Servitude for 20 Years: How Ukraine Will Pay Billions of Dollars to Creditors Due to the Growth of the Hryvnia

For the second year in a row the exchange rate of the hryvnia continues to surprise. The usual seasonal fluctuations, when from the end of summer the hryvnia starts to fall, and in spring to grow, no longer work. On the contrary, this summer and autumn the hryvnia strengthened much stronger than could be expected.

Changes in the official hryvnia exchange rate in 2016-2019. Photo: National Bank of Ukraine

This is particularly surprising given that Ukraine has a chronic foreign trade deficit. We sell much less goods for export than we buy abroad in the form of imports.

The Ukrainian “Strana” agency tried to understand the reasons for the unusual behaviour of the exchange rate of the hryvnia this year.

Ukraine pays huge interest to creditors

At first glance, the solution to the phenomenon of the hryvnia strengthening is simple: this year there is an unusually large inflow of foreign investments domestic government loan bonds (DGLB) in hryvnia. These is debenture, thanks to which the Ministry of Finance takes hryvnia within Ukraine to cover the expenses of the state budget.

Ukrainian government bonds are one of the most profitable in the world. At the beginning of the year, the interest on DGLB was about 20% per annum. Now the yield has decreased slightly and is about 15% per annum.

It’s a very high rate. Such a percentage is dramatically different from the yield on bonds of other states. For example, yields on US government bonds fluctuate around 1-2%, and Germany’s government bonds generally started to be sold with negative yields this year. Even Ukraine’s neighbours Poland and Hungary pay about zero percent on public debts.

Why does Ukraine pay so much on its debts? After all, the taxes of Ukrainian enterprises and citizens are spent on paying off ultra-high interest. This money, instead of being used to pay financial speculators, could be spent for more useful purposes, such as building roads, as well as raising salaries for doctors and teachers.

It was not necessary to get into debt

It seems that some of the loans at huge interest rates were not needed. “Strana” analysed the data of the State Treasury concerning the balance of money in the unified treasury account, where the funds of the state budget are collected. As it turned out, since August of this year record amounts of dead weight started to accumulate there: 48 billion hryvnia at the beginning of August and 61 billion hryvnia at the beginning of September and October.

Amounts of balances on the unified Treasury account of the State Treasury

Why the Ministry of Finance needed to borrow billions of hryvnia through the issue of new DGLB if the treasury accounts contain record amounts of hryvnia balances, one can only guess.

The hryvnia exchange rate fell because of non-residents

Ukraine’s ultra-high bond yield attracted international financial speculators this year.

During the current year, non-residents have increased their investments in DGLB by 15 times. Since the beginning of 2019, foreign companies (non-residents) have bought DGLB in the amount of 90 billion hryvnia. That’s the equivalent of about $3.4 billion.

Now, according to the National Bank of Ukraine, non-residents own bonds of domestic state debt worth almost 100 billion hryvnia, which is the equivalent of about $4 billion.

The volume of government bonds owned by non-residents

The factor of non-residents purchasing domestic government loan bonds, according to experts, became the main reason for the strengthening of the hryvnia this year. The currency transferred by non-residents to Ukraine strengthened the hryvnia by more than 10% – from 27.5 to 24.8 hryvnia per dollar.

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There is a direct link between the growth of purchase by non-residents of DGLB and the growth of the hryvnia exchange rate. Its mechanism is as follows.

In order to buy DGLB, non-residents must first transfer currency to Ukraine. Here they sell it in exchange for hryvnia. Only after this can non-residents buy domestic government loan bonds for hryvnia.

As a result, due to the sale of large volumes of currency, the exchange rate of the hryvnia is rising, and the dollar and the euro, respectively, are falling.

A direct dependence between the hryvnia exchange rate and the volume of investments in DGLB by non-residents was observed throughout 2019: the more the hryvnia strengthened – the more investments of non-residents in hryvnia government bonds there were, and vice versa. This dependency is clearly seen in the following graph.

