Ukraine’s public debt management function has remained highly resilient throughout Russia’s war of aggression, but a number of risks and challenges remain. This chapter outlines the current fiscal context and describes the key features of Ukrainian public debt, and the domestic bond market. It maps the legal and institutional framework for public debt management, the strategies used for issuance and redemption, as well as key features of the primary and secondary markets. It then sets out the major refinancing, foreign exchange, interest rate, contingent liability, and sovereign-bank nexus risks, as well as challenges relating to issuance of domestic bonds, operational risk management, institutional capacity and cash management. Finally, it proposes priority areas where the OECD can assist Ukraine, to strengthen its public debt management function, and develop its domestic bond markets to support the country’s recovery.
Mapping Ukraine’s Financial Markets and Corporate Governance Framework for a Sustainable Recovery
Abstract
This chapter reviews the current policies and practices for public debt management in Ukraine. It begins with an outline of the impact of Russia’s full-scale invasion on Ukraine’s public finances and its public debt management; followed by an overview of the sources of funding for Ukraine’s budget deficit. It then goes on to identify the key features of Ukraine’s current public debt management function and the associated challenges; and concludes with some recommendations for consideration and further development. This chapter draws mainly on data available on the Ministry of Finance of Ukraine’s and the NBU’s websites, supplemented by available market data.
This chapter identifies the following key findings concerning public debt management in Ukraine:
Ukraine’s public debt management function has exhibited strong resilience to the various operational challenges of wartime conditions. Ukraine was able to borrow in the domestic market days after Russia’s invasion starting 24 February 2022, and has not cancelled or postponed any domestic debt operations since. However, significant challenges and constraints remain during wartime.
Ukraine’s debt-to-GDP ratio has surged since the start of the full-scale invasion, with a heightened risk of sovereign stress. It had fallen to 51% in 2021 but jumped above 90% in 2024 and is projected to peak at 108% in 2026. Restoring and maintaining debt sustainability is essential, to provide the fiscal space for reconstruction and promoting sustainable growth.
Public debt is now characterised by a relatively high share of foreign currency debt, increasing currency risk. Foreign currency debt accounted for 74% of the total as of end-September 2024, up from 60% at the end of 2021. Since February 2022, 76% of Ukraine’s financing has come from concessional loans and grants from international partners.
Refinancing risks remain high with large redemption peaks continuing into 2025 and 2026, while the maturity of domestic issuance remains relatively short. This is a consequence of the significant increase in the fiscal deficit required to finance Ukraine’s defence. While Ukraine has been gradually increasing the maturity of its domestic issuance since 24 February 2022, its longest ‘on the run’ bond still only has a maturity of 3.5 years.
The institutional set-up for debt and cash management is viable in the current context of martial Law but could be limited if Ukraine has to access more market based financing to support its recovery. Ukraine is limited in its ability to forecast future cashflows and has minimal access to liquidity management tools, reducing its fiscal flexibility.
There is limited liquidity in Ukraine’s domestic bond market, while ownership and risk are concentrated in the banking sector. A lack of institutional investors limits the amount of duration Ukraine can issue, while the reliance on the banking sector increases the risk of the sovereign-bank nexus.
Ukraine also faces significant operational risk, owing to the frequency of issuance and wartime conditions. Increased operational risk also exacerbates ‘key person’ risk, while being able to recruit and retain skilled staff is essential to build capacity in the debt management function.
Rapidly growing explicit and implicit contingent liabilities could have a substantial impact on public debt sustainability. From a public debt management perspective, it is important to strengthen the institutional and legal infrastructure for public guarantee provision.
4.2.1. Fiscal developments
Ukraine’s economy and public finances have been severely impacted by the war. Prior to February 2022, Ukraine had achieved a significant reduction in its debt burden, which had fallen from 79% of GDP in 2015 to 51% of GDP in 2021 (Figure 4.1 panel A). Following the government’s fiscal consolidation efforts, Ukraine had managed to reduce its fiscal deficit down to an average of 2% of GDP between 2015 and 2019 before the outbreak of the COVID-19 pandemic and had got it back to 4% in 2021 (panel B). However, the shock to the economy and the tax base, coupled with increasing defence and security spending, have significantly undermined Ukraine’s fiscal position. Despite the government's efforts to contain spending beyond defence and social transfers, the general government deficit reached a high of nearly 20% of GDP in 2023, following a 16% deficit in 2022.
Note: Debt refers to the general government gross debt, and the fiscal deficit encompasses the general government. Fiscal deficit figures include foreign grants. The ‘p’ in the X axis refers to projected fiscal aggregates from 2025 onwards.
Source: IMF World Economic Outlook Database.
The government has largely restored the taxation regime in place prior to the full-scale invasion based on the recently agreed IMF programme (IMF, 2024[1]), but revenues have been compressed by the loss of economic activity, while spending pressures, especially from defence-related items, remain exceptionally high. As a result, Ukraine’s fiscal deficit stabilised around 19% of GDP in 2024 and is projected to remain near this level in 2025. Assuming security risks and associated military spending subside, the deficit could decline to around 5% of GDP on average over 2026-28, which would stabilise Ukraine’s debt-to-GDP ratio. These deficits will be caused by only partial economic recovery, high reconstruction spending, and the need to support some state-owned enterprises (SOEs), including in the energy sector.
4.2.2. Sources of financing
Since the start of the full-scale invasion, Ukraine’s financial position has been and remains strongly supported by international partners through grants and concessional funding. Foreign grants and concessional loans covered 72% of Ukraine's financing needs in 2024. The international community has committed USD 122 billion to Ukraine for the period between 2023 and 2027 (IMF, 2024[1]), including assistance from donor countries and international financial institutions (IFIs). Ukraine received USD 42 billion of foreign aid in 2024, close to the USD 43 billion figure in 2023, primarily in the form of long-term concessional loans, but also in grants. Both years marked an increase from the USD 32 billion in foreign aid received in 2022 (Ministry of Finance of Ukraine, 2024[2]). An important catalyst for this support is the expectation that Ukraine will comply with the conditions of the USD 15.6 billion, four-year Extended Fund Facility (EFF) arrangement with the IMF, concluded in March 2023 (IMF, 2023[3]).
Following Russia’s full-scale invasion, the issuance of domestic bonds had declined significantly as a source of funding, but increased in 2024. Last year, domestic bonds were the second largest source of funding, totalling around USD 16 billion, or 30% of total financing, up from 27% in 2023 (Figure 4.2 panel A). Since February 2022, domestic bond issuance had been the third largest source of funding overall, but climbed to second in 2024, and by the end of the year accounted for around USD 36.3 billion gross, or 24% of financing overall during this period (panel B). Marketable securities now account for the second largest share of Ukraine’s outstanding state debt (40%), having been overtaken in 2023 by concessional loans, which now account for 58% (panel C).1
Note: Panels A and B are as of 31/12/2024. Domestic bonds are recorded at nominal value; Both concessional loans and grants are included in Panel B; Concessional loans are defined here as loans with a combination of lower-than-market interest rates, grace periods and/or long-term maturities (the definition retained here is broader than the IMF definition, based on a minimum of 35% grant element using a 5% discount rate).
Source: Ministry of Finance of Ukraine, and National Bank of Ukraine.
The change in the debt composition is a result of concessional funding and grants covering most of Ukraine’s borrowing needs since 24 February 2022 (around 76% as of 31 December 2024). Ukraine’s stated aim moving forward is to increase its share of market-based financing. For comparison, marketable securities constituted, on average 80% of outstanding debt in Ukraine’s EU-linked peers in 2023.2
4.2.3. Composition of Ukraine’s debt
Ukraine had made progress towards maintaining a higher share of domestic debt in the years directly preceding Russia’s full-scale invasion. The share of domestic debt averaged above 45% between 2019 and 2021 (Figure 4.3 panel A). However, following the full-scale invasion and the heightened reliance on concessional financing, domestic debt fell to a share of 31% of the total outstanding in 2023 and to 28% by end-September 2024. For comparison, Ukraine’s EU-linked peers had, on average, a domestic share of debt of 57% in 2023.3
As a result of Ukraine’s reliance on external funding sources, which to a lesser extent also predates the full-scale invasion, state debt, from hereon referred to as public debt4 or simply debt, is largely denominated in foreign currency. This accounted for 74% of the total as of end-September 2024 (Figure 4.3 panel B). The high share of foreign currency debt creates significant foreign exchange risk, not just from fluctuations in the hryvnia’s (UAH) exchange rate but also in case of large-scale currency mismatches in the financial and public sector. For comparison, debt denominated in foreign currency accounted for on average 21% of total debt in Ukraine’s EU linked peers in 2023. It should be noted though that this group includes several members of the euro area, for which debt denominated in euros, including financing provided by EU institutions or bilaterally from euro area countries prior to that country becoming a member of the euro area itself, is considered local currency debt.
The share of Ukraine’s EUR-denominated debt has more than doubled from 14% at the end of 2021 to 36% as of end-September 2024 (Figure 4.3 panel B). This is largely attributable to a significant increase in the EU’s Macro-Financial Assistance (European Commission, 2022[4]). The third largest category comprises USD-denominated debt (23%), which also includes Ukraine’s USD denominated Eurobond series. Special drawings rights (SDR) denominated debt raised as part of financing within the IMF programmes represents 11% of Ukraine’s debt.5 By design, this provides something of a natural hedge against foreign exchange risk. Domestic debt denominated in foreign currency (which accounts for circa 10% of domestic debt and 3% of total debt) explains the discrepancy between the share of total foreign currency denominated debt and share of external debt.
Progress towards EU accession, with a longer term pathway to joining the euro area should over time reduce euro denominated foreign exchange risk and volatility. Foreign exchange risk in marketable dollar debt is therefore likely to be the biggest challenge, although concessional loans are always negotiable, particularly in extreme scenarios.
Foreign exchange volatility can be significantly higher than interest rate volatility. Value-at-risk (VAR) calculations with stress scenarios that test the impacts of certain market moves (in the UAH/USD or UAH/EUR currency pairings for example) on future repayment schedules will be required to try to determine the level of this risk, and potential fiscal impacts.
Note: Based on outstanding debt as of end-September 2024.
Source: Ministry of Finance of Ukraine.
