Ukraine's debt chief vows to meet obligations

6 min read
EMEA, Emerging Markets
Robert Hogg

Yuriy Butsa, Ukraine's government commissioner for public debt management, is adamant that the sovereign will continue to service its debt despite the outbreak of war, while calling on businesses to honour their ESG commitments and sever economic ties with Russia.

Ukraine made a coupon payment of US$292m on its US dollar 7.75% September 2022s on March 1 in a sign of the government's promise to meet its obligations, Butsa told IFR.

"Even in these extreme conditions Ukraine is fully committed to service its debt both in local and hard currency," said Butsa.

"We don’t plan any debt restructuring. We need to have stable and continuous access to both concessional and commercial financing and any restructuring can severely disrupt it."

The September 2022 Eurobond is Ukraine's largest single obligation due this year, but previous liability management exercises have brought the amount owed down to US$912m, according to Butsa. It is a one of a series of US dollar notes issued on September 1 2015 after the restructuring of the sovereign’s debt following Russia's annexation of Crimea.

The instruments have an annual coupon of 7.75%, payable in two semi-annual amounts on March 1 and September 1. The bonds were designed to mature in nine roughly equal amounts each year between 2019 and 2027. Around US$7.6bn of principal remains outstanding.

Overall in 2022, Ukraine has a relatively light debt repayment schedule compared to previous years, Butsa said, with external repayments of US$2.27bn due before the end of the year, and much of that concessional. The debt payments on the local side amount to around US$8.5bn-equivalent.

Massive help

Help has come from the international community with US$1.4bn provided to Ukraine's state budget through the IMF's Rapid Financing Instrument, and discussions are taking place on further cooperation.

"One of the discussions we initiated is creating a trust fund where IMF members can channel their Special Drawing Rights, with the goal to provide [funds] supplementary to IMF financing of a significantly larger magnitude," said Butsa.

Italy was the first country to donate to Ukraine's state budget following the outbreak of war, offering €110m, with the European Commission, IMF, World Bank and EIB all expediting procedures at a highly accelerated pace to provide much needed funding.

"We are receiving massive help from our international partners, both IFIs and governments, and we are grateful for their support," said Butsa.

"We are working with all the G7 countries to secure the additional financing and are also grateful to all the European countries who have already committed grant financing to us. I must say that given the widening of the fiscal gap, in order not to face the debt sustainability problem after we win the war, we need to concentrate to maximize the grant financing to the [greatest] extent possible."

War bonds

Ukraine has introduced capital controls and other measures to ensure macroeconomic stability, and the intention is for these to stay in place until the war is over. This has in turn led to the auction of so-called "war bonds", the third round of which took place on March 15.

The auctions so far have seen around US$688m-equivalent raised, mostly through one-year hyrvnia notes sold at 11%. There have also been local currency regular two-month bills offering a 10% yield, and the third auction also saw a small one-year US dollar leg sell at 3.70%. The bonds are being sold well below market rates.

"For those investors who received their payments in hryvnia and can not convert it into FX at the moment we offered a short hryvnia instrument maturing next month so that they could park their liquidity in this instrument and continue to receive returns," said Butsa. "We are looking also into other mechanisms to provide more comfort to investors and stimulate further investments."

The auctions, Butsa said, have provided enough funds to cover debt repayments.

"The National Bank of Ukraine supported the state budget through the purchase of Ukrainian government securities in the primary market due to the need to finance the Armed Forces of Ukraine and for the duration of martial law," said Butsa. "When martial law is over we will come back to our prudent fiscal and monetary policies."

Butsa welcomed the economic pressure brought by international partners with sanctions on Russia, and called on businesses with ESG aspirations to make good on their pledges.

"What we also want to see is that all those businesses, who claimed the ESG considerations are central to their operations, stick to their commitments by stopping any economic relationship with Russia," said Butsa. "The civilized world should totally reject Russia until it stops its brutal military crimes and repays the harm it has done to Ukraine and its people."

As for how a government can operate in a state of war, Butsa said it has found a way to continue functioning.

"Russian military attack and a full-scale invasion in Ukraine made a major disruption in the work of many institutions in Ukraine as people found themselves in a necessity to find a safe place for themselves and their families," said Butsa. "However, the government stays fully functional and with two years of Covid we learned already how to continue efficient operations with many people working remotely."