Photo: National Bank of Ukraine

Servitude Yaresko-style

Perhaps the solution to the strange multi-billion-dollar debts that Ukraine has collected this year lies in the near past.

In 2015 Ukraine, represented by the-then Finance Minister and US citizen Nataliya Yaresko, reached an agreement with foreign creditors to restructure the public debt in the total amount of $18 billion.

Back then politicians talked about writing off 20% of Ukraine’s debts. In fact, part of the debt – about $3.2 billion – was not written off, but replaced by “GDP-linked bonds”.

These are special securities for which investors should receive part of the country’s gross domestic product (GDP) growth.

Creditors were then proposed to replace every $1000 of debt with new debt securities. Ukraine has pledged to pay interest at the rate of 7.75% on every $800 of debt. Payments on another $200 of debt began to depend on GDP growth, i.e., on the growth of the Ukrainian economy.

Under the terms of the restructuring, payments on “GDP-linked bonds” should begin under two conditions:

  1. The country’s GDP, starting in 2019, should be above $125.4 billion;
  2. Ukraine’s GDP growth should exceed 3% per year.

The terms of the issue of these “Yaresko bonds” were recorded in 2015 in a special resolution of the Cabinet of Ministers.


Payments on “Yaresko bonds” will start due to the growth of the hryvnia exchange rate

Ukraine surpassed the GDP bar, above which the mechanism of payments on “GDP-linked bonds” starts to operate, already in 2018. In terms of dollars, GDP last year exceeded $130 billion.

The problem is that, according to the terms of the agreement with the creditors, the data of the International Monetary Fund (IMF) are used in the calculation of GDP. And the figures calculated by the IMF depend heavily on the exchange rate of the hryvnia to the dollar.

The fact is that the indicators calculated by the State Statistics Committee of Ukraine are calculated in hryvnia. And the IMF, in its calculations, recalculates the figures into the US dollar at the National Bank of Ukraine’s rate.

In 2015, when the Ministry of Finance under the leadership of Nataliya Yaresko issued “GDP-linked bonds”, the volume of GDP of Ukraine, according to the IMF, amounted to $90.5 billion. Although two years earlier in 2013, Ukraine’s dollar GDP was twice as large – $179.5 billion.


The two-fold difference between the indicators of “dollar” GDP in 2013 and 2015 was formed due to the more than threefold fall of the hryvnia exchange rate.

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And from 2015 to 2018, “dollar” GDP grew mainly due to high inflation: prices in hryvnia rose, but the exchange rate changed little. As a result, in terms of the dollar, all goods and services (which make up GDP) rose sharply, giving the growth of dollar GDP from $90 to $130 billion in just three years.

Thus, the volume of “dollar” GDP, which payments on “Yaresko bonds” are linked to, directly depends on the exchange rate of the hryvnia to the dollar. And this course, as we have already found out, has recently directly depended on the volume of DGLB purchases by non-residents.

As a result, it turns out that the Ministry of Finance, selling this year hryvnia DGLB at inflated interest rates, attracted international financial speculators. They threw about $4 billion into Ukraine’s foreign exchange market, which they bought hryvnia with. As a result, the hryvnia exchange rate strengthened by 10%.

And this, in turn, led to the fact that GDP in terms of the dollar will again exceed this year’s threshold of $125.4 billion, and the mechanism for calculating payments on “Yaresko bonds” will begin to work.

If the exchange rate of the hryvnia had not increased this year, but fell at least to the indicator of 30 hryvnia per dollar, Ukraine would have had the opportunity to avoid exceeding the “dollar” GDP level of $125.4 billion, and, accordingly, the beginning of payments on “Yaresko bonds”.

However, the actions of the Ministry of Finance to strengthen the exchange rate of the hryvnia left Ukraine without any chance of avoiding these payments.

How much has to be paid

This year could be the first time Ukraine will have to share its GDP with creditors. According to NBU and IMF forecasts, the economy will grow by more than 3%. Therefore, the second condition for starting payments should also be activated.

And the amount Ukraine will have to pay depends on how much GDP grows this year.