One of the main objectives of Ukraine’s Medium-Term State Debt Management Strategy is to contain refinancing risk (Ministry of Finance of Ukraine, 2023[5]).6 Refinancing risk includes interest rate exposure arising when debt is rolled over, with an increase in risk if redemptions are concentrated in specific years, as well as liquidity and execution risks arising from sizeable redemption payments, particularly if these occur in the near term. For example, Ukraine had, as of 31 December 2024, 79 local currency bonds maturing in the next three and a half years.
Two approaches that borrowers can take to help mitigate refinancing risk is to lengthen the average maturity of their debt portfolio by issuing more at longer maturities to spread out future redemptions, and to increase the percentage of fixed-rate instruments in their portfolio (OECD, 2024[6]). Refinancing risk can also be alleviated in part by diversifying funding in different marketable instruments, amongst different investor types and geographic areas, and also through the use of operations such as switches and buybacks (OECD, 2024[7]).
Although the largest share of Ukraine’s public debt is made up of instruments maturing in more than 10 years at 47% (Figure 4.4 panel A), this is largely a result of the composition of Ukraine’s external debt, more than 50% of which has a maturity greater than 10 years. Conversely, the share of domestic debt which matures in more than 10 years is 38%. Consequently, the weighted average term to maturity of Ukraine’s total debt is 9.5 years, (panel B), while domestic and external debt mature on average in 8.4 and 10.1 years, respectively. 7
The weighted average term to maturity of Ukraine’s external debt moved from 6.3 years in 2021 to 10.1 years in 2024. As much of this lengthening of the external debt was due to the provision of long-term concessional loans, Ukraine has relied on this funding source not only to meet most of its funding requirements but also to access more term and help to mitigate refinancing risk.
70% of Ukraine’s public debt portfolio is comprised of fixed-rate debt instruments (panel C). In this respect, Ukraine’s portfolio is comparable to that of its EU-linked peers, where the average share of fixed-rate debt was 76% in 2023. Ukraine's public debt with variable interest rates is mostly tied to the IMF’s SDR interest rate, the NBU’s key policy rate for domestic bonds, the Secured Overnight Financing Rate (SOFR), which primarily represents debt owed to the World Bank, and Euribor. Specifically, instruments linked to the SDR interest rate and SOFR respectively make up 11% and 8% of total debt, while those instruments where repayments are tied to the NBU key policy rate and Euribor respectively make up 5% and 4%. Therefore, Ukraine’s debt interest payments are sensitive to interest rate movements in both the Euro area and the United States (Ministry of Finance of Ukraine, 2023[5]).
Note: As of September 2024.
Source: Ministry of Finance of Ukraine.
However, the refinancing profile does not fully convey the true interest rate risk in Ukraine’s debt portfolio. The average time to re-fix interest rates for Ukraine’s debt stands at a much shorter 5.4 years (Table 4.1). This discrepancy between the time to re-fix and the maturity can be explained by the structure of much of the external concessional financing Ukraine has received since the full-scale invasion began, and the status of its Eurobond series since the original moratorium was agreed.8 The average time to re-fix is higher for external debt (8.9 years) compared to domestic debt (3.2 years), due to a larger share of long-term (maturing in more than 10 years’ time) external debt with fixed rates.
Source: Ministry of Finance, Ukraine.
The proportion of Ukraine’s debt with interest rates that was re-fixed in 2024 was 44.4%. Interest rates were re-fixed on 52.6% of domestic debt and 31.6% of external debt. Ukraine’s stated aim is to enhance the interest rate structure of its external debt, i.e. to have a limited share of external debt which is due to be re-fixed in the near-term, thus limiting the interest rate risk. With regard to the domestic market, the government had expected interest rates to decrease as inflation was forecast to fall in the medium term; thus, it was anticipated that much of the domestic debt will be re-fixed at lower rates (Ministry of Finance of Ukraine, 2023[5]).
While lower inflation and policy rates had begun to materialise in the first half of 2024, progress in lowering inflation began to stall in the second half of 2024 (Figure 4.9 panel C). Indeed, inflation is forecast to reaccelerate in 2025, with the NBU enacting its first rate hike in December 2024 since June 2022 (Figure 4.9 panel B). This demonstrates why best practice is to conduct debt management without trying to be opportunistic regarding the future path for interest rates. Ukraine has been gradually extending the maturity of its fixed rate domestic issuance since 24 February 2022 and should look to continue doing so in order to increase the average time to re-fixing of its domestic debt.9
In addition to considerations around refinancing and interest rate risk, having a greater percentage of fixed debt servicing costs can help to forecast and manage cash flows more accurately and effectively. Part of this could be switching NBU floating rate bonds with fixed rate bonds. Another possibility to help fix costs is to use derivatives to hedge out SDR, Euribor and SOFR risk, perhaps with the support of an IFI.
4.2.4. Debt service and redemption profile
Despite notable progress in terms of the maturity profile, and the relatively high percentage of fixed-rate instruments, Ukraine’s redemption and debt servicing profile is frontloaded with large peaks continuing into 2025 and 2026 (Figure 4.5 panel A). This is a consequence of the significant increase in the fiscal deficit required to finance Ukraine’s defence, and the shortening of the profile of domestic bond issuance. Redemption and interest payments combined (henceforth referred to as debt service) are projected to peak at more than 13% of GDP in 2024 and 2025, before falling slightly to around 12% in 2026. This figure averaged around 5% between 2015 and 2019 and had fallen below 4% in 2021.
These debt service peaks will likely need to be smoothed by obtaining further long-term concessional financing or through liability management operations such as switches and buybacks.10 Liability management operations consist of the proactive refinancing of selected debt liabilities (domestic or external) prior to their final maturity date, to smooth the redemption profile, reduce refinancing risk or the debt service cost, and/or extend the weighted average maturity. Ukraine has conducted such operations previously, in 2017 and 2020.11 Such opportunities may, however, be limited in the current context, which leaves long-term concessional financing as the country’s main option.
Another possibility for consideration is the use of switch auctions. Here bonds which are close to maturity are exchanged for ‘on the run’ issues. These are non-cash transactions which decrease the nominal amount outstanding, and therefore the amount to be redeemed at maturity in the ‘off the run’ bond. On 13 September 2024 the Ukrainian government passed a resolution that will allow the Ministry of Finance to carry out switch auctions (Ministry of Finance of Ukraine, 2024[8]), which will enable Ukraine to build up individual bond lines to greater size, supporting liquidity, whilst managing the redemption risk.
Besides the near-term redemption profile, another factor affecting Ukraine’s debt servicing is the increased cost of borrowing domestically. The weighted average interest cost on Ukraine’s debt was 7.3% in 2023, substantially higher than its EU-linked peers, where it was 2.5% on average. The figure for Ukraine comprises an average interest cost on external debt of 3.6%, which is lower compared to before Russia’s full-scale invasion (4.5% in 2021), and a substantially higher average interest cost on domestic debt at 14.0% compared to 10% in 2021 (Figure 4.5 panel B). This jump is primarily the result of the NBU’s effort to contain higher inflation levels by lifting interest rates to 25% following the full-scale invasion, and keeping them above pre-February 2022 levels since.
Despite the ongoing war and the current global monetary tightening cycle, Ukraine’s total cost of debt was only 0.1 ppts higher in 2023 compared to before the full-scale invasion. This dynamic is driven by the substantial disbursement of external concessional loans with lower-than-market interest rates (circa 2.0% on average) since the beginning of the full-scale invasion (Ministry of Finance of Ukraine, 2023[5]). This demonstrates that Ukraine is also reliant on concessional financing to keep the cost of servicing its debt manageable.
Note: Debt payments refer to both interest repayments and redemptions. Projections are based on debt obligations as of end-2024; It reflects the capitalisation as of September 2024 in the principal of coupon amounts deferred as part of the August 2022 debt management transaction. It also reflects the fact that official creditors have agreed to a standstill (i.e. deferral of all principal and interest payments) over the IMF programme period (2023-27).
Source: Ministry of Finance, Ukraine, and IMF.
4.2.5. Debt restructuring
The economic and fiscal fallout of the war forced Ukraine into a debt freeze on its Eurobonds to avoid a sovereign default. Among official creditors, the Group of Creditors of Ukraine12 agreed on a two-step approach to debt restructuring as part of the EFF approval in March 2023. First, the temporary standstill decided in July 2022 was extended for the duration of the IMF programme (until March 2027).13 Second, they committed to an additional debt treatment to restore Ukraine’s debt sustainability before the final review under the IMF programme.
In August 2024, Ukraine reached a further agreement with its private creditors to restructure these outstanding Eurobonds. This involved investors holding over 97% of the country’s Eurobonds swapping their previous holdings for new securities (Figure 4.6 panel A). This acceptance rate activated collective action clauses (CACs) which brought all the country’s Eurobonds into the restructuring. The restructuring of the state-run road operator Ukravtodor’s guaranteed Eurobonds was also approved by creditors as part of this process.
Ukraine’s ‘new’ Eurobonds began trading on Monday 2 September 2024 (Figure 4.6 panel B). They are ‘step-up’ notes, with coupons rising in stages from 2025 to 2033, and include two notes for which the principal repayment is linked to Ukraine’s GDP performance between now and 2028 relative to IMF projections.14 This restructuring allows for an upfront nominal haircut of 37% (Figure 4.6 panel C) reducing Ukraine’s debt stock by more than USD 8.5 billion, a reduction in debt service payments by approximately USD 11.4 billion over the course of the EFF arrangement through 2027 (an over 90% reduction) and by approximately USD 22.75 billion until 2033 (an over 75% reduction), and an extension of the weighted average maturity of Eurobonds by close to four years, on top of the two-year extension granted in 2022.
Both the IMF and the bilateral creditors backing the deal agreed on bondholders receiving interest payments starting as soon as 2025, while the country will still be receiving disbursements from the IMF loan as part of the EFF arrangement which stipulated that it should restructure its debt with private creditors.
The government also needs to renegotiate its debt with holders of USD 2.6 billion of GDP warrants, which have disbursements linked to economic performance, providing creditors with payments if GDP expansion exceeds certain levels. These were created during Ukraine’s debt restructuring in 2015 in the wake of Russia's illegal annexation of Crimea as a ‘sweetener’ to creditors. Ukraine made a payment of about USD 200 million to holders of its GDP warrants on 1 August 2024. In their current form, the warrants could cost Ukraine tens of billions of dollars in the coming decade if the country's economy rebounds strongly. Ukraine also needs to deal with the warrants as part of its agreement with international backers.
