing from international financial institutions and sometimes debt markets. It had an absolutely terrible crisis in 2008. The global financial crisis hit Ukraine very, very hard. And it was subsequent, rather desperate, negotiations between the nominally pro-Russian government of [Ukrainian President Viktor] Yanukovych and the European Union over an improved economic relation between Ukraine and the EU to save Ukraine that went awry in 2013 because the Europeans didn’t offer enough. That tipped Yanukovych back toward [Russian President Vladimir] Putin, who offered a lot of billions of dollars quite quickly, which precipitated the Maidan popular uprising of 2013, the EU- and U.S.-backed coup against Yanukovych, and then the Russian invasion of eastern Ukraine in 2014.
So when Ukrainians say that this war with Russia goes back to 2013, 2014—in other words, 10 years or more—the financial problems attendant on that also go back that far and are precipitating factors. And from a very early stage, the International Monetary Fund (IMF) and private creditors brokered a deal to support Ukraine in its recovery from the shock of 2013, 2014; debts continued to pile up; and it’s the legacy of that which we’re dealing with now and the additional loans taken on since the beginning of the war. So, since the beginning of the war, Ukraine has had other, more important things to worry about than its debts that go back all this time. Even in the economic sphere, far more important is the hit to the electricity system, which the Russian bombardment has delivered. But the money has come due because it’s been on a timer. And Ukraine has piled up billions and billions of dollars in debt, to private lenders, to the IMF, to bilateral and multilateral loans from the American government, among others, but also from the Europeans. And the private component of the debt was deferred in 2022 for two years but only for two years. And furthermore, there are nasty bits of the debts that were negotiated in 2014 and 2015, which are GDP-linked, and they’re growth-linked.
So, as the Ukrainian economy—it’s totally perverse—recovers from the depths of the shock that it suffered from the Russian invasion in 2022, it is required to make payments. And we’re talking about billions of dollars of debt service added to which are the IMF loans at 8 percent-plus interest. And so Ukraine has a very considerable debt service obligation running to several percentage points of GDP—it depends on how it’s calculated—which it’s desperately trying to renegotiate. I think it’s very difficult to imagine a full-on default. But it puts huge stress on Ukraine at a time when it’s struggling militarily and when it is trying, in fact, to assemble an adequate package of support from the outside to enable it to continue the war into what looks like a fourth year at this point. A really grim prospect.
CA: Who decides at this moment whether Ukraine, then, gets more financial assistance and under what conditions that assistance would be given?
AT: So, in debt crises around the world right now, there’s this mesh of conflicting interests. And you see this whether you’re looking at Zambia or Sri Lanka. The first layer is private investors who have bought Ukrainian debt, which is what we mean when we say “lending.” So Ukraine issues a bond, and a Western fund buys it. And we’re talking at the top end about BlackRock, about Amundi, which is Europe’s biggest asset manager, or Pimco, the world’s leading bond fund. And they take a gamble on Ukrainian debt because it offers them a risk-return profile that you can’t get if you buy U.S. Treasurys, for instance. And when things get real, as they’ve got now, they organize themselves in creditor committees. So they actually form a body, and this one’s called the Ad Hoc Creditor Committee for Ukraine. And they argue with Ukraine. And if you’re in this kind of business, you know that you’re going to have to make concessions. And you went in underpriced, right? So you don’t buy the Ukrainian debt at $100 for $100 face value. You buy it at some very large discount. And the question really is, how big is the discount that Ukraine is going to be able to extract? The Ukrainians want a 60 percent discount. The creditors are offering 20 percent. And that’s, as it were, one aspect of this.
The other two pieces of the puzzle are Western governments and the IMF. And the private creditors have to be part of the deal because otherwise you end up in the perverse situation in which, for instance, at the G-7 meeting ahead of the NATO summit a few weeks ago, the leading Western powers agreed that they’re going to impound the Russian assets and use those to back the $50 billion loan to Ukraine. But what’s going to happen to that loan, unless you get concessions from the private creditors, is that the loan will be used to pay the private creditors off, BlackRock and Pimco and so on, to keep them sweet so as to maintain Ukraine’s borrowing status, its credit rating. So effectively, Western governments are being mobilized, and taxpayers, ultimately, are on the hook for maintaining payments by way of Ukraine to BlackRock. And no one on the Western side likes that, right? So you need a private creditor deal to enable a public sector deal from the Western states.
