KIEV: As government troops face off against pro-Russian separatists, Ukraine is also maneuvering on the financial front, scrambling to stave off disaster by renegotiating its foreign debts.
Kiev’s pro-Western government owes billions of dollars to US and London-based investors, among others, as well as Russia, its rival in the current conflict that has pushed Ukraine’s recession-hit economy to the brink.
The International Monetary Fund has stepped in with a $17.5 billion rescue loan. As part of that deal, Ukraine must save a further $15 billion over four years by restructuring its debts.
“If the debt operation fails, Ukraine will lose a big share of the package,” said Konstantin Kucherenko, a fixed-income trader at Kiev-based investment group Dragon Capital.
“The funds that other multilateral and bilateral donors provide will not be sufficient to keep the Ukrainian economy running for the next four years,” he said.
The IMF has so far dished out $5.0 billion to Ukraine and must decide in June whether Kiev has met the terms for the next slice. With that deadline looming, Ukraine is trying to persuade investors to cut it some slack.
Investors fear ‘haircuts’
Among Ukraine’s biggest creditors are five US investment firms led by California-based Franklin Templeton. They risk a “haircut” — a potential reduction in the payback on their principal investment.
“The government is aiming to finalize everything by June. It’s not going to be easy,” Kucherenko said.
“The question now is principal haircuts. The creditors are resisting, particularly the top five who hold a blocking stake in the negotiations.”
Ukraine’s Finance Minister Natalie Jaresko in Washington last week tried to pressure investors to give ground, warning they may face greater risks over the country’s future if they do not.
“They’re misunderstanding… the depth of the economic-financial distress that the country is in,” the Wall Street Journal quoted her as saying.
Her ministry said it “does not agree” with certain counter-proposals by the five creditors, who hold $10 billion of Ukraine’s debt.
During the talks, “we can expect all kinds of declarations, but those just should be seen as attempts to gain an advantage in the negotiations,” said one senior Ukrainian official who asked not to be named.
Debt to Russia
Russia, meanwhile, holds a $3.0 billion bond due for redemption in December, which it is refusing to renegotiate.
Russia is not taking part in the current debt talks, but analysts say its bond could be used to pressure Ukraine over its standoff with pro-Russian separatists in the east, the country’s industrial heartland.