Ukraine’s GDP warrants were included as part of the 2015 restructuring that required investors to write off 20% of the original value of their holdings. They pay no regular interest or principal, but kick in once Ukraine's nominal GDP exceeds USD 125.4 billion and the annual growth rate exceeds 3%. Until 2025 their annual payouts cannot exceed 0.5% of GDP but after that, until the current expiry date in 2041, there is no upper limit. For example, based on the current formula, should the economy expand by 4% or more, the cost could plausibly run into the tens of billions of USD between now and 2041, as IFIs expect Ukraine's growth rate to accelerate to around 6% in 2025, and to remain strong for years after a larger rebuilding effort starts.
The Ukrainian government has the right to buy back the warrants by exercising a 'call' option. This option is available until August 2027, but it would require Ukraine to pay back the warrant holders in full (USD 2.6 billion). Ukraine could also offer to replace the warrants with a less burdensome and more predictable alternative like a conventional bond, albeit there would have to be some strong incentives for the warrant holders to accept the switch.
Meanwhile, ratings agency S&P Global affirmed Ukraine's foreign currency credit rating at "selective" default and affirmed its 'CCC+/C' rating and stable outlook for Ukraine's currency following the announcement of the restructuring deal. Ukraine’s Eurobonds had been trading at around 30 cents on the dollar, deeply distressed levels, and had been around these levels since the spring of 2022 when Ukraine’s credit rating was downgraded to default or near default by all the major credit ratings agencies. Though the ‘new’ Eurobonds are still in distressed territory, they have traded up from around 40 to nearly 50 cents on the dollar since the restructuring.
Note: Ukraine’s two new zero-coupon Eurobonds maturing in January 2035 and January 2036 are GDP-linked; The weighted average price in panel B is weighted by the nominal amounts outstanding separately for the old USD and EUR bonds.
Source: Ministry of Finance of Ukraine and Bloomberg.
4.2.6. Ukraine’s domestic bond market
To help fund its defence efforts, the Ukrainian government has reinforced its domestic debt market. Ukraine has been issuing shorter maturity ‘wartime bonds’ regularly since 24 February 2022 in the domestic market to ensure an uninterrupted source of financing for the state’s needs under martial law. The government has committed to using the proceeds from these primarily to support military efforts, such as purchasing weapons, ammunition, equipment, food, and medicine. In practice however, the proceeds all flow into the Treasury Single Account (TSA) and are fully fungible with the proceeds from central government taxation, concessional loans and grants, and any other forms of revenue.
Wartime bonds are denominated in UAH and may be purchased by both residents and non-residents, as well as institutional and individual investors. As of 31 December 2024, the issuance of wartime bonds had attracted around USD 36.3 billion to the state budget since February 2022. UAH-bonds can currently be bought at a range of maturities between approximately 1 and 3.5 years (Ministry of Finance of Ukraine, 2024[9]).
In total, they were approximately USD 42 billion of domestic government bonds outstanding at the end of 2024, of which the share held by domestic banks was 46.6%, the NBU 38.5%, domestic non-banks 13.7%, and foreign entities 1.3%.15 Amongst Ukraine’s EU-linked peers average domestic bond ownership was 34% for domestic banks, 34% for foreign entities, 28% for domestic non-banks and 4% for the central bank in 2023 (Figure 4.7 panel A). Ownership is more evenly distributed amongst non-central bank participants amongst Ukraine’s EU-linked peers, with much larger holdings by foreign entities and the domestic non-bank sector, while Ukraine has a substantial share of its debt held by the central bank. To move towards more market-based financing, Ukraine will need to increase participation in its bond market from these two investor groups.
The composition of Ukrainian public debt has changed significantly since the start of the war (Figure 4.7 panel B). Domestic government bonds accounted for most of the net funding in 2019 and 2021; but since 2022, Ukraine’s net funding requirements have mostly been met by concessional loans. In 2022, net bond issuance was negative in both domestic and external markets. This reflects the relative difficulty Ukraine experienced in accessing the market following the onset of the full-scale invasion and its reliance on other funding sources. However, access to domestic markets has improved (Box 4.1), and bond issuance began generating net funding in the spring of 2023 (with new issuance levels surpassing total redemptions and buybacks) for the first time since the full-scale invasion began. By way of comparison, in 2019 domestic bond issuance was the only source that made a positive net contribution to funding.
At the end of 2022, the NBU, and the Government of Ukraine, in cooperation with the IMF, developed a set of measures to increase borrowing in the primary market for domestic government bonds.
In particular, in 2023, the NBU allowed banks to cover up to 50% of their total required reserves with benchmark domestic government bonds from the list set by the NBU, with this list gradually expanding. In addition, the NBU allowed non-residents to transfer abroad funds received from the payment of interest on domestic government bonds after April 1, 2023 (lifting one of the original restrictions as part of the martial law that was implemented on 24 February 2022), and in May 2023 it established a requirement for a minimum continuous holding period of domestic government bonds until interest is received.
For its part, the government keeps interest rates on government bonds at the market level. The concerted actions of the NBU and the government made it possible to intensify the domestic debt market, which is important for ensuring macro financial stability. This can also be a safeguard against a return to monetary financing of the budget deficit, and also an important step to improve the maturity of funds in the banking system and minimise risks to the foreign exchange market and price stability (NBU, 2023[10]).
Note: Panel A is as 5 November 2024.
Source: Ministry of Finance of Ukraine.
Ukraine has previously issued zero-coupon short-term securities (T-bills) at 3-, 6-, 9- and 12-month maturities and has outstanding domestic bonds (both fixed coupon and inflation-linked) with maturity dates out as far as 2052 (although it hadn’t issued anything longer than 7 years since 2020). The issuance of long-term bonds (which Ukraine defines as having maturities of greater than 5 years) accounted for nearly 62% of the net financing from bond issuance in 2019, with medium-term bonds accounting for the remaining 38% (Table 4.2). This shows that Ukraine was able to access more term liquidity in the years prior to the full-scale invasion.
However, since 24 February 2022, the maturity of issuance has been reduced, initially to less than 12 months, although the current longest ‘on the run’ bond has a residual maturity of 3.5 years. To illustrate this further, in 2023, short-term issuance contributed to nearly one-third of net financing from bond issuance, while long-term issuance did not contribute to the country’s funding; there was zero issuance, and some small amounts of long-term bonds were bought back or redeemed early.
Source: Ministry of Finance, Ukraine.
The decision to purposefully and significantly reduce the maturity of issuance was made at the request of the Primary Dealers, as the ongoing war and inflation trajectories make the pricing of longer-term bonds more difficult. Ukraine has been incrementally increasing the maturity of issuance though, up from less than 12 months in the initial aftermath of the full-scale invasion, to between 1 and 3.5 years in 2024.
4.2.7. Procedures for auctions
The placement of domestic bonds is carried out primarily through auctions conducted by the Ministry of Finance of Ukraine (Figure 4.8). Only Primary Dealers can participate directly in auctions. Primary Dealers meet certain conditions and assume certain obligations and privileges under a bilateral co-operation agreement with the Ministry of Finance. As part of this they agree to provide bilateral quotations for government bonds and purchase domestic government bonds at their initial placement, while the Ministry of Finance provides dealers with the exclusive right to purchase government bonds at the moment of their issuance on the primary market. Investors can address Primary Dealers to purchase domestic government bonds on their behalf.
The issuance of bonds comes in the following forms:
initial placement of bonds
auction sale of existing bonds
Domestic government bonds are distributed through primary placements and reopenings. New bonds, which have not yet been in circulation under the terms of the issue and the volume of rights granted to their owners, are distributed through primary placement. Domestic government bonds that in accordance with the terms of their issue correspond with bonds currently in circulation by maturity, size of coupon payments, if any, and volume of rights granted to their owners, are distributed through reopenings.
The redemption of domestic government bonds and the payment of coupons are executed on the terms provided during their initial placement. Government bonds are tradeable on the secondary market.
Auctions are held every Tuesday and typically consist of three or more different lines. Individual lines are placed and reopened in consecutive weeks until they reach an outstanding size of between approximately USD 500 million and 1 billion, with the placement of a new bond with a similar maturity following thereafter.
Monthly and quarterly auction calendars are provided in advance following the results of the demand assessment, which is done in consultation with the Primary Dealers. The final list of domestic bonds to be placed can be adjusted when announcing auctions, and the size of the individual operations is announced in advance, with the instrument’s volume of placement limited to achieve the targeted auction size. Auctions are conducted via Bloomberg’s Auction System (BAS), and the results are announced shortly after they close on the Ministry of Finance's website. The settlement for government bonds is T+1 (the day of execution + 1 trading day) (Ministry of Finance of Ukraine, 2024[11]).
Source: Ministry of Finance, Ukraine.
Bonds can be purchased via Primary Dealers and via active licensed brokers. Other ways to access the Ukrainian domestic government bond market include:
opening an individual securities account with a local custodian
buying eligible securities through ClearStream16
buying relevant Global Depositary Notes (GDNs) or Credit-linked Note (CLNs) which are clearable in Euroclear / ClearStream
using the securities account of a nominee holder opened at a Ukrainian depository institution
via mobile application (Box 4.2)
While wartime bonds can attract retail (household) investors for reasons of patriotism, easy access to government bonds is also important for this group, in particular for diaspora looking to invest in their home countries. In Ukraine, accessing government bonds used to be complicated and expensive for retail investors. There has been a push to change this since 24 February 2022, through measures such as the launch of mobile applications and other web-based solutions, and also the removal of commissions and minimum purchase thresholds.
Diia is an E-governance platform that was first launched in October 2022 with the goal of making 100% of Ukrainian public services available online (Ministry of Digital Transformation of Ukraine, 2022[12]). There are now more than 20 million users in Ukraine, accessing over 70 government services via the portal and 14 digital documents (including ID card and vehicle insurance policies) via the mobile application. Users can purchase and sell Ukrainian government bonds through the Diia mobile application in just two clicks.
