After months of tense negotiations, Ukraine secured an agreement with its largest private creditors; the deal must still be approved by smaller creditors. The largest creditors accepted a 20% write-off on their sovereign bonds and a freeze on debt repayments for four years. Russia, which holds a USD 3 bn sovereign bond due in December this year, already announced that the country wouldn’t participate in the restructuring. The month of August was also marked by a surge of violence in Eastern Ukraine and the backing by Parliament of the first reading of the decentralisation bill. The bill provides for more autonomy to the eastern regions of Luhansk and Donetsk. It represents a key part of the Minsk deal signed in February. However, it isn’t supported by everybody in Kiev as shown by the protests outside Parliament during which one national guardsman was killed and more were injured. End August, Ukraine and pro-Russian separatists agreed to put to an end to all ceasefire violations as of 1 September 2015.

Impact on country risk

This sovereign bond restructuring is welcome as, when implemented, it will contribute, along with fiscal reforms, to restore fiscal sustainability. However, the big challenges facing Ukraine remain. On the political side, the biggest challenge is to find a long-lasting solution for the Eastern part of the country that is acceptable for all parties. After all, despite the recent agreement between Kiev and the pro-Russian separatists backed by France, Germany and Russia, tensions in Eastern Ukraine remain high. On the economic front, the economy remains fragile, real GDP is expected to contract by 9% this year compared to a decline of 6.8% in 2014. Inflation is also expected to remain very high (at 45% end 2015 compared to 25% end 2014). The current account deficit is likely to narrow thanks to lower imports rather than strong exports. The latter are impeded by Russian trade restrictions and low commodity prices. The banking sector remains very weak as highlighted by the number of banks which needed the intervention of the central bank. On the positive side, the IMF approved the disbursement of USD 1.7 bn in July 2015 (under the Extended Fund Facility agreement approved in March 2015) which would further boost the low level of foreign exchange reserves and hence allow for a gradual lifting of the heavy controls on foreign exchange operations. That being said, the liquidity situation in Ukraine remains alarming when comparing the short-term financial obligations of the country with its short-term resources. In this context, prospects to reopen cover for Ukraine remain meagre. Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com