This past year will definitely be remembered as the most dramatic in the modern history of Ukraine.
Having started with the armed suppression of anti-government protests in the center of Kyiv, it
continued with Russian occupation of the Crimean peninsula and the invasion of Eastern Ukraine by
Russian troops. That is the price Ukraine is paying for the geopolitical stand-off with Russia.
Naturally social and political developments of this kind are extremely harmful for the economy and,
specifically, for international capital markets. We can only hope that this period of turbulence will
calm down (in light of Minsk Peace Protocols signed in September) in the not-so-distant future.
But for now, the circumstances Ukraine finds itself in have had an obvious negative impact on the
investment climate in the country. In terms of capital markets this year was not marked by any
significant private issues or offerings. In early spring certain Ukrainian companies still had some
lingering hopes for the recovery of the market but had to make a reality check and postpone their
Eurobonds and IPOs plans as the Donbas conflict grew more violent.
Hence, the last window of opportunity for Ukrainian companies was back in the spring of 2013, when
a number of Ukrainian private and state-owned issuers made successful placements. The list of
companies that succeeded at the time both includes agriculture companies such as MHP,
UkrLandFarming, and Mriya, banks such as PrivatBank, Oschadbank, and Ukreximbank, and
energy, transport & infrastructure companies such as DTEK, Ukrainian railways, and FESCO. The
total amount of funds attracted in the international capital markets at the time exceeded USD 3
billion. These days discounted bonds of those companies are hitting the year's low (in some cases
even touching historical lows), and expert forecasts are not optimistic.
Leaving aside the rumors of fraudulent actions that may have led to the problems of Mriya
Agroholding which resulted in their Eurobonds default, the other factors that affected the companies’
financial standing can be summarized as follows: (1) First, of course, the bad shape of the Ukrainian
economy and finances in general. The decrease of the international monetary reserves of the
Central Bank of Ukraine to a critically low level has resulted in a substantial depreciation of the
Ukrainian currency. Consequently, credit rating agencies downgraded Ukraine’s sovereign rating
several times during 2013-2014. (2) Second, the production facilities of many Ukrainian producers
are located on the territories now occupied by pro-Russian rebels and troops. Most of those facilities
are now abandoned, which unavoidably leads to a slash of corporate revenues. (3) Finally, Russia
has introduced a so-called ‘full import-substitution’ state policy and imposed an embargo on goods
originating from certain Western countries, including Ukraine. The Ukrainian economy – which
traditionally focused on the Russian market – is now forced to look for new markets, which requires
significant time and therefore leads to immediate losses. Ukrainian producers are very much reliant
on the EU-Ukraine Association Agreement finally signed by the newly-elected Ukrainian President.
Regardless of these negative signs, most private issuers keep assuring their investors that the
situation is under control and that restructuring can be avoided.
In fact, the capital markets remain closed for Ukrainian issuers, and they therefore have to look for
alternative sources of financing. As a majority of Western banks have significantly cut down or
completely zeroed their financing limits for Ukraine, most financing in 2014 was granted by
international financial organizations such as the EBRD and the European Investment Bank.
In this unfriendly environment some issuers are trying to restructure their debt obligation through the
extension of bond maturity. The first successful Eurobond restructuring in the banking sector of
Ukraine (implemented in August, 2014, by VAB Bank through a postponing of the maturity of a USD
88.3 million Eurobond until 2019) did not help, however, to restore the bank’s financial standing, and
temporary administration was appointed in November, 2014.
Public finances are not doing much better. The only USD 1 billion bond issue the Ukrainian
government made in 2014 was guaranteed by the USA. Meanwhile, prices for the bonds of the
Ukrainian issuers slump and show the highest yield on record. Although Ukrainian PM Arseniy
Yatsenyuk stated that Ukraine will not declare a default (unlike Argentina), experts keep debating a
potential restructuring of public debt. Whether or not restructuring occurs, the Argentinian experience
should be mentioned. The sovereign in that case failed to restructure, as some note holders refused
to accept the proffered deal. This non-consent by certain creditors prompted the International Capital
Markets Association to develop a new framework for sovereign debt contracts, aimed at dealing with
such situations. Apparently, this framework cannot be applied by Ukraine to the terms of the
outstanding bond issues, as they are missing relevant contractual provisions. Thus the restructuring
may not be worth initiating unless all investors are likely to consent on the deal.
However, as long as international aid is available for Ukraine, the risk of default on state debts
remains rather remote. The next tranche of USD 17 billion IMF financial aid is expected in the
beginning of 2015. Other achievements on the international stage (e.g., negotiating acceptable
terms of gas import and arranging for international financial assistance from other financial
organizations) rely on optimistic expectations.
Obviously, the overall picture is not very promising, but the economy may start recovering rapidly as
soon as Russia is pushed back in Eastern Ukraine, and the efforts of the international community
may result in localizing the conflict in a very limited area in the East, preventing further economic
turmoil in Ukraine as a whole. This could re-open the capital markets for Ukrainian companies as
soon as 2015.