Holdings by retail investors almost tripled from around USD 622 million in February 2022 to around USD 1.7 billion by October 2024. Retail investors now account for nearly 4% of Ukraine’s outstanding domestic government bonds.
4.2.8. Primary Dealers
Ukraine currently has 11 Primary Dealers, which is in line with its EU-linked peers (Table 4.3).17 These include the five state-owned Ukrainian banks that dominate the domestic banking sector, accounting for more than half of total bank assets in Ukraine. To become a Primary Dealer, a bank must meet all the following minimum criteria before they can apply:
have working share capital equivalent to EUR 10 million or more
have a current license to conduct professional activity on the Ukrainian stock exchange
have a total volume of trading in Ukrainian domestic government bonds of UAH 1 billion or more
The evaluation of banks that apply is carried out by the Commission on Selection and Evaluation of Primary Dealers.
Source: OECD WPDM Primary Survey 2024.
Primary Dealers are ranked each year based on their performance against the obligations, which are specified in the contract they enter with the Ministry of Finance, if their application is successful. These obligations and privileges include:
to participate in the placement of bonds by submitting competitive and non-competitive bids at auctions
to purchase at least 3% of the total volume of bonds issued over half of the year
to serve as a market-maker for domestic government bonds and to maintain liquidity in the domestic government bond market through the purchase and sale of the bonds in the amount of at least 3% of the total turnover over half of the year
to provide advice to the Ministry of Finance regarding the need for placement of certain bonds and their volumes, maturities and the calendar of issuance based on their market assessment.
The Primary Dealer rankings are published on The Ministry of Finance’s website.
4.2.9. The legal and institutional set up for public debt management
Responsibility for public debt management
The Ministry of Finance of Ukraine, in accordance with the Resolution of the Cabinet of Ministers of Ukraine (2001[13]), holds placement of domestic government bonds in the form of auctions. The NBU performs public debt service operations related to the placement of domestic government bonds: their redemption and debt-service payments, as well as depositary activities including maintaining their centralised record-keeping in book-entry form.
According to its mandate, the Ministry of Finance of Ukraine performs the following activities:
develops and publishes indicative calendars for the placement of domestic government bonds
defines the timing for and amount of bonds to be placed (an issuance calendar, as well as adjustments to it, are published on the official website of the Ministry of Finance)
determines the forms and ways of placement of domestic government bonds, sets the maturity of domestic government bonds as well as the maturity and coupon payment dates
conducts auctions using the BAS
establishes the marginal level of the yield of domestic government bonds, according to which bidders' applications are filled
publishes information on the results of auctions and the placement of domestic government bonds.
Legal basis for borrowing
The placement of domestic government bonds is based on the current financing needs of the State Budget of Ukraine. Borrowing is carried out to cover the budget deficit and to refinance outstanding state debt. The right to carry out borrowing within the limits set out by the Budget Law of Ukraine belongs to the state represented by the Minister of Finance of Ukraine on behalf of the Cabinet of Ministers of Ukraine. The Cabinet of Ministers of Ukraine defines the underlying terms and conditions for borrowing, including the basic terms of the loan agreements and the basic conditions of issuance and the procedure for placing government bonds.
Loans from foreign states, banks, and IFIs for the implementation of investment projects are attracted by the state based on international agreements and are reflected as external state borrowing (external debt).
Servicing of the debt comes from the budget under the loan agreements and respective legal acts, regardless of the amount of funding set forth for such purpose by the law on the State Budget of Ukraine.
The Ministry of Finance of Ukraine is responsible for the management of public debt within the limits of the powers determined by legislation. For the purposes of the effective management of public debt and/or liquidity of the TSA, the Minister of Finance of Ukraine on behalf of Ukraine is entitled to execute transactions in public debt, including exchange, issuance, purchase, repayment, and sale of government debt, subject to compliance with the limit of state debt at the end of the budget period.
4.2.10. Contingent liabilities
According to the Budget Code of Ukraine, state-guaranteed debt is the total amount of liabilities of Ukrainian resident business entities on outstanding loans guaranteed by the state. Such guarantees are the most common form of contingent liability, which may also include the liabilities of SOEs, public private partnerships (PPPs), and subnational debt. Contingent liabilities are major sources of fiscal risks due to the uncertain financial commitments they involve. Their effective management, therefore, is essential for increasing stability and predictability in public finance.
From a sovereign debt management perspective, effective management of fiscal risks arising from contingent liabilities has long been a concern because realisation of these risks has direct consequences on governments’ fiscal positions and thereby public debt managers’ debt and cash management policies and operations (OECD, 2017[14]).
One of the Quantitative Performance Criteria (QPC) established by the EFF with the IMF puts a ceiling on the level of state guarantees Ukraine could commit to in 2024 of UAH 47.9 billion (or 3% of yearly revenues, consistent with Ukraine’s Budget Code) (IMF, 2024[15]). It also commits Ukraine to strengthen the link between the fiscal risks assessment and the predictability of government spending, and to develop methodological guidance for assessing fiscal risks in key spending areas and contingent liabilities, including PPPs, state guarantees, and SOEs. By integrating these assessments more robustly into the early stages of the budget cycle, fiscal risk analyses can better inform budgetary and fiscal decisions.
Ukraine has also committed to retaining adequate space against this ceiling to facilitate guarantees on loans from IFIs and foreign governments for projects, including those for recovery and reconstruction. Meanwhile the ceiling will be subject to an automatic upward adjustor for guarantees signed for selected projects financed by the multilateral and bilateral donors (e.g., The World Bank, European Investment Bank, the EBRD and the KfW).
To ensure the full or partial fulfilment of debt obligations of Ukrainian resident business entities, state guarantees may be provided by a decision of the Cabinet of Ministers of Ukraine or based on international agreements solely within the limits and by the directions specified in the State Budget Law of Ukraine. Upon the decision of the Cabinet of Ministers of Ukraine, the relevant deeds on its decisions are made by the Minister of Finance of Ukraine. State guarantees are provided on the terms of payment, maturity, and property security in a manner prescribed by law. State guarantees are not provided to secure debt obligations of economic entities if the direct source of repayment of loans is foreseen by the state budget (except for the debt obligations arising from loans provided by IFIs).
Payments related to the performance of state guarantees in the guaranteed event are carried out in accordance with the relevant agreements, regardless of the amount of funding determined for this purpose in the State Budget Law of Ukraine and are reflected as a credit from the budget to the economic entities with guaranteed liabilities. State and state-guaranteed debt do not include subnational debt and the debts of SOEs, but these are tracked as contingent liabilities.
In 2023, state guaranteed debt stood at USD 9.2 billion compared to USD 11.3 billion as of the end of 2021.18 The decrease was primarily driven by the repayment of the IMF’s loans (USD 2.7 billion decrease) by the NBU. At the same time, other categories, such as loans from IFIs and domestic banks, witnessed a USD 0.5 billion increase (Ministry of Finance of Ukraine, 2023[5]).
4.2.11. Calculation and classification of debt
The amount of public debt and state-guaranteed debt are calculated in a monetary form as the outstanding nominal amount of debt liabilities. Data on state and state-guaranteed debt is determined in UAH and USD at the official exchange rate of the NBU on the last day of the reporting period and includes transactions dated that day. Table 4.4 shows the different classifications of public debt and and state guaranteed debt.
According to the Budget Code of Ukraine, the total amount of public debt and state-guaranteed debt at the end of the budget period cannot exceed 60% of the annual nominal GDP of Ukraine.19 This provision does not apply in the cases of the introduction of a martial law, a state of emergency or carrying out an anti-terrorist operation on the territory of Ukraine. Therefore, this provision does not currently apply.20
Source: Ministry of Finance of Ukraine.
4.2.12. Subnational borrowing
According to the Budget Code of Ukraine, The Verkhovna Rada of the Autonomous Republic of Crimea, regional, city, village, and rural councils have the right to carry out local internal borrowings (except for cases provided in Article 73 of this Code) and local external borrowings.
Local borrowings are made to finance:
the development budget
for the creation, increase, or renewal of strategic long-term use objects or objects that ensure the implementation of tasks of the relevant councils, aimed at meeting the needs of the population, and
for fulfilling debt obligations to repay loans (borrowings) obtained and not repaid from previous periods, in order to ensure efficient management of local debt
during the period of martial law in Ukraine, current expenditures of local budgets and to provide financial support to communal enterprises for repaying credits taken from IFIs in previous periods under local guarantees, if such a purpose is provided in the terms of the credit agreements with the relevant IFI(s).
Local guarantees may be provided by the decision of the relevant councils to ensure full or partial fulfilment of the debt obligations of business entities-residents of Ukraine that belong to the communal sector of the economy, are located within the corresponding territory and implement investment projects in that territory aimed at developing municipal infrastructure or introducing resource-saving technologies, and/or repay received and outstanding loans (borrowings) whose debt obligations were secured by local guarantees in previous periods, with the aim of effectively managing the debt.
Business entities for which a decision is made to provide loans under local guarantees are obligated to provide property or other security for the fulfilment of obligations under the guarantee (collateral) and to pay a guarantee fee to the corresponding local budget in the amount established by the relevant local council, unless otherwise provided by the decision on the local budget.
In order to minimise the risks related to local borrowings and the provision of local guarantees, budget legislation has established appropriate restrictions, in particular:
The limit on the total amount of local and guaranteed debt at the end of the budget period may not exceed 200 percent of the average annual income of the general fund of the local budget, received during the three previous budget periods, excluding personal income tax and intergovernmental transfers.
Local budget expenditures on servicing local debt cannot exceed 10% of the expenditures of the general fund of the budget.
During the term of the local guarantee agreement, the relevant councils shall allocate funds in the relevant decision on the local budget to fulfil the guarantee obligations for payments: in the amount of 100%, in the event of a guarantee case, at least 50%, in other cases.
Local guarantees shall not be provided to secure the debt obligations of business entities if the direct source of loan repayment is provided by the local budget funds (except for debt obligations arising from borrowing from foreign states, foreign financial institutions, and IFIs for the implementation of investment projects), etc.
In the event of an expected exceedance of the limit on the total amount of local and guaranteed debt, the local financial body shall immediately apply to the relevant council for permission to temporarily exceed this limit and submit for approval an action plan of measures to bring the total amount of the debt into compliance with the provisions of the Code, subject to prior approval of the Ministry of Finance of Ukraine.
