Trapped in Western Debt, Ukraine Faces Bankruptcy

JAKARTA – Ukraine is in danger of defaulting on its massive debts as early as next month if it fails to negotiate a restructuring deal with creditors.

In February 2022, bondholders including U.S. financial giants BlackRock and Pimco and French asset manager Amundi froze Ukraine’s debt for two years because of its conflict with Russia. But the agreement with Western countries is due to expire in August, and creditors want Ukraine to start paying interest on its debt.

Under the deal, worth 15% of Ukraine’s annual GDP, if payments are required, it would be Kiev’s second-largest spending category after defense. The conflict with Russia has dealt a severe blow to Ukraine’s economy, shrinking by a quarter.

Ukraine’s debt-to-GDP ratio will approach 94% by the end of this year despite Western support in the form of artillery, tanks and funding allocations. Ukraine has one month to avoid defaulting on its debt.

The International Monetary Fund (IMF) wants to negotiate a debt relief plan, but such a deal seems unlikely anytime soon. According to Russian Today from The Economist, last month, the Ukrainian government failed to reach an agreement with a group of foreign investors to restructure the country’s $20 billion debt in the form of Eurobonds.

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Kiev has been urging bondholders to accept a large debt reduction as it tries to meet IMF demands to restructure and maintain access to international markets. Ukraine is seeking to reduce its debt to 60% of its current value, while creditors say 22% is more reasonable.

If a new debt restructuring deal is not reached, Ukraine could default, which would damage the country’s credit rating and complicate its ability to borrow in the future.

The most likely scenario for Kiev is an extension of the debt freeze until 2027 or a declaration of default. Either way, Ukraine will not resume payments to its creditors.

(nng)