A few months after Russia’s invasion of Ukraine, Rothschild & Co, the country’s financial adviser, provided a substantial document to Ukraine’s debt chief, Yuriy Butsa. The folder, filled with details of major sovereign debt restructurings over the past three decades, became crucial for Butsa, who was 40 at the time and had not been part of Ukraine’s last debt restructuring effort in 2015, following Russia’s annexation of Crimea.
Faced with a war-ravaged economy and mounting costs, Ukraine reached an agreement with its creditors in August 2022 to halt bond payments. With no clear end to the war, the country recently completed one of the fastest and largest debt restructurings in history. The restructuring, which covered more than $20 billion in debt, is only surpassed in scale by those of Argentina and Greece and is expected to save Ukraine $11.4 billion over the next three years. This financial relief is critical to support Ukraine’s war efforts and its ongoing program with the International Monetary Fund (IMF).
“A stable situation where there are no uncertainties can only benefit Ukraine,” remarked Arvid Tuerkner, managing director for Ukraine and Moldova at the European Bank for Reconstruction and Development, a major multilateral partner of Kyiv.
The story of how Ukraine and its bondholders reached this agreement is based on discussions with five individuals involved in the negotiations, who spoke anonymously.
Reviving Negotiations
Initial talks between the Ukrainian government and its lenders did not go smoothly. Negotiations in June broke down after a few weeks when the core group of bondholders felt that Ukraine’s proposed writedown was excessive, far beyond the 20% they anticipated, and could severely damage relations. With less than two months left before the moratorium on payments was set to expire, Rothschild arranged direct meetings at its sophisticated offices on Avenue de Messine in Paris.
Negotiators, including representatives from top asset management firms, their legal and financial advisers, and Ukraine’s legal team from White & Case, gathered in Paris on July 16. The Rothschild offices, adorned with images of the family’s famous vineyards, hosted multiple meeting rooms for collective discussions and private strategizing sessions. Sources from both sides described the atmosphere as pragmatic, with everyone hoping to strike a deal despite the considerable differences still present.
Exceptional Uncertainty
Several factors prompted a return to the negotiating table. In addition to the looming deadline, the IMF, which is supporting Ukraine with $15.6 billion, had recently updated its economic projections, reflecting a worsening outlook but providing a new basis for discussions. Ukraine laid out its proposal, while key bondholders, including major asset managers like BlackRock and Amundi, voiced their conditions: immediate resumption of coupon payments, a clear path to higher principal recovery, and simplicity in the restructuring terms.
The IMF’s experts, who were available both in Kyiv and Washington, played a crucial role, offering support for the intensive modeling needed to evaluate each proposed compromise’s impact on Ukraine’s long-term debt sustainability. By the early morning of July 18, after nearly 48 hours of continuous talks, another request for recalculations was made to the IMF. Those involved in crunching the numbers had barely rested.
The IMF’s assistance was pivotal, overcoming numerous obstacles, including challenges related to tapping Russia’s frozen assets and adapting to new IMF policies designed to address the financial realities of a country at war. The talks had been delayed since April’s IMF Spring meetings, partly due to these complexities.
Butsa’s team and the IMF were firm on avoiding costly mechanisms like the ‘GDP warrants’ used in 2015, which required Kyiv to pay out a portion of its economic output under certain conditions. Instead, Ukraine proposed a simpler GDP-linked bond and immediate coupon payments starting at 1.75% and increasing to 7.75%, addressing key creditor demands. The structure, designed to qualify for main bond indexes, made the bonds easier to trade and helped close the gap between the negotiating parties.
A Close Call
Just as the negotiations were wrapping up, Butsa encountered unexpected drama. While returning from the Polish airport—his preferred route due to flight restrictions caused by the war—a car crash involving his VW Golf delayed his return. Although uninjured, Butsa found himself in an insurance office in Lviv, handling paperwork while coordinating the finalization of the restructuring statement.
Despite these challenges, the bondholders voted overwhelmingly in favor of the agreement, with over 97% support, marking a significant step forward for Ukraine amidst ongoing turmoil.