The state is not liable for the debt obligations of the Autonomous Republic of Crimea, regional councils, and territorial communities. The local and guaranteed debt of the Autonomous Republic of Crimea, regional councils, cities, settlements, or village territorial communities is not included as public debt or state guaranteed debt. The amount and terms of local borrowings and the provision of local guarantees are agreed upon with the Ministry of Finance of Ukraine.
Between 2015 and 2020, subnational debt almost doubled in nominal terms, from UAH 14.8 billion to UAH 28.2 billion. However, as a share of total subnational revenue, Ukraine reported only a minor increase; from 5% in 2015 to 6% in 2020. Moreover, when controlling for inflation, in 2020, subnational debt was about the same as in 2015. Furthermore, subnational debt represented only a very small part of all public debt, fluctuating between 0.6% and 1.4% between 2015 and 2020. This was well below the 2019 EU-28 (14.5%) and OECD (22%) averages. Compared to OECD member countries, only Greece (0.5%) had lower subnational debt as a share of all public debt. This trend can be explained by the fact that in recent years no significant changes have been made to the legislative and regulatory framework related to borrowing by subnational governments, set out above, which in effect only allows the councils of oblasts and major cities to borrow (OECD, 2022[16]).
4.2.13. Pricing of domestic bonds
At auctions
In the primary market, competitive auctions with a stated target size invite ‘blind’ bids from primary dealers on their own account or on behalf of clients. These auctions are generally held on a bid or multiple price basis (i.e., successful bidders pay the price they bid), with non-competitive bids allocated at the price associated with the weighted average accepted yield.
The total level of bids received divided by the allocated amount provides the bid-to-cover ratio. As bids are blind, Primary Dealers cannot see what other dealers are bidding, nor can they see other dealers' allocations in terms of overall level or price. They can only see the ‘accepted yield’, as well as the maximum yield, minimum yield, and weighted average yield in the published auction results.
The Ministry of Finance of Ukraine does not publish the tail, which can often be a good indicator of the success of an auction and the overall health of the market, as it shows how efficiently the market was able to price the supply.21 The tail is the difference between the price of the marginal yield and the price of the weighted average accepted yield. A larger tail indicates lower demand for the auction. An example of the published results of an auction can be found below in Table 4.5.
The allocation of bonds at the end of the auction is done automatically by BAS according to the parameters of accepting bids set by the Ministry of Finance; total volume of placement, volume of placement for non-competitive bids, cut-off yield. The information on the allocation, after it is finalised, is transferred by BAS to the NBU depository for placement of the government bonds on the accounts of bondholders instantly.
Secondary market
Transactions for the purchase/sale of domestic government bonds on the secondary market take place between professional stock market participants and their clients (individuals, legal entities, non-residents). Bid and offer prices are quoted by primary dealers and licensed brokers, and real-time bid and offer, as well as market mid prices, are available the websites of stock exchanges. On global platforms (such as Bloomberg and Reuters) the information on quotations is very limited and is mainly oriented towards international and not domestic investors.
Source: Ministry of Finance of Ukraine.
4.2.14. Ukraine’s UAH yield curve
Ukraine’s UAH yield curve is currently heavily inverted from the 3.5-year point onwards and has been ever since the start of the full-scale invasion (Figure 4.9 panel A). In 2024 Ukraine issued almost exclusively in maturities between 1 and 3.5 years. This naturally led to a cheapening in this segment as the market demands a concession to absorb all the supply. This helps to explain the current shape of the curve with no trading beyond the 3.5-year mark, and this segment of the curve reflecting only long term, and therefore highly uncertain macroeconomic forecasts, and not actual market rates.
Until Ukraine can issue regularly further out on its curve, it is difficult to assess the shape of the curve and therefore the optimal issuance strategy. Notwithstanding the decision taken in conjunction with the primary dealers to shorten the maturity of all supply, the current shape of the curve might indicate that it would be cost effective for Ukraine to issue at longer (>3.5 years) or shorter (>1 year) maturities. However, it is likely that the shape of the curve would change materially if there were regular issuance and regular secondary market trading here, and it may not be the case that bonds at these maturities could be sold at competitive levels.
In addition, since inflation in Ukraine had fallen substantially from a high of 26.6% in December 2022 (Figure 4.9 panel C), Ukraine’s on the run bonds have been offering very sizeable real returns in excess of 5%. These returns are clearly making bonds a very attractive investment and in part may explain the uptick in demand, particularly from more price sensitive investor groups such as retail. These bonds are also currently yielding more than the NBU’s key policy rate, which indicates the existence of a credit premium which Ukraine is having to pay to issue.
This credit premium needs to reduce to avoid an upwards spiral in debt-to-GDP ratios moving forwards. Ideally, the 1-year yields should track closely expectations for average policy rate over the coming 12 months. In addition to improving its credit rating, being able to issue more evenly along the curve will help Ukraine achieve better pricing as it will reduce the pressure on certain segments of the curve. This could also crowd in more investors, particularly those who typically require more duration, such as pension and insurance funds. This will also require Ukraine to keep inflation low and stable while reducing its fiscal deficits, and ultimately develop its capital markets.
Source: National Bank of Ukraine, Bloomberg.
4.2.15. Cash management
Ukraine’s stated aim for its cash management function is the timely execution of payment orders of administrators and recipients of budget funds, as well as other clients of the Treasury. Under martial law, receipts into the TSA (i.e., tax and non-tax domestic revenues, proceeds from the issuance of domestic government bonds and Eurobonds, grants, and loans from multilateral and bilateral creditors) stay in the account until they are spent.
Thus, Ukraine does not have an active cash management function. An active cash management function refers to the regular use of marketable instruments such as repo (repurchase agreements). In this scenario cash managers look to actively trade, raising and placing funds via the short-term money markets, and leaving a relatively small balance in the TSA at the end of each trading day.22 Such an approach requires a cash flow forecasting process and system that all central government accounting units use to forecast their revenues and expenditures.
4.3.1. Refinancing risk
As only 46% of Ukraine’s total outstanding state debt is in marketable securities, with this figure set to fall further in the coming few years, its refinancing profile must be viewed in the context of all its funding sources.
The weighted average term of Ukraine’s external debt (concessional and non-concessional loans and Eurobonds) is 10.1 years, up from 6.3 years in 2021. This is in large part due to the long-term concessional financing extended to Ukraine as part of the total support package following Russia’s full-scale invasion. As external debt is an increasing share of Ukraine’s overall portfolio, the country is reducing refinancing risks at the cost of increased currency risk.
Moving forwards, if Ukraine looks to move more in line with its EU-linked peers, it should both increase its local currency marketable debt share and lengthen the maturity profile of its domestic bonds. As of 31 December 2024, it had 79 local currency bonds maturing the next 3.5 years, which will put significant pressure on its cash management function and limit its fiscal space and flexibility.
Considering Ukraine’s current public debt portfolio and the context of martial law being in place, high refinancing peaks are forecast to continue for at least the next two years, which means the immediate priority is managing these peaks successfully. This will require the unlocking of further long term concessional financing including the recent agreement by G7 countries to send Ukraine USD 50 billion in loans backed by proceeds from frozen Russian sovereign assets.23
4.3.2. Foreign exchange risk
The impact of fluctuations in the UAH/USD exchange rate, on the state budget, is accentuated by a high degree of correlation with other major currencies in which Ukraine’s debt obligations are denominated. This increases the exchange rate risk of Ukraine’s debt, as 74% of Ukraine’s debt is denominated in a currency other than UAH. Figure 4.10 shows the volatility of Ukraine’s exchange rate since the start of 2022.
Source: National Bank of Ukraine.
4.3.3. Interest rate risk
Owing to the structure of Ukraine’s debt, with a high level of concessional financing and the restructuring its Eurobond series, Ukraine is unable to ‘fix’ much of its repayments schedule for extended periods of time. This leaves it exposed to interest rate risk as debt becomes due for re-fixing. By increasing its ability to raise funding via different means, other than relying mostly on concessional financing, and beginning repayments on its Eurobond series, Ukraine will be able to mitigate this in the long term by issuing more fixed rate domestic bonds at incrementally longer maturities. Another possibility could be the use of derivatives to manage this shorter than desired ATR.
4.3.4. Contingent liability risk
As mentioned in Chapter 2, the Ukrainian banking sector is characterised by a relatively large proportion of banks with state participation, representing more than half of the sector’s total.24 Severn banks, partially or wholly owned by the state, constitute contingent liabilities that could materialise in case of a bank failure or bank run, in addition to the fiscal costs caused by the likely disruption to the wider sector. For example, PrivatBank the largest commercial bank in Ukraine, was nationalised in 2014, following a major capital shortfall, which led to the need for capital injections financed by the issuance of domestic government bonds. In addition, contingent liabilities risk also stems from the additional recapitalisation of the Deposit Guarantee Fund, which may take place in case of a bankruptcy in the banking sector.
Additional contingent liabilities risk is stemming from Ukraine’s domestic government bonds issued for the recapitalization of state banks and SOEs. These securities are largely foreign exchange-linked bonds and represent approximately 7% of Ukraine’s total public debt. Moreover, the state-guaranteed debt contains another risk. Ukraine also has state derivatives in the form of GDP-Linked warrants. The first of these were issued as part of the 2015 restructuring following Russia’s illegal annexation of Crimea. These securities have a total nominal amount of USD 2.6 billion, but do not have a specific face value at the repayment date. Payouts on these instruments are entirely contingent and depend on Ukraine’s real GDP growth rate from 2019 to 2039.
Two of the new Eurobonds issued as part of the August 2024 restructuring are also partly GDP-linked, with the level of principal repayment based on Ukraine’s GDP performance by 2028 relative to IMF projections. They mature in January 2035 and January 2036, and have nominal values of around USD 1.6 billion and USD 1.4 billion respectively.
4.3.5. Sovereign-bank nexus
Domestic banks in Ukraine are the single largest holders of domestic government bonds (holding 46.6%). This increases the risk of the sovereign-bank nexus, whereby the financial health of banks and the sovereign is intertwined. Domestic banks and the sovereign are linked by three interacting channels:
banks hold large amounts of sovereign debt
banks are protected by government guarantees (particularly in Ukraine where over 50% of banking assets sit on the balance sheets of state-owned banks)
the health of banks and governments affect and is affected cyclically by economic activity.