And the IMF acts as the ultimate backstop, so the IMF will lend even when private creditors are not available, at least notionally. But on the other hand, the IMF also insists on super senior creditor status. In other words, there can be no renegotiation of the principal amounts which the IMF lends. That can’t happen. You can phase. So what the IMF is doing with these 8.5 percent interest rates is just rolling them. If the Ukrainians can’t pay the interest and the repayment on a $10 billion loan, the IMF gives them a $15 billion loan, of which the majority is used to repay the first IMF loan, and then an increment remains to the Ukrainians to cover their outstanding debt. And it’s this three-way relationship between the private creditors, who are ultimately going to have to absorb some of the loss but will resist it; the governments, which are providing subsidized loans but won’t want those to be used to subsidize the private creditors; and the IMF, which will provide credit but will not allow any write-down of its loans but will roll, if necessary, over and over again, that this is going to be played out. Pity the Ukrainians are caught in this spiral. It’s a nightmare from their point of view, given everything else they’ve got going on.
CA: How do current U.S. electoral politics affect the process of evaluating Ukraine’s economic viability? There is a shift toward a new populist foreign policy that often involves ceasing to support Ukraine in its war against Russia. Do financial markets already price that in?
AT: So I think the first thing to say is Ukraine has got so much on its plate right now that the looming threat of a [second Donald] Trump presidency is not number one. You can see it in the prices of the debt. $100 worth of Ukrainian debt can be bought from between $0.28 and $0.31. So it’s already at a 70 percent discount, which tells you huge default risk, major risk of losses on this. Of course, if you get in at $0.28 and it then rises to $0.31, you can sell it and make a 10 percent profit. But right now we’re talking about massively depreciated debt that’s under all sorts of different types of risk. Ukraine could lose this war; their entire power supply could fail. That’s what you’re principally worrying about. Trump is the icing on the cake.
What the Trump risk is doing is bringing forward the urgency of all of the financial discussions for next year. And that then compounds that incredible knot of creditor claims that we were just talking about. Because if you are going to tie down IMF and multilateral government funding for Ukraine in the next couple of months so as to get the deals done before Trump comes in, you need the private creditors to make the concessions necessary to make those public sector deals viable now. And that’s what has driven part of the urgency on the negotiations over the debt. So it isn’t a specific risk from Trump, a specific issue one way or the other, but the general sense that uncertainty increases, including also for American political reasons, going forward that drives the pace of the negotiations.
But I think it’s also worth stepping back to read an op-ed that [Republican vice presidential candidate J.D.] Vance did a couple of months ago, which spells out a more fundamental question here, which is, are we all basically ignoring the underlying fact about the issue here of Ukraine’s survival and prospects going forward? The conventional position of Western governments, of NATO, of the Biden administration is, of course, that Ukraine can’t fail, will not lose, and, on the other hand, cannot be strong-armed into negotiations either. And the question you have to ask is, is this a realistic position going forward? Because is the West willing to do enough to actually put Ukraine in a position to survive, let alone win this war? And is any amount of aid that the West would actually be able to deliver going to be enough? Now, that depends on your judgment on Russia. And judgments on Russia fluctuate back and forth all the time.
But the point I’m trying to get to is that we shouldn’t fixate too much on the particular position of Trump and Vance and so on. We should, however, take very seriously the basic question that they’re asking, which is, what is the underlying coherence of the Western position to date? How long are we actually willing to go on backing Ukraine in a war which, in terms of the recovery of territory, it’s virtually impossible to see how they can possibly win it? And if not, then what are the prospects for the stabilization of the Ukrainian state going forward if its politics and its political leadership is committed to that impossible goal? And really isn’t the fundamental issue about Ukraine’s debt not the willingness of the Trump-Vance administration to mobilize new funds from Congress but what the underlying rationale of this war effort is at all? And isn’t that really the big question mark hanging over the debt?
The post Ukraine’s Other Problem: Spiraling Debt appeared first on Foreign Policy.
