The government of Ukraine announced plans to issue a $1bn eurobond to shore up public finances and refinance a 2010 loan from Russian state-owned bank VTB. The bond will mature in 2014 with an annual coupon of 7.95%, according to a statement on the cabinet's website published on August 27.
The debt will be used to refinance the remainder of a $2bn loan from Russia's VTB Group that was issued in 2010 for six months and has already been extended three times. Ukraine issued a $2bn eurobond in July, half of which was used to pay down the loan. Reports at the time suggested that VTB itself had bought most of that issue.
Stanislav Zelenetsky at Art Capital points out: " At the beginning of the summer, the government for the first time mentioned issuing $1bn of new Eurobonds to partially refinance its $2bn debt to VTB. At that time, the head of VTB, Andrey Kostin, pledged the bank would sell the new Ukrainian eurobonds on the secondary market. We believe VTB's plans are still valid. The new issue being on the Ukraine sovereign curve, VTB has good chances of selling the bonds at the nominal price. However, doing so may put downward pressure on Ukrainian eurobond prices."
The ongoing rollover of the Russian debt illustrates the efforts of the cash-strapped government to stave off devaluation of the hryvnia. Kyiv's international reserves remain dangerously close to the three months of import cover that economists say is the minimum needed to maintain currency stability.
The National Bank of Ukraine stated that the hryvnia's exchange rate has grown 12.9% year on year against the currencies of Ukraine's major trading partners on August 27. However, that buoyancy is heavily dependent on the central bank's support of the currency ahead of parliamentary elections in October, allowing the hryvnia to follow the US dollar higher.
Analysts at Foyil worry that the current trend is only setting Ukraine up for a bigger fall following the vote, while also holding back potential economic growth. "Nominal strengthening of the national currency is negatively impacting Ukraine's trade balance, leading to moderation of inflation," they write. "However, such a tendency creates an additional ground for devaluation of hryvnia after the ... elections. Some nominal correction of the exchange rate will be required to cope with Ukraine's widening trade deficit and thereby to boost price competitiveness of export industries."
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