As a result of these channels, powerful feedback effects between banks and sovereigns are likely. In adverse conditions, “doom loops” may emerge: a crisis originating in the banking system will weaken the sovereign, which in turn will worsen the banking (sovereign) crisis itself.
4.3.6. Pricing and the cost of issuing domestic debt
Ukraine’s issuance strategy is severly limited by its inability to issue any term beyond five years and therefore an inability to issue right across its curve. With issuance concentrated in the 1-3.5 year maturities, Ukraine is issuing right into the cheapest part of its curve. Its on the run bonds are offering >5% real returns and a pick up of several 100 basis points over the NBU’s key policy rate. The cost of domestic issuance is raising Ukraine’s overall cost of debt. This is hampering Ukraine’s ability to direct resources towards its defence and will also hamper efforts to invest in its economic future.
Ukraine is heavily reliant on external sources (in particular concessional financing) to prevent its debt financing costs from rising exponentially. Indeed, the cost of its external debt has actually fallen since 2021, but the total cost of its debt has increased since the beginning of the war.
4.3.7. Operational risk
Ukraine conducted 201 operations in total in 2024. Considering the relatively low (compared to its EU-linked peers) proportion of gross funding that is accounted for by the issuance of marketable securities (33% in 2024) this is a large number of supply events. This is not exclusive to the period of martial law either. In 2019 Ukraine conducted 302 auctions, albeit to meet a much larger proportion of its gross funding needs.
Supply events represent risk events for both the issuer and the wider market. The issuer faces significant reputational risk if a supply event does not go smoothly, and each operation represents potential risk in terms of credit and cyber, whilst also being very resource intensive. Meanwhile supply always ‘weighs’ to some extent on secondary market trading as it takes time for the curve to adjust to the increased amounts of a bond in issue. Supply events that are considered ‘soft’ (with low cover ratios or that are uncovered, that exhibit a large supply concession in the secondary market, have a large tail and/or a large concession in the strike price versus the secondary market mid) can particularly affect liquidity, and create more uncertainty around future supply events.
Primary Dealers also have to make balance sheet and trading (human and IT) resources available to absorb the supply, they then have to warehouse the risk (which often comes at a cost in terms of profit and loss) and are not always able to find cost effective ways to offload it. The potential for one of these risks to materialise is greater when there are so many touch points with the market.
In addition, individual lines would benefit from being reopened in larger sizes, as this would support liquidity without them having to be reopened as frequently. In this scenario different parts of the curve could be tapped at regular intervals, better spreading liquidity and giving sections of the curve a ‘breather’, with ideally mutliple weeks between instances of supply in the same bond.
Operational risk also includes key person risk, and ensuring the functioning of multiple sites and robust contingency planning. All issuers face key person risk as debt management typically involves highly specialised skills and experience and often only a handful of individuals are authorised to run operations. If for any reason these individuals become unavailable significant issues can arise. In addition if certain physical sites or systems became unavaiable there have to be plans in place to ensure operations can still be conducted, if necessary, remotely or at a ‘back up’ site. Currently The NBU can hold auctions for the placement of domestic government bonds on behalf of the Ministry of Finance of Ukraine on the back up in-house developed platform if it is not possible for Ministry of Finance to hold them on the BAS. However, no such cases have been recorded since September 2019.
All of these risks are particularly pertinent in Ukraine, as it continues defending itself, and they are further amplified by the large number of supply events. However, to date Ukraine has not cancelled or postponed a single domestic bond auction since Russia launched it’s full scale invasion.
There is always a trade off to some extent between the size of an operation and how well it performs, and trying to supply more duration than the market can smoothly absorb is not desirable, as it would result in a greater likelihood of a ‘soft’ operation. However, from a resource perspective, larger operation sizes are more optimal. In consultation with Primary Dealers and, where possible, end investors, an appropriate balance must be struck, taking account of the latest market and demand conditions. But given the limited number of trading days in the year and therefore of windows of liquidity suitable for supply events, in addition to the stated ambition for bond issuance to play a greater role in Ukraine’s financing in the future, the sizes of individual operations will eventually have to be incrementally increased.
4.3.8. Institutional capacity
At the moment the Ministry of Finance of Ukraine is fully responsible for public debt and state-guaranteed debt management, acting under the current legislation and approved by the government’s Debt Management Strategy (Ministry of Finance of Ukraine, 2019[17]). The current model for public debt management in Ukraine is viable and has enabled continued access to capital markets under martial law, with bond issuance making an increasing contribution to net financing since the middle of 2023. However, in the longer term, where the intention is for bond issuance to form a much larger proportion of gross funding, the efficiency of this model is limited. In particular the development of the middle office functions will be neccessary to assess and monitor medium to long term costs and risks around issuance strategies and the debt portfolio.
Another key consideration will be the remuneration of key personnel, and how Ukraine can recruit and retain the skills it needs to have a robust public debt management function that can provide the bulk of its financing needs through market based financing. Sovereign debt management encompasses highly technical tasks such as funding, liquidity management, risk management, and settlement and payments that require a high degree of financial expertise and experience as well as public policy skills (OECD, 2020[18]). The ability to attract and retain skilled staff is also crucial for mitigating operational risk. In addition, building staff capacity through technical assistance and peer learning would help support the development, communication and implementation of the debt management strategy.
4.3.9. Limited cash management function
Forecasting
Ukraine currently has an ineffective mechanism for forecasting cash flows and liquidity on the Treasury accounts (TSA and foreign currency accounts). This is in part a result of weaker co-ordination between different public institutions where the exchange of relevant data is not automated, and the extraordinary pressures Ukraine is currently facing during wartime. This can lead to the unnecessary accumulation of cash resources which can result in a loss of economic benefit, 25 and it can also lead to larger unexpected positions on the central banks’ balance sheet, which can affect the implementation of monetary policy.26 Worst still, it can result in a temporary shortage of cash resources, which may require overdraft to ensure payments are made. Other consequences include a delay in payments or in an extreme scenario a technical default through non-payment.
The collection of short-term cash flow forecasts from budget administrators (i.e. a payment calendar) is not currently carried out, there is no forecasting information system for automated data processing and a lack of forecast in regard to the balances on the foreign currency accounts and their dynamics (Ministry of Finance of Ukraine, 2020[19]).
Utilisation of cash surpluses
Cash surpluses are not used to best advantage (lent out to make an economic return and/or traded to a future date of a known cash outflow). However, it should be noted that placing cash with commercial banks could have a negative impact on the overall state budget due to the cost of absorbing any placed liquidity as central bank deposits.27 Ukraine’s poor forecasting mechanism prevents a quick determination from being made of the amount of temporarily free cash resources, which makes it more difficult to use any to best advantage. There is a lengthy procedure for utilising funds through the buying and selling of domestic government bonds. There is also not currently a market for repo transactions (lending out bonds overnight in exchange for cash or vice versa).
Uneven revenues and expenditures
There are uneven inflows and outflows throughout the year and even between months, a dynamic which is exacerbated by the day-to-day realities of the ongoing war and the often unpredictable disbursement of external support. This limits Ukraine’s cash management function further as it does not allow it to borrow or invest with any regularity, nor can it borrow or invest to certain dates knowing that the maturity of the borrowing or investment will help offset certain future flows.28
The main objective of public debt management is to meet the central government’s borrowing requirement at the lowest possible cost whilst considering the medium and long-term risk. Certain factors must be considered, including what is operationally deliverable under the various constraints on public debt management; an assumption that the central government is a repeat borrower that will borrow in perpetuity; and the need for cost-effective access to liquidity at all times and under all market conditions. 29
OECD area leading practices suggest that the sound management of public debt requires compliance with five principles: Accountability; Responsibility; Transparency; Predictability, and Efficiency. Public debt management practices and framework of accession countries for example are reviewed relative to these principles, and they will be used as a framework for assessing Ukraine’s public debt management function and priorities for policy reform in this Chapter.
4.4.1. Cash flow forecasting
Cash flow forecasting is crucial for governments to effectively manage liquidity and make proactive decisions to maintain target cash and liquidity balances and anticipate future funding needs. When forecasts signal potential liquidity challenges, governments adjust their financing operations, creating a feedback loop that continuously refines financial decisions. Thus, accurate forecasts are critical in reducing the need for large cash buffers and alleviating pressure on funding sources to meet unexpected cash shortages (OECD, forthcoming[20]).
In Ukraine, increasing the initial cash flow forecasting period to 6 or 12 months could improve quality and usability, although the realities of wartime will continue to affect these. On demand access to relevant information would help forecasters and cash managers alike to spot trends and act in advance to help offset flows. Also, the automated reporting of forecasting errors should reduce the time spent on manual data collection and processing, while the ability to drilldown and compare data with past periods will help to finesse the process and learn from previous mistakes. Finally, the implementation of a liquidity management decision support system (utilisation of cash, retention of the minimum required balance on the TSA etc.) will help to automate the process of communicating positions between spending departments, the tax authorities, the Ministry of Finance, and the NBU.
This requires the implementation of a cash flow forecasting system that all central government units must use to forecast their revenues and expenditures, and of a common portal for data collection and reporting. Ideally this would also include historical data to identify patterns, potentially making use of AI or machine learning tools. The aggregate netting of revenues and expenditures will improve efficiency and reduces costs. Also, flows of foreign exchange can be integrated into the process.