For example, here is a small calculation. According to statistics, in the first half of 2019 GDP growth amounted to 3.6%. If by the end of 2019 the GDP growth of Ukraine will be 3.5%, the country will have to pay 15% of the amount exceeding 3%, i.e. 0.075% of the GDP amount.

The IMF estimates that Ukraine’s GDP for 2019 will amount to about $150 billion. Therefore, according to the results of 2019 it will be necessary to pay creditors about $113 million (the equivalent of about 2.8 billion hryvnia at the current exchange rate).

If economic growth accelerates, for example, to 5% per year, payments to creditors will increase manyfold. It will be necessary to pay 15% of GDP growth from 3% to 4%, and 40% of GDP growth exceeding 4%.

For example, if GDP totals the same $150 billion, the volume of payments to creditors will increase to $830 million or to 20.5 billion hryvnia.

And this will happen every year until 2040. Experts estimate that creditors will receive up to $14 billion during this period.

Recall that the original amount of debt, in exchange for which “Yaresko bonds” were issued, amounted to only $3.2 billion.

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In fact, this means that Ukraine will not be profitable to show GDP growth of over 4% per year in the next 20 years. After all, 40% of the amount of this growth will have to be paid to creditors from the state budget.

Time Bomb

As early as June of this year, President Vladimir Zelensky’s Adviser for Economy, Finance and Tax Issues, Daniil Getmantsev, in an article in “Zerkale Nedeli”, stated that “GDP-linked bonds” issued during the restructuring of Ukrainian debt in 2015 are a “time bomb”. He urged to consider the possibility of early redemption.

Getmantsev described these papers as “a financial time bomb of super-destructive force laid by the outgoing team”.

“Securities issued on bonded terms not only can become a deterrent to the economic growth that we all aspire to have, but also lead to payments that are several times more than the debt restructured in 2015,” said the expert.

Currently Daniil Getmantsev is a high-ranking official of the authorities. For the parliamentary election he joined the list of the “Servant of the People” party at No. 20. Now in the Verkhovna Rada he chairs the committee on finance, tax, and customs policy.

Another expert, an analyst of the large investment company “Concorde Capital” Aleksandr Parashchy on Facebook wrote that if the government fulfills its plan for economic growth, only in 2020-2026 will Ukraine be forced to pay $9 billion to holders of “GDP-linked bonds”.

In response to these statements, Prime Minister of Ukraine Aleksey Goncharuk said on September 2nd that “being afraid of economic growth, given that it is necessary to fulfil some obligations, is an inadequate approach”.

In this regard, it is interesting that the current Finance Minister Oksana Markarova is a long-time associate and friend of Nataliya Yaresko. They are united by long-standing friendships and business relations.

From 1998 to 2003 (with a short break), Oksana Markarova served as adviser and manager in the US government-established private equity fund “Western NIS Enterprise” (now managed by “Horizon Capital”), which was run by Nataliya Yaresko.

In 2013, according to “Nashi Groshi”, the group of companies “ITT”, the co-owner and head of which was Oksana Markarova, acquired “Aktiv Bank”. Oksana Markarova was appointed Chairwoman of the Supervisory Board of the Bank, and the new owners appointed Nataliya Yaresko as a member of the board.

From 2015 Markarova started to work as Deputy Minister of Finance, which at that time was already Nataliya Yaresko.

Oksana Markarova and Nataliya Yaresko still maintain friendly relations. This is evidenced, for example, by joint photos of social networks.

It seems that the current policy of the Ministry of Finance on the debt market is coordinated with the organisers of the issue of “GDP-linked bonds” in 2015, and is carried out in their interests.

As was reported by “Strana”, the Cabinet of Ministers plans to grow real GDP in 2020 at the level of 3.7%. This scenario will be included in the draft state budget for 2020.

The Cabinet of Ministers also predicts that Ukraine’s economy will accelerate to 3.8% in 2021 and 4.1% in 2022. And according to a more optimistic scenario, in 2021 Ukraine’s economy will accelerate to 5.5%, and in 2022 – to 6.5%.

Aleksey Romanov

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