INTERVIEW: "There are no big buyers" – Ukrainian government struggles to sell bonds, says deputy managing director of Dragon Capital

Ukraine's domestic bond market was flourishing before the war and had become a major source of capital for the government. Now the Ministry of Finance is struggling to attract investors. / bne IntelliNews
By Dominic Culverwell in Berlin October 21, 2022

Ukraine’s government is struggling to sell new bonds on the local market amidst an ailing hryvnia and a closed Eurobond market.

With the full-scale Russian invasion causing an estimated $350bn in damage to Ukraine, escalating inflation and a $5bn monthly deficit, the country is precariously balancing on the edge of an economic abyss. Sergii Fursa, the deputy managing director at Dragon Capital, explains the financial challenges the Ukrainian government is facing in an exclusive interview with bne IntelliNews.

Ultimately, Ukraine lacks big investors in its primary market, with its Eurobond market closed and no real demand for short-term local bonds (OVDPs) as the Ministry of Finance “doesn't want to increase yields significantly”, Fursa said. He mentioned that the highest yield placed at the last auction was 18.5%, with typical set at 12%, 14%, 16%. On the secondary market, this is close to 22-24%, as the prime rate of the National Bank of Ukraine (NBU) is 25%. As such, Fursa claims the market is “very calm now”.

“There are no big buyers. Banks prefer to stay away from it, and the Ministry of Finance can’t even refinance local government bonds that they used to place a year or two years ago,” he added.

Instead, Fursa notes that the biggest change in investors is seen in the high number of local Ukrainians investing in OVDPs, rebranded as war bonds. “The changes we see is that there is a much bigger involvement from local people themselves because they are buying war bonds to support the government,” he said.

He notes that technology has made it much easier to purchase bonds, with citizens simply buying them over their phones or computers. However, most of the money raised goes towards Ukraine’s military rather than supporting the economy. Therefore the NBU is printing UAH30bn ($812mn) a month to financially support Ukraine, whilst the EU and the US have pledged billions in financial aid to fund humanitarian and social necessities.

With the war looking set to continue well into 2023, Ukrainian President Volodymyr Zelenskiy told international donors last week that Ukraine needs $38bn to make up for the budget deficit next year in addition to $17bn to rebuild infrastructure. He emphasised the need to encourage investments and suggested working together with the World Bank to create specific instruments. 

Another major challenge for the government is selling hryvnia bonds. Due to Ukraine’s high inflation rate, predicted to reach 30% by the end of the year, and the devaluation of the hryvnia, few investors are willing to buy bonds in Ukraine’s local currency. “No one wants to take the hryvnia risk now,” Fursa said.

As such, Ukraine is having to sell US dollar bonds, thereby depleting the country’s foreign exchange reserves, which dropped by 5.9% to $23.9bn at the start of the month. However, Fursa noted that US dollar bonds are usually bought by state banks, which simply “refinance it”.

Despite Ukraine's challenges and concerns over the summer that the country will default after state-company Naftogaz asked bondholders to delay payments, Fursa believes that “there is no such chance for the local market to default.” This is due to the Ministry of Finance successfully negotiating with investors to freeze the Eurobond payments until 2024.  “It's restructured but I can't say it's a default, because the investors agreed and understand why it should be done,” he said.

Keeping the country operating will be a major issue for the coming year. Noting that Russian President Vladimir Putin is “not going to stop”, particularly after newly intensified strikes, Zelenskiy has called for a financial Ramstein group to help support Ukraine and “provide the basic needs for the people”. Millions of people are suffering from the economic and physical damage of the war, with Ukraine’s poverty rate predicted to reach 25% by the end of the year. 

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