NEW HAVEN—Ukraine’s war with pro-Russian separatists in its easternmost regions of Donetsk and Luhansk, started soon after Russia annexed Crimea in March 2014, has cost more than 6,000 lives and displaced more than a million. The war also damaged or destroyed much of the housing stock, infrastructure, and productive capacity in its industrial heartland and sent the economy into a freefall. The gross domestic product (GDP) dropped by 7 percent last year and is projected to drop another 9 percent this year. Facing a projected balance of payments deficit of $10 billion this year, the country entered 2015 on the verge of bankruptcy and desperately needing assistance.
In March, the International Monetary Fund (IMF) approved Ukraine’s request for $17.5 billion over four years through its Extended Fund Facility—which allows a longer payment period for structural reforms—something it had refused to do in 2013. That refusal led then-President Viktor Yanukovych to seek and obtain financial assistance from Russia, in turn prompting violent protests in Kyiv. The parliament removed Yanukovych, and Russia, declaring his removal a coup d'état, took control of and annexed Crimea.
While the IMF agreed to provide $17.5 billion, it also estimated that Ukraine faces a larger external financing gap of $40 billion. The IMF called for a “debt operation”—a restructuring of the debt held by private sector creditors that would provide $15.3 billion toward covering that gap.
Thursday last week, after five months of stalemated negotiations, Ukraine announced it had reached an agreement with an ad hoc committee representing its largest external private-sector creditors to restructure their holdings. Finance Minister Natalie Jaresko announced the committee had agreed to a 20 percent “haircut” in the $18 billion of bonds held by the private creditors, a deferral of four years in redemptions and a reduction of the coupon on all debt to 7.75 percent. Together, those measures are expected to provide the $15.3 billion called for by the IMF.
