New challenges and risks

This year began with tremendous geo-global and domestic political volatility which immediately had an impact on the debt policy and financial situation in Ukraine. The reinstatement of the Ukrainian government, the Russian invasion and annexation of Crimea, the escalation of the situation in eastern Ukraine (especially Donetsk and Luhansk oblasts), the presidential elections, and the renewed natural gas war caused market sentiment to undulate. When at the end of 2013 and at the beginning of January all eyes were on Russia and its offering of US$15bn of financing, decreasing gas prices, etc., in February an acute political crisis that raged for three months ended with former incumbents fleeing to Russia to avoid prosecution in Ukraine. The new government was abhorred by Russia to the extent that the Kremlin withdrew its promised Russian financing, invaded and annexed Crimea, and assembled its troops on the border to prepare in invade eastern Ukraine. Not only did these moves cancel all possibilities for the new Ukrainian government to negotiate on financing and new gas prices with Russia, but in June Russia closed its gas supply to Ukraine, keeping only transit to Europe.

Although Ukraine currently does not need significant FX funds for debt repayments, the debt markets are closed for new issues, reflecting the increased risk of sovereign default or debt restructuring. The chances of default and restructuring could rise due to many factors, although not directly from the Ukrainian government. While significant redemptions are scheduled over the next three years, the largest is the Russian Eurobond redemption scheduled next year which should not be restructured, while in 2016 and 2017 there are many quasi-sovereign and guaranteed Eurobonds which will also not be included in sovereign debt for restructuring.

Meanwhile, we saw stable financing from domestic sources this year, using not only occasional domestic QE demand but also domestic market demand for bonds with maturities up to 3-years.

Ukraine's future is now defined by new steps by the government which immediately began negotiations with the IMF. At the end of April, the IMF adopted a US$17.01bn stand-by loan and new program for Ukraine, the US offered to guarantee a US$1.0bn Eurobond issue for Ukraine which was successfully placed in May, and the EU also provided support and funds as well.

Источник: ICU