After an IMF delegation visited Ukraine to review the country's progress toward meeting the terms of its March aid package, the institution revised downward its forecast for the Ukrainian economy. On May 31, the IMF adjusted its March estimate of a 5.5 percent decline in Ukraine's gross domestic product in 2015 to a 9 percent decline. Despite the lower prediction, the IMF praised Ukraine's implementation of its reform program and emphasized that a debt operation, in addition to ensuring that the country's public debt is sustainable, would be needed to ensure the success of Ukraine's aid package.
Ukrainian officials are hoping to receive over $2 billion in aid from the IMF in June, after having obtained $5 billion in March. Both tranches are part of a planned $17.5 billion aid package that will be distributed over the course of four years. However, the IMF board's decision to approve the second tranche in June will depend heavily on Ukraine's negotiations with its bondholders.
Ukraine is in dire need of financial assistance. In September and October, two bonds worth $500 million and 600 million euros ($656 million), respectively, will mature. In addition, Ukraine must repay Russia $3 billion in December. At the end of April, the National Bank of Ukraine's international reserves held less than $10 billion. Though these are the highest reserves Ukraine has seen this year, they still do not even cover two months' worth of the country's total imports.
The IMF envisions that in addition to its own $17.5 billion contribution, other countries will give about $7 billion in aid to Ukraine over the next four years. However, to receive the aid package, the IMF has stipulated that Ukraine must reach an agreement with its private bondholders to keep its debt at a sustainable level. To that end, Kiev is negotiating with its bondholders — mostly Western firms — to restructure its bonds and loans to save about $15.3 billion between now and 2018.
Some of the country's main bondholders, including Franklin Templeton Investments, T. Rowe Price, TCW Group and BTG Pactual Europe, formed a committee in March to negotiate with the Ukrainian government. Together, they hold about $8.9 billion of Ukraine's outstanding debt. The committee seeks a deal that would contain maturity extensions, delaying the due date of the bonds' principals, rather than reducing the prinicipals themselves. Ukrainian officials have responded with attempts to boost their bargaining position by passing a law through parliament that would allow the government to halt its payments on some foreign debts — in effect, defaulting. However, some creditors have been more publicly open to compromising with Ukraine. BlackRock, one of the largest holders of Ukrainian debt, has indicated that it would consider approving a reduction in the bonds' principals.
The $3 billion in Ukrainian bonds held by Russia is not part of the current talks. On May 23, Russian Prime Minister Dmitri Medvedev made it clear that should Ukraine fail to repay the $3 billion, Russia would "adopt as tough a position as possible." There are legal ambiguities surrounding the status of Russia's loan; Moscow has claimed that Kiev's refusal to repay it would violate IMF regulations. Nevertheless, the Kremlin will have a hard time forcing Ukraine to pay back the money it owes, and if Ukraine refuses altogether to make good on its loan, the dispute could turn into a drawn-out legal battle.
It is unlikely that Ukraine will default on its debts to private bondholders. It will probably reach an agreement, because failure to do so not only would lead to a default but also would jeopardize the future of the country's IMF aid package, which is crucial to avoiding bankruptcy. There have already been signs that Ukraine and its private bondholders are approaching a deal. Following a May 29 phone call between Ukrainian officials and creditors, the Finance Ministry announced that it was "pleased" with accelerated engagement between the two sides and that a follow-up call was set for June 5.
The Ukrainian government is under pressure to reach an agreement ahead of the IMF's June board meeting. However, as negotiations drag out, it is possible that this deadline will pass without a finalized deal, weakening Kiev's position in the negotiations as the summer progresses. For Ukraine, it is more important that it secures an agreement and the subsequent approval of IMF funding before its sovereign bonds are due in September and October, making a deal before summer's end likely.
