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Ukraine current account ($mn)
would struggle to make the coupon payments even with a 40% write-down, say experts. An agreement on the terms of the restructuring is anticipated
by August 1 but a default is looking increasingly likely.
In the face of all these problems, the government is already planning to cut crucial spending on the war, Yaroslav Zheleznyak, member of the Ukrainian parliament, said on his Telegram channel. Military spending in 2025 will amount to UAH2.2 trillion ($54.5bn). However, in 2026 and 2027 military spending will decrease to UAH1.6 trillion ($39.6bn) and UAH1.5 trillion ($37.2bn) respectively.
A funding crunch is coming that will change the calculus on seizing the CBR’s circa $300bn of frozen assets.
“Seizing the CBR’s money is off the table for the moment, as everyone worries that will undermine the euro and the Western banking system,” a senior advisor to the German government told bne IntelliNews on the condition of anonymity, as they were not authorised to speak about sensitive topics. “However, when the money runs out, probably in 2025, that will change the calculus completely and the attitude to confiscating that money. There aren’t any other options.”
Polls show support is fading
Ukraine fatigue is growing amongst countries’ populations as well, but the sentiment is very varied depending on the country and political proclivities.
Russia: Unsurprisingly, support for
the war remains strongest in Russia. Patriotism is at an all-time high and Putin’s propaganda has been effective. He has also managed to shield the average Russian from any effects of the war and rising incomes and a booming economy have helped.
Still, a June poll by the independent pollster Levada found that 71% of Russian respondents would back ending the war if Putin called it off, although only 30% would support ending the war if that included returning the annexed territories.
Source: NBU
were undercutting them and driving small and medium-sized Polish truck companies out of business.
Ukraine's exports to the EU plunged by almost 10% in January-June this year. Ukraine exported $10.97bn worth of goods to the EU, which is 9.7% less than the same period last year, according to the Ministry of Economy. Trade with Ukraine’s immediate neighbours and biggest trade partners has fallen even more precipitously: Poland, by 25.7%; Slovakia, by 21.3%; Hungary, by 67.2%, and Romania, by 50.2% in the same period.
Ukraine has been running a current account deficit of anything between $100mn and $2bn a month for most
of 2023 that has to be funded somehow.
By contrast, Russia’s exports are booming. It posted a $260bn current account surplus in 2022, twice more than its previous all-time high of $120bn set in 2021. That fell to $51bn in 2023 when the oil sanctions kicked in, but this year it is on course to top the $120bn pre-war record again, thanks to booming grain and oil exports.
Debt and default problems: Ukraine’s finances could take a sharp turn for the worse in just the next few weeks. The state debt is mounting slowly as increasingly the money it is given is in the form of repayable loans, but more worryingly, its bond restructuring deal is about to expire and it is looking default in the face.
Only a quarter of the money Ukraine received last year was in the form of grants that don’t need to be repaid, down from three quarters before. Increasingly, fresh money is loans that do. The state debt-to-GDP ratio was
a healthy 49% before the war, but has crept up to 94% of GDP now and could breach 100% of GDP before the end
of this year. The state debt of Ukraine grew by almost $2.6bn in May alone, to a total of $151bn.
For the past two years Ukraine’s private bondholders have agreed to suspend debt-service payments, but that
deal ends on August 1. Institutional bondholders have agreed to suspend payments until 2027. The let-off – from both government and private lenders – is worth 15% of GDP a year.
If these payments had still been in force, they would have been the state’s second- biggest expenditure, behind defence.
MinFin is in talks with its creditors and has asked for a 60% write-off, but the Eurobond holders committee is digging its heels in and will not agree to more than a 25% write-off. Last week, MinFin dropped its offer to a 40% haircut, but no agreement has been reached and the clock is ticking.
The last thing that MinFin wants to
do is ruin its credit profile through a default that would mean it can’t raise money post-war, but resumption of coupon payments will only put added pressure on the state’s finances. MinFin
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