Ukraine - a long war suggests financing adjustments

I long argued last year against an early Eurobond debt restructuring in Ukraine and that it made more sense to extend the debt moratorium until the end of the war when macro assumptions would be clearer.

See some of my musings here:

The danger was that debt would be restructured, the war might be prolonged, macro indicators would turn south, debt would again become unsustainable and the whole process would need to be repeated.

The IMF understood the uncertainty and built in a downside scenario into its forecasts for its EFF.

See the data herein:

https://www.imf.org/en/Publications/CR/Issues/2025/03/28/Ukraine-Seventh-Review-Under-the-Extended-Arrangement-Under-the-Extended-Fund-Facility-565703

Under the base case the war ended in 2025 and it’s under that scenario that the fund targeted to cut Ukraine’s debt to GDP from 100-odd percent to 65% by 2033. But in the downside scenario of the war extending to 2026, at least, the target ratio stays above 100% with the Fund suggesting that there would then need to be a second debt treatment in 2026-27. That now seems more like the base case.

If we are also in the downside scenario the Fund will need to come up with additional financing assurances to fill likely financing gaps caused by the extended war but also by doubts around US support. There is also a looming risk to the $50 billion ERA facility that underpins the EFF and is funded from the interest flow on immobilised CBR assets. A key date therein is looming at the end of July when EU sanctions pertaining to the immobilised CBR assets needs to be extended. If Hungary blocks these - unanimity is needed in the EU n this decision - Russia could get the underlying assets back which would leave either a huge financing gap for Ukraine or G7 countries on the hook to fill the void as there would be no assets from which to secure an interest stream. Hopes are that Hungary will be persuaded to roll the sanctions. If not let’s hope the EU has a plan B.

For me the fact that the EU is dependent on Hungary every six months rollover just underlines the shear stupidity of our leaders in not seizing CBR assets way back three years ago when they were first immobilised and we argued psssionately in favour and laid out solutions therein on the legal basis - countermeasures - and provided assurance on the economic risks therein - and also solutions.

The problem with the ERA does though just reaffirm the fundamental issue I had with the debt restructuring, IMF and G7 financing of Ukraine. The debt restructuring itself did not really touch the sides of Ukraine’s annual $100bn plus financing needs - providing $10.8bm in flow relief over the duration of the IMF programme to 2027. It was a sticking plaster and actually, as with the ERA, allowed G7 politicians to avoid making the big but crucial decisions around the required financing needed to ensure Ukraine’s victory. As I long argued, $100 billion a year was needed to keep Ukraine in the war and avoid defeat, $150 billion to ensure victory. But Western taxpayers were never sold the right story - that if we want to beat Putin, and ensure our security, this is the price tag. And by the way - we would rather spend your tax dollars, euros and pounds than Russian taxpayer cash sitting doing absolutely nothing in our banking systems.

The harsh political reality is that the only way to ensure sufficient funds to ensure Ukraine’s victory is by tapping immobilised Russian assets. As is we have drip fed Ukraine financing, as with munitions, enough to survive but not to win. The result the war goes on and now Ukraine’s financing and the debt restructuring agreed in 2024 no longer really adds up.

I got the logic of doing an early debt restructuring so as to ensure early market access upon the end of the war. But unless we assure Ukraine the finance and equipment to bring an end to the war then there is no market access. The price for the option of potentially having early market access has been the $3bn annual debt service paid as per the debt restructuring deal. I think that’s a high annual price to pay with no market access in sight. Ukraine can buy a lot of air defence missiles with that money which might provide a step up in its defence, security and an earlier end to the war.

And now we might all have to revert to the whole debt restructuring process again as per the IMF’s downside scenario - great for lawyers and restructuring advisers, not perhaps so great for Ukraine.

Again, and to summarise, the only way for Ukraine to have a chance of winning this war and bringing an early end to the war is by properly funding and arming it. Western taxpayers appear incapable of doing that if the last 3.5 years are anything to go by - and with Trump in the WH and MAGA like movements still on the march in Europe the only way to do this is by grasping the bull by the horns and seizing the $330 billion in CBR assets, making Russia pay for a Ukrainian victory. It is the right and moral thing to do. And it might actually work.