4.4.2. Introduction of new and improvement of existing liquidity management tools
In the future Ukraine’s cash management function will ideally have more flexibility to act and more tools with which to act. Possible tools for consideration could include T-bills, repos, and commercial paper to manage fluctuations in cash needs (OECD, forthcoming[20]). Some of the possible steps needed to add more flexibility and make use of more tools are set out below:
improving legislation on active public debt transactions
carrying out active operations with government debt, in particular, exchange and repo transactions in government bonds
frequent T-bill programme, and scope for T-bill issuance for funding and balance shortages
the development of the domestic stock market and capital market infrastructure
legislative regulation on the use of temporarily free funds in the TSA to cover temporary cash gaps of the general fund of the state budget within the budget period, and the assignment of temporarily free funds of the TSA to the sources of budget funding
the introduction of liquidity management tools aimed to ensure successful payments by administrators to recipients of budget funds, as well as other clients served by the Treasury, in case of insufficient funds in the TSA
carrying out analysis and preparing proposals on coordination of terms of significant revenues and expenditures of the state budget – information sharing with the tax authorities is essential here, the provision of average tax refunds would be helpful
creating opportunities for obtaining short-term loans from commercial banks in case of insufficient funds
management of the minimum balance on the TSA (with a target range to account of the risks)
exploring the use of derivatives for risk management purposes (FX and IRD)
The OECD has recently undertaken a project working with certain OECD and partner countries to share policies and practices in cash management. The OECD formed an ad hoc working group under the auspices of the Working Party on Debt Management (WPDM) to share these policies and practises in a range of areas of cash management, including forecasting and liquidity management. The culmination of this work is a monograph on managing government cash (to be published shortly), and Ukraine can benefit from the findings of this work. In addition, it may be possible to use the group, which consists primarily of representatives who work primarily on cash management, or a select subset of it, to share their findings with Ukraine specifically.
This would allow Ukraine to draw on the expertise and experiences of cash managers in other OECD and partner countries and would aim to help the Ministry of Finance and other authorities involved in Ukraine’s cash management to better align with OECD best practices.
4.4.3. Developing Ukraine’s capital markets and building greater liquidity in the secondary market for Ukraine’s domestic bonds
Ultimately, to be able to upsize operations and/or issue more duration Ukraine requires conditions that will push the demand curve forward. This in practice requires larger domestic and foreign investor bases, which can only be achieved through the development of Ukraine’s capital markets (as discussed in Chapters 2 and 3).
The strongest pull for foreign institutional investors is secondary market liquidity. This allows investors to quickly access and exit the market without a large impact on pricing. Debt managers can take steps such as building up liquidity in key benchmark maturities and offering securities lending facilities for market management purposes (OECD, 2024[7]). Furthermore, a liquid and well-functioning government bond market is essential for financial stability. Other factors that can help to widen the investor base include:
Reducing credit risk by improving longer term debt sustainability (exogenous to the DMO).
Diversifying funding in different instruments; such as issuing a sovereign sustainable bond, which could also support the planned reform of public financial management (Ministry of Economy of Ukraine, 2024[21])); and geographic areas, by for example issuing under English or New York law.
Considering the optimal secondary market infrastructure to support the price discovery process.
Ensuring institutional investor outreach/dialogue is systematic. This may include having dedicated customer relationship managers (CRMs) to ensure proactive, regular dialogue and follow up.
Further easing, and eventually lifting the foreign exchange controls that are currently in place, as mentioned in Chapter 1.
4.4.4. Increasing the size of individual operations and issuing at longer maturities
In the medium to long term, Ukraine should look to continue to incrementally increase the maturity of issuance, and also look to increase the size of individual operations. This must be done carefully and in close consultation with the market participants as both steps require the absorption of more risk by the market. In the long term this will help to gradually reduce operational risk, refinancing and interest rate risk and also develop Ukraine’s own capital market by providing more liquid benchmarks along the curve enabling private sector borrowers to price off multiple maturity points. It will also enable investors to access liquid risk-free assets at a wider range of maturities, while allowing the government to borrow to invest longer term.
Issuance across the curve will help spread the risk which will be beneficial for achieving better pricing in the long term while also helping to draw in more investors. Part of the solution will be an improvement in Ukraine’s credit ratings, achieving low and stable inflation levels and beginning repayments on its Eurobond series. Another factor here will be the development of Ukraine’s system of financial markets. Ultimately successfully executing operations that entail more duration is a vote of confidence in Ukraine’s domestic bond market and its public debt management function.
4.4.5. Issuance of new debt instruments
Issuing new debt instruments, such as sovereign sustainable bonds can help achieve debt managers’ objectives concerning the diversification of the investor base.30 As reported by a few DMOs in the OECD, these bonds attract different investors compared to conventional bonds, diversifying the investor base, and potentially altering the cost and risk trade‑off. However, depending on the precise features of the sustainable bond, such as maturity, indexation, currency denomination and (floating) coupon, they may also increase debt portfolio risks or costs. Comparing the characteristics of sovereign sustainable bonds with conventional bonds, some countries benefit from issuing these bonds to reduce debt portfolio risks, while others incur additional risks through their issuance (OECD, 2023[22]).
An additional consideration is the resources required to identify eligible expenditures (in the case of the Use of Proceeds structure) and to put in place the additional documentation and reporting associated with issuing sustainable bonds. Issuing such instruments can also reduce a sovereign’s fiscal flexibility.31 Likewise, with a KPI or any other index linked structure (such as Sustainability-linked bonds) there can be asymmetric risks to the issuer, with the final payment profile ultimately unknown. Given the risks and additional costs a full value for money assessment is required to ascertain if the benefits outweigh these.
The OECD has been monitoring the issuance of new debt instruments, in particular sustainable bonds, regularly since they emerged as an asset class. The OECD Global Debt Report 2024 contained a standalone chapter on sovereign sustainable bonds, which focussed on key characteristics and trends in the market, informing policy discussions on the goals of investors, how these instruments may alter issuers’ decisions and what can be done to further develop the market. In addition the OECD covers the issuance of new debt instruments by members and partners at annual meetings of the WPDM and the Global Forum through specific agenda items and country presentations. Ukraine could benefit form this accumulated knowledge on trends and best practises, including the OECDs ongoing monitoring.
4.4.6. Contigent Liability / Credit guarantee risk management
The development of methodological guidance for assessing risk from contingent liabilities that Ukraine has already committed to could be implemented by handing responsibility to the debt management function to cover the risk management of contingent debt alongside direct debt, enabling an integrated portfolio approach to risk management.
This would require the development of a function to monitor the credit guarantee portfolio, with particular attention afforded to the financial health of the banking sector, given the prominence of state-owned banks as well as the fiscal risk posed by the potential need for a recapitalization of the Deposit Guarantee Fund.
In addition to the state-guarantee commitment ceiling, the introduction of a contingency reserve fund for the purpose of funding needs arising from credit guarantees can help reduce the potential consequences of the latter on debt and cash management operations.
Other areas for consideration to improve the risk management around this include the regular consolidated reporting of contingent liabilities, including an updated assessment of default risk; transparency around the methodology used to price any fees levied for the provision of guarantees; the part or full collateralisation of any guarantees; the mechanism for partial recovery of funds in the event of crystallisation; and clear policy guidance around the trade-offs between supporting businesses and protecting the treasury.
In addition to dedicated work on contingent liabilities including a working paper on the role of public debt managers in contingent liability management, which draws on practises from across the OECD, the OECD could also work with WPDM members that have already been involved in the review to set up a dedicated workshop to discuss contingent liability management.
4.4.7. Mutualisation of subnational borrowing
Concentrating borrowing operations by local authorities into one institution reduces funding costs and can help ensure the funding for these authorities. It can also help Ukraine to develop its debt capital market. This arrangement typically works best when the credit outlook of the local authority sector is relatively stable.
Given that, according to the Budget Code of Ukraine, local budgets are independent and the state is not liable for the debts of the Autonomous Republic of Crimea, regional councils, and territorial communities, there would be a need to clarify the content, regulatory and organisational framework for the mutualisation of local borrowing by local authorities in a single institution, as well as indicators for the effectiveness of implementing such a proposal.
4.4.8. Institutional set up for debt management
The longer term transition to a new format for public debt management in Ukraine in line with its EU-linked peers, which would see the establishment of a separate Debt Management Office (DMO), at arms length from the wider Ministry of Finance, with delegated authority for operational decisions on debt and cash management. This would help to support four main objectives:
As a separate government institution, the DMO will not be dependent on and will be at arm’s length distance from political factors, which is important for enhancing investor confidence and the predictability of public debt management processes in the long term.
The institutional capacity of a separate DMO will enable more effective and comprehensive use of debt management instruments. This will better serve the objective of meeting the government's financing needs at the lowest possible cost taking account of medium and long-term risk.
The DMO will be able to make use of advanced liquidity management tools utilising market instruments. This, in turn, will help avoid liquidity and solvency crises at the beginning of budget periods, ensuring the efficient use of surplus funds.
Building an independent DMO function is also an opportunity to utilise modern technologies to make sure that all critical delivery chains (e.g. payments and settlements) are resilient (according to new standards) and business continuity can be secured at all times in all conditions.
Such a set up would also better serve the objective of maintaining investor relations as a separate DMO can serve as a hub for investor feedback and consultation, allowing for more candid conversations and more regular, informal dialogue, particularly if such an institution houses the dealing teams.
However, this set up requires additional financial, and political support and can take a long time to achieve. In addition, there is no guarantee that the institution will ultimately be independent from political factors. Equally, from a practical point of view, such a set up may be more easily achieved once the war of aggression ends.
In the nearer term, concentrating all the debt management functions (front, middle and back office) in one place (one team or directorate) could also help to support the aforementioned objectives.
The OECD could set up a workshop with WPDM members who have changed their institutional set up for debt management, to share their experiences and advise on the different key considerations when making these types of changes to the debt management function. The OECD could also work with members who have a more similar current set up to Ukraine, to give Ukrainian authorities more information with which to consider any major institutional changes.
References
[13] Cabinet of Ministers of Ukraine (2001), Resolution, Dated January 31, 2001 N 80, Kyiv, On the issues of domestic government bonds, https://mof.gov.ua/storage/files/CMU%2080%20On%20the%20issueances%20of%20domestic%20government%20bonds(1).pdf.
[23] EBRD (2024), Boosting Ukraine’s telecoms industry, https://www.ebrd.com/news/2024/boosting-ukraines-telecoms-industry.html#.
[4] European Commission (2022), Ukraine: Macro-financial assistance, https://economy-finance.ec.europa.eu/international-economic-relations/candidate-and-neighbouring-countries/neighbouring-countries-eu/neighbourhood-countries/ukraine_en.
[1] IMF (2024), Fourth review of the Extended Arrangement under the Extended Fund Facility, https://doi.org/10.5089/9798400282386.002.
[15] IMF (2024), World Economic Outlook, https://www.imf.org/external/datamapper/profile/UKR.
