It seemed like good news when on August 28, Ukraine agreed to a debt restructuring with holders of $24.3bn in Eurobonds. 

Nearly all the holders agreed to the proposals which provide for a 37% upfront debt write-off, agreement over lower coupons, and maturity extensions. The deal should save Ukraine around $11.7bn over the next three years and open the way for further help from the International Monetary Fund (IMF.)

The speed at which this deal was agreed was striking — a matter of months compared to the years taken for other recent restructurings, including Ghana, Zambia, and Sri Lanka. So was the high approval rate among bondholders, reflecting the relative generosity of the deal for a country still at war, plus the willingness of the private sector to share the burden of supporting Ukraine to defend itself, and Western democracy more broadly. 

So, this is an achievement for Ukraine. Although the financing contribution is not much more than could have been secured with an extension of the two-year debt service freeze agreed in August 2022, the prize for Kyiv is clearing the decks on restructuring and moving speedily toward the day it can borrow once again on the markets. 

While that is unlikely while the war continues, an end to the fighting should see the private sector quickly move to help share the burden of the huge reconstruction costs. 

And yet — there’s always a yet. This deal does not address Ukraine’s significant challenges in getting to peace in one piece. 

The IMF, in its Extended Fund Facility (EFF) program document, assumes financing needs of $122bn over the period 2024-2027, and they assume this is covered partly through the $11.7bn freed up the debt deal, as well as with Western bilateral and multilateral support. 

The IMF perspective is oddly myopic. It only looks at budget and balance of payments financing needs, which have been running at up to $40bn annually since the full-scale invasion of Russia by Ukraine. It altogether ignores the huge military financing needs. 

 

Total Western financing to Ukraine since the full-scale invasion has been running at closer to $100bn a year (see here the excellent work by the Kiel Institute.) In my view, Ukraine’s financing needs are actually higher — at more like $150bn if we want it to win. 

Indeed, while Western funding for Ukraine has averaged around $8.5bn a month for the past two and a half years, we can see rises and falls mirroring the country’s defensive and offensive operations, the latter being more expensive than the former. 

For example, in the summer of 2023, funding picked up to $12.5bn monthly (nearer $150bn annualized) as the armed forces recaptured territory. But then as the 2023-24 $61bn US funding got stuck in Congress, funding dropped to $3.5bn a month between October 2023 and February 2024, and Ukraine lost territory. 

To reiterate, Ukraine needs $100bn-$150bn a year to win, not the $35bn-$40bn suggested by the IMF. Failure to be honest about Ukraine’s financing needs means it is short-changed, the war drags on, more Ukrainians die, and the risk of actual Ukrainian defeat becomes a possibility. 

So how can the West fund this? It is, after all, a huge sum of money, and Western taxpayers don’t have an endless appetite to pay the bills. Debt relief and private sector funding cannot fund the gap. 

The only realistic approach is to tap the full $330bn in immobilized Russian Central Bank assets in Western jurisdictions. It’s no good using short-term fixes like securitizing the interest flow on these assets — as with June’s G7 agreement for a $50bn fund. This does not touch the sides, covering just four to six months of Ukraine’s financing needs. And worryingly, there have been hints from the German government that they will cut their bilateral funding for Ukraine to take account of this. 

The reality is that the G7 and IMF are just not being serious or transparent about Ukraine’s financing needs. But reality will return, as it always does, and the West will be forced to act. 

Those frozen Russian assets are never returning to Kremlin control. They are a downpayment for all the blood and sacrifice Ukraine has spent to keep the Kremlin’s imperial project at bay. 

Why not just say so and get on with it?

 

Timothy Ash is a Senior Emerging Markets Sovereign Strategist at RBC BlueBay Asset Management. He is an Associate Fellow at Chatham House on their Russia and Eurasian program.  

 

This article first appeared on Center for European Policy Analysis (CEPA) website here. Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions are those of the author and do not necessarily represent the position or views of the institutions they represent or the Center for European Policy Analysis.