In Ukraine, Debt Holiday For The Government. Private Sector Not As Lucky

Markets In Ukraine, Debt Holiday For The Government. Private Sector Not As Lucky Kenneth Rapoza Senior Contributor Opinions expressed by Forbes Contributors are their own. I write about global business and investing in emerging markets.

Following New! Follow this author to stay notified about their latest stories. Got it! Oct 11, 2022, 12:00pm EDT | New! Click on the conversation bubble to join the conversation Got it! Share to Facebook Share to Twitter Share to Linkedin Ukrainian President Volodymyr Zelensky gets his country a debt holiday. Private sector won’t be as .

. . [+] lucky.

(Photo by SERGEI SUPINSKY/AFP via Getty Images) AFP via Getty Images Ukraine has the second-largest loan portfolio out with the International Monetary Fund. Only Argentina’s debt with the IMF is larger. But then Ukraine’s government also owes the European Bank for Reconstruction and Development (EBRD) and at least $1.

9 billion to the World Bank . Many of these loans, namely the IMF and EBRD disbursements, were issued after the 2014 Euromaidan events that overthrew a pro-Russian Viktor Yanukovich presidency and set the table for the crisis that has led to a war and annexation of Ukrainian territories in the Donbas and Crimea. The good news for the Ukrainian government is that the U.

S. and European governments have agreed to put a pause on payments, even as the IMF stood against this in July. The IMF and EBRD have not said they were pausing payments, but agreements by G7 governments will surely help Ukraine service those debts.

Ukraine has been counting on this since July. The private sector, including those whose businesses were wiped out by the Russian war in East Ukraine, are still on the hook with their lenders. There is little foreign governments can do about this.

These are private deals between private banks and investment firms. But Ukraine, whose economy was already on life support from the IMF, is now in even worse shape – amidst a war, a private sector in a war-torn, destroyed economy is bleeding red. How will they pay their debts? The EBRD predominantly finances private and large state-owned companies.

The bank has stated its readiness to restructure debt obligations. The same is true of the World Bank when it comes to Ukraine. International investors have committed billions of dollars to Ukraine’s private sector by investing in various assets.

Those assets are now in distress, having depreciated in value and lost much of their cash-generating capacity. While Ukraine’s GDP has plummeted by over 30% with its currency losing a further 30% against the dollar, the economy’s foreign-currency debt obligations have remained unchanged. This handout picture taken and released by the Ukrainian President press-service in Kyiv on May 16, .

. . [+] 2022 shows Zelensky and Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva holding a video conference.

(Photo by AFP) (Photo by STR/AFP via Getty Images) AFP via Getty Images MORE FOR YOU Juan Soto Contract Rejection Could Make Orioles A Better Buy Than Nationals Odds Of Global Recession: ‘98. 1%’. Broader Picture ‘Concerning’.

Cantu Beauty’s Global Vice President Talks About The Power Of Reaching Within Ukraine: Debt Holiday for Some What does that debt holiday look like? In August, G7 nations agreed to restructure Ukraine’s foreign debt . So did the Paris Club of creditor nations – who have a lot of experience in dealing with bad loans in Argentina . Other creditors and major international bondholders agreed that Ukraine can defer debt payments until 2024.

Ukrainian Prime Minister Denys Shmyhal said the deal will help save the country $6 billion. The country has also been on the receiving end of billions of dollars in aid money from the U. S.

and Canada, each disbursement coming with its own set of requirements. It is unclear if any of those funds can be used to service debts owed to the IMF and EBRD. According to Shmyhal in an article published by the Kyiv Post, the deal also included debt payments owed by several state-owned enterprises (SOE), including Ukrenergo, the nation’s leading utility company, as well as Ukravtodor, a civil engineering firm mostly known for highway construction.

On September 5, Ukraine’s Central Bank reportedly sent a letter to Ukrainian private companies experiencing financial problems because of the war, and told them to open negotiations with their creditors, recommending them to restructure and reschedule. Problems emerged almost immediately. Several companies were denied any debt holiday by their foreign creditors.

This even includes Naftogaz, which is state run. It has been largely unsuccessful in its attempts to negotiate a restructuring of its foreign debt obligations, with only 2024 bonds extended. Debts falling due in 2022 and 2026 remain payable as initially scheduled.

Naftogaz can count on state support. Private companies are facing even more significant challenges. In April, The Atlantic Council said that around 30% of all Ukrainian businesses had been forced to cease activities, while others downgraded operations due to limited access to resources or markets.

A photograph shows anti-tank obstacles on a wheