Ukraine mired in intense negotiations with creditors

By Andrew Jay Rosenbaum

ANKARA

Ukraine is mired in intense negotiations with its international creditors who are resisting the country's attempts to write down part of the country's public debt.

Shattered by the war with pro-Russian separatists in the eastern region of the country, the Ukrainian economy saw its gross domestic product (GDP) fall 15.2 percent on an annual basis last year, the most in more than five years, according to the government statistics office, while the hryvnia is the world's worst-performing currency.

Lands in the eastern region of the country formerly accounted for nearly a quarter of industrial output.

In the past three years, Ukraine's GDP has halved.

So it should surprise no one that Ukraine Finance minister Natalia Yaresko warned creditors Friday that they may have to accept a write-off of part of the country's public debt -- which amounted to $68.9 billion in January, according to the ministry.

'Fighting for survival'

Timothy Ash, an analyst with Standard Bank in London, in a note published March 5: "This is a country which faces huge challenges in terms of macro stability, political stability, security and debt sustainability.

"There has to be understanding that a halving of GDP means that Ukraine cannot support/service the same level of debt, and creditors need to be understanding of this, and especially also when the country is fighting for its very survival."  

But creditors are hoping to limit debt reductions and write-downs. 

Ukraine's international creditors have formed a group and hired the U.S. international investment and advisory firm Blackstone to represent them. 

Blackstone will negotiate with advisers at Paris-based Lazard, which is representing the Ukrainian government and also represents Greece in its negotiations with its European creditors.

Debt restructuring

The ministry plans debt restructuring which will involve principal write-downs as well as maturity extensions and coupon reductions, Yaresko told a conference call with creditors and media Friday.

Aside from a $17.5 billion loan from the International Monetary Fund, the bailout ministry plans to raise $15.3 billion by restructuring the debt. 

The restructuring would include debt Ukrainian state-owned firms including Oschadbank and Ukreximbank, whose $750 million bond matures on April 27, 2015, and will be included in the restructuring, as will Eurobonds issued by Kiev.

Three bond issues of Ukrainian infrastructure fund Fininpro amounting to a total of $1.8 billion maturing in 2017 and 2018 will also be part of the restructuring.

Will Russia, which holds $3 billion of Ukraine's public debt, accept the restructuring? The Russian Finance Ministry said in February that it would not.

Analysts warn that a refusal to negotiate by Russia could lead to a Ukrainian default and even the IMF has admitted that efforts to restore financial stability in Ukraine face "exceptionally high" risks from further conflict and disgruntled creditors.

'Dangerous' delay

In a report released when the bailout plan was announced, the IMF said: "Creditors may balk at the terms being offered in the debt operation and holdouts may try to free-ride.

"The negotiations may be protracted, particularly as some creditors have large positions in specific bond issues."

Blackstone and Franklin Templeton both hold a large share of the debt.

Delay could be dangerous for the country, analysts said.

Mark Adomanis, who specializes in the Russian economy, expressed concern about delays in helping Ukraine's economy recover.

In a note at the end of February, he wrote: "Russia’s escalation dominance might extent to Ukraine’s economy as well: it has the ability to inflict disproportionate economic harm at times and places of its choosing.

"The West has more than enough money so that it could meet and exceed Russian economic pressure, but it needs to act."