The two sides were under pressure to reach an agreement because a payment freeze 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 accept a 37 percent nominal “haircut”, writing off more than $8.5 billion of Ukraine’s debt stock. The agreement also offers bondholders the possibility of higher recovery in the long term, 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).
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).
Ukraine’s government is currently diverting the bulk of its domestic revenue towards military needs, while using Western cash to pay for current spending on items such as pensions and public-sector salaries. Its own tax base has been hollowed out by the loss of much of its territory, the incessant attacks on its industrial and economic infrastructure and, most of all, by the loss of its people. Ukraine had a registered civilian labor force of 11.5 million in 2021; it has now shrunk to nine million, according to Deputy Minister of Economy Tetyana Berezhna.