[3] IMF (2023), IMF Executive Board Approves US$15.6 Billion under a New Extended Fund Facility (EFF) Arrangement for Ukraine as part of a US$115 Billion Overall Support Package, https://www.imf.org/en/News/Articles/2023/03/31/pr23101-ukraine-imf-executive-board-approves-usd-billion-new-eff-part-of-overall-support-package.
[12] Ministry of Digital Transformation of Ukraine (2022), Digital Country, https://ukraine.ua/invest-trade/digitalization/.
[21] Ministry of Economy of Ukraine (2024), Investment Guide Ukraine, https://montenegro.mfa.gov.ua/storage/app/sites/54/ukraine-investment-guide-2024.pdf.
[11] Ministry of Finance of Ukraine (2024), Auctions Procedure, https://mof.gov.ua/en/procedura-provedennja-aukcioniv.
[9] Ministry of Finance of Ukraine (2024), Debt Policy, https://mof.gov.ua/en/borgova-politika.
[8] Ministry of Finance of Ukraine (2024), Government Takes Another Step towards Implementing Best Practices in Public debt Management, https://mof.gov.ua/en/news/uriad_priiniav_rishennia_pro_provedennia_minfinom_novikh_vidiv_auktsioniv_z_obminu_derzhavnikh_obligatsii-4786.
[2] Ministry of Finance of Ukraine (2024), In June, entrepreneurs received 767 loans for 2.4 billion hryvnias under state guarantees on a portfolio basis, https://mof.gov.ua/uk/news/minfin_u_chervni_pidpriiemtsi_otrimali_767_krediti_na_24_mlrd_griven_za_derzhavnimi_garantiiami_na_portfelnii_osnovi-4711.
[5] Ministry of Finance of Ukraine (2023), Medium-Term State Debt Management Strategy for 2024 -2026, https://mof.gov.ua/en/osnovna-informacija.
[19] Ministry of Finance of Ukraine (2020), Concept of liquidity management 2020-2023, https://mof.gov.ua/storage/files/concept_ENG(1).pdf.
[17] Ministry of Finance of Ukraine (2019), Medium-Term State Debt Management Strategy, https://mof.gov.ua/storage/files/MTDS%202019-2022_ENG%20vf.pdf.
[10] NBU (2023), Since the beginning of 2023, the government has raised the equivalent of UAH 293 billion from the sale of government bonds at auctions, and in total during martial law – UAH 545 billion, https://bank.gov.ua/ua/news/all/z-pochatku-2023-roku-uryad-zaluchiv-vid-prodaju-ovdp-na-auktsionah-ekvivalent-293-mlrd-grn-a-zagalom-uprodovj-voyennogo-stanu--545-mlrd-grn.
[7] OECD (2024), Global Debt Report 2024: Bond Markets in a High-Debt Environment, OECD Publishing, Paris, https://doi.org/10.1787/91844ea2-en.
[6] OECD (2024), OECD Economic Outlook, Volume 2024 Issue 2, OECD Publishing, Paris, https://doi.org/10.1787/d8814e8b-en.
[22] OECD (2023), OECD Sovereign Borrowing Outlook 2023, OECD Publishing, Paris, https://doi.org/10.1787/09b4cfba-en.
[16] OECD (2022), Rebuilding Ukraine by Reinforcing Regional and Municipal Governance, OECD Multi-level Governance Studies, OECD Publishing, Paris, https://doi.org/10.1787/63a6b479-en.
[18] OECD (2020), OECD Sovereign Borrowing Outlook 2020, OECD Publishing, Paris, https://doi.org/10.1787/dc0b6ada-en.
[14] OECD (2017), The role of public debt, OECD Publishing, Paris, https://doi.org/10.1787/22264132.
[20] OECD (forthcoming), Cash Management Practises in OECD Countries.
← 1. Marketable securities are financial assets generally in bond format that can be easily exchanged (either on a stock market or over the counter (OTC) and/or bear interest rates that are aligned with current market rates; NBU securities are not listed but are issued in bond format and are thus defined as marketable securities.
← 2. As set out in Ukraine’s Medium-Term State Debt Management Strategy for 2024-2026 (Ministry of Finance of Ukraine, 2019[17]), Ukraine’s EU linked peers include Bulgaria, Croatia, Cyprus, Czechia, Hungary and Poland.
← 3. Excessive levels of external debt can hamper countries' ability to invest in their economic future, as their limited revenues are spent servicing their loans. This can thwart long-term economic growth.
← 4. Outstanding loans and bonds issued by the central government.
← 5. Special Drawing Rights (SDR) are an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. SDR is not a currency as such but is a potential claim on the freely usable currencies of IMF members. As such, SDRs can provide a country with liquidity. A basket of currencies defines the SDR, these include: the US dollar (USD), Euro (EUR), Chinese Yuan (CNY), Japanese Yen (JPY), and the British Pound (GBP).
← 6. Ukraine’s Medium-Term State Debt Management Strategy is a tool designed by the Ministry of Finance of Ukraine to assess the status and dynamics of the state debt of Ukraine and define objectives, targets, and tasks over the medium term to optimize state debt structure from a cost/risk perspective while bringing the country on the path to a more sustainable debt trajectory.
← 7. The figures in the preceding paragraph and Figure 4.4 are now outdated, as they are based on the Medium-Term Debt Management Strategy for 2024-2026, which employs data from June 2023.
← 8. On 20 July 2022, a group of creditors of Ukraine from G7 countries and Paris club members (the “Group of Creditors”) announced their intention to suspend principal and interest payments on bilateral debts from 1 August 2022 until the end of the year 2023.
← 9. Foreign currency debt can never truly be considered fixed rate because of the foreign currency risk/fluctuations in the spot exchange rates for currency pairings.
← 10. As set out in Ukraine’s medium-term state debt management strategy.
← 11. In July 2020, Ukraine executed a switch tender offer targeting its Eurobonds series due 2021 and 2022, and successfully refinanced a notional amount of USD 800 million, financed by the issuance of a new 12-year Eurobond. In September 2017, Ukraine launched a tender offer on its outstanding Eurobonds series due 2019 and 2020, and refinanced a notional amount of USD 1.6 billion, equivalent to 64% of the 2019 series and 23% of the 2020 series. The operation was financed by a new 15- year Eurobond issuance, thereby significantly reducing refinancing risk.
← 12. Includes six members of the G7 and Paris Club: Canada, France, Germany, Japan, UK and US.
← 13. This has saved Ukraine around 15% of GDP a year. If the repayments had been made, they would have been the state’s second-biggest expenditure, behind defence.
← 14. The potential increase in the principal payment owed in November 2029, would be equal to 0.3 times the difference over 3 percentage points between Ukraine’s 2028 nominal GDP and the IMF’s baseline projection for Ukraine’s 2028 nominal GDP, converted into USD at the average 2028 UAH/USD exchange rate. It would be conditional on Ukraine’s actual GDP at constant prices in 2028 being at least equal to projections and would be capped at USD ~2.9 billion.
← 15. Non-banks here include nonbank financial institutions (NBFIs) such as investment, insurance, and pension firms, in addition to households and individuals (retail).
← 16. Clearstream is a financial services company that specializes in the settlement of securities transactions. It provides settlement and custody as well as other related services for securities across all asset classes. It is one of two European International central securities depositories (Euroclear being the other).
← 17. Ukraine’s current primary dealers are: JSB “UKRGASBANK”; JSC ”Oschadbank”; JSC ”Raiffeisen Bank”; JSC “OTP BANK”; PJSC "Citibank"; JSC ”Ukreximbank”; PJSC "FUIB"; JSC “PrivatBank”; PJSC «Sense Bank»; PJSC "KredoBank"; JSC JSB “PIVDENNYI”
← 18. Based on exchange rates at the time.
← 19. This was Ukraine’s fiscal anchor; this is effectively superseded now by its agreed annual budgets under the IMF EEF.
← 20. Martial law has been in effect in Ukraine since 24 February 2022.
← 21. Almost half of OECD and OECD partner countries (19 out of 40 based on a recent survey study) publish the tail auctions.
← 22. Small refers to the size compared to expected and/or known outflows (such as redemptions), meaning that constant market access is assumed. In this scenario any buffer is likely available in the form of liquidity (access to liquid instrument such as government bonds) rather than actual cash holdings.
← 23. The United States, European Union, United Kingdom, Japan, and Switzerland immediately froze whatever Russian central bank assets they had access to following the full-scale invasion of Ukraine. These were assets being held in banks outside of Russia. The assets are immobilized and cannot be accessed, but they still belong to Russia. There are around USD 330 billion of Russian central bank assets currently immobilised in Western jurisdictions, around two thirds of these are in the EU, mostly in France and Belgium. The weight in France and Belgium is due to the role played by the financial depository Euroclear. If the assets of Russian citizens held in these jurisdictions is considered, the total figure is closer to USD 400 billion (EBRD, 2024[23]).
← 24. As of October 2023.
← 25. In an environment of positive interest rates there is an opportunity costs to holding to holding cash balances.
← 26. Naturally the government’s position with the central bank will fluctuate day to day, but if this can be accurately forecast in advance, the central bank can take offsetting measures to ensure that these fluctuations are relatively balance sheet neutral and don’t impact upon the implementation of monetary policy.
← 27. With no market for repo transactions, any institutions that absorb liquidity from central government are highly likely to deposit it with the central bank.
← 28. For example, if day X is a known day for large tax receipts and the cashbook is currently short, the cash desk could borrow out to day X knowing that they will receive large receipts to cover the position when it matures.
← 29. Overall constraints refer to the level of the borrowing requirement, the credit rating of the sovereign, status of the local currency and depth and liquidity of the market.
← 30. Sustainable bonds refer to an emerging category of financial instruments that have captured the attention of investors. These bonds can be categorised into three primary types. Firstly, based on the use of proceeds, which includes green, social, sustainability, SDG (Sustainable Development Goal), and transition bonds. These instruments are explicitly designated for projects that deliver positive environmental and/or social outcomes. Secondly, based on Key Performance Indicators (KPI), known as sustainability-linked bonds, which tie financial performance to pre-determined sustainability targets, often through non-binding documentation. Lastly, there are unlabelled bonds, which are deemed ESG-compliant based on a second-party opinion.
← 31. The value of proceeds raised from the issuance of Use of proceeds bonds has to be matched to eligible expenditures. The eligibility criteria has to be set ex-ante in a framework document.