Russia and its proxies may yet attempt to undermine the deal’s positive effects by escalating the fighting in east Ukraine

Good news on Ukraine has been sparse in the past year. But Kiev’s debt restructuring agreement with a private creditors’ committee is genuinely positive. Bondholders are to be commended for accepting a 20 per cent writedown on their principal — even if this is only half of what Kiev initially demanded. With changes to the coupon and maturity extensions, the agreement essentially meets objectives set by the IMF, reducing Ukraine’s debt repayments by $15.3bn over four years as part of an aid package worth $40bn.

There are caveats. Russia, which owns a $3bn bond maturing in December, signalled it would not participate in the restructuring. The agreement still needs to attract broad support from creditors outside the committee. The use of growth-linked warrants to compensate creditors if Ukraine’s economy later starts expanding could create a sizeable long-term liability.

But the deal preserves Ukraine’s ability to return to capital markets in the midterm. The debt moratorium Kiev had threatened — in effect, a default — is averted. Ukraine’s debt load is reduced, its solvency strengthened.

Russia and its proxies may yet attempt to undermine the deal’s positive effects by escalating the fighting in east Ukraine, which has already flared in recent weeks. But Moscow appears reluctant to embark on a big new offensive that would prompt tighter western sanctions on a Russian economy severely weakened by low oil prices and China’s slowdown.

Ukraine’s economy, meanwhile, though still in a critical condition, is showing the first, tentative, signs of stabilisation. The currency has stopped declining and inflation is moderating. The debt restructuring could therefore provide Kiev with a vital breathing space. It must utilise it to the full. As the IMF notes, Ukraine’s post-revolutionary government has made a stronger start to reforms than is widely appreciated. But most Ukrainians are yet to feel a tangible impact on their lives; as a result, government support is tumbling. The country is only at the beginning of a long-term effort to turn itself into a modern, prosperous, democratic and fully sovereign state.

The government must summon the political will to push through sweeping reforms of the judiciary, to stamp out corruption, curb the oligarchs and improve the business and investment climate. If Ukraine squanders this chance, as it did after the “Orange” revolution of 2004, it may not get another.

Yet Kiev will still need more foreign help to reach that goal. Now that private creditors have agreed to share the burden, the focus shifts back to international financial institutions and western capitals. The $25bn support committed to date — excluding the savings from debt restructuring — may seem large in comparison to Ukraine’s economic output, shrunken by recession and devaluation. But it is paltry compared with its real needs, and to the support given to the likes of Greece.

Though the economy has shrunk by more than forecast this year because of the simmering eastern conflict, the IMF has not changed its projection for Ukraine’s financing gap. Kiev may need billions more to close that hole and rebuild reserves to a healthy level. That is before it even begins to think about rebuilding costs after the conflict.

The west could never prevail in a military confrontation over Ukraine with Russia, which would always be prepared to go further. But it has financial firepower Moscow cannot match. If Kiev continues down the path of real change, western countries must be ready, collectively or bilaterally, to bring the full weight of those financial resources to bear in its support.

Copyright The Financial Times Limited 2019. All rights reserved.

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