Ukraine: external debt - a financial stranglehold or a way of existence?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:48

Ukraine is a resource-rich country with a warm mild climate, developed industry and hardworking people. She began her journey without having a public debt behind her. Now one can only sympathize with what Ukraine's external debt has accumulated by 2015.

The start of the journey

Ukraine began its history as an independent state in 1991. Russia became the legal successor of the USSR, including obligations on the debts of the former Soviet republics.

July 15, 1992 can be considered the starting point of the "credit history" of Ukraine. On this day, the Verkhovna Rada legalized state guarantees for loans to Ukrainian enterprises, which many of them took advantage of. In total, $2 billion was raised in this way. Most of these funds were paid by Ukraine. The external debt of companies, now to the state, has not been repaid so far.

In 1993, the increase in public debt continued and reached $3.6 billion. Ukraine received its first loans in Russia. The new states did not yet haveown currency and the Russian ruble was in use. Taking advantage of the gaps in the legislation, Ukraine actively "printed" electronic rubles, paying with them for Russian goods. This behavior was regarded as fraud by the Eastern neighbor, and these amounts were later issued as a commodity loan.

Ukraine and international financial institutions

Since 1994, Ukraine has been looking closely at international credit organizations. To borrow money there, it was necessary to strictly observe financial discipline. Uncontrolled money emission from the end of 1994 ceases. To replenish the budget, the National Bank is developing a program for issuing government bonds within Ukraine. They featured short repayment periods and high interest rates.

Bonds in 1995 were sold for 300 million hryvnia, next year for 1.5 billion. Naturally, such a policy led to difficulties in servicing the public debt. In 1995, Russia writes off part of the debt in the amount of $1.1 billion and postpones the maturity of the remaining part to 1997, and makes a number of other concessions - in particular, it accepts payment for gas with government bonds.

The budget remained in deficit in 1997 as well. But it was not possible to attract the entire $1.145 billion abroad - international financial institutions were not satisfied with the pace of reforms being carried out in the country. The shortfall was covered in the usual way - by issuing high-yield bonds. The hour of reckoning came in 1999. The state was unable to pay the interest on the bonds and went to reconsiderpayment terms. Payment terms were pushed back and interest on debt obligations was reduced.

For the economy of Ukraine, 1999 was the most difficult year in its history. The devaluation of the hryvnia, record low GDP and default occurred this year. By January 1, 2000, the public debt amounted to $12.5 billion, or 60% of GDP. The increase in the payment period and the positive dynamics of prices in the metallurgy and chemical industry provided Ukraine with economic growth until 2008. During this period, borrowed funds were practically not attracted, and the total debt gradually decreased.

Ukraine: external debt during the 2008 crisis

The global crisis hit the Ukrainian economy hard. To overcome negative trends, a loan of $16.5 billion with a maturity of 15 years was agreed with the IMF. The gas conflict with Russia also dates back to this time, when the refusal to pay for the consumed gas forced Gazprom to cut off fuel supplies. The crisis continued into 2009.

On the chart showing Ukraine's external debt by years, it is easy to see the rise in these 2 years. If in 2007 it was $54 billion, by the beginning of 2010 it had already grown to $103 billion. As a result of the crisis, the ratio of Ukraine's external debt to GDP jumped sharply - from 55 to 85%.

From fall to fall

The recession of the economy stopped in 2012, in the 2nd quarter there was even some growth. In the next 2 years, there was a decrease in GDP by 1-2%. The economy was in precarious equilibrium, but the political turmoil of late 2013 and early 2014caused her to plummet.

The violent change of power in February 2014 led to unrest in eastern Ukraine. Russia has suspended the allocation of the 2nd tranche of a $15 billion loan agreed with the previous government. Ukraine, whose external debt to Gazprom has reached indecent proportions, has become forced to purchase gas on a prepaid basis. From that moment on, the opportunity to attract money from Russia was lost for Ukraine.

The new regime was in dire need of external support due to the secession of Crimea and the war in the Donbass, a region whose contribution to the country's GDP reached 20%. Ukraine, whose external debt had reached alarming proportions, could count on IMF assistance. Help was provided, but with a number of conditions.

Standard IMF requirements for countries that have fallen into a financial hole - reducing budget spending, raising tariffs for the population, strict financial discipline.

Forecasts and prospects

Economic problems and a decrease in gold and foreign exchange reserves caused the devaluation of the hryvnia by 3 times. Servicing foreign debt denominated in US dollars has become an overwhelming task. Ukraine's external debt, whose repayment schedule resembles a minefield, threatens to lead the country to default at any moment. So far, only more and more loans keep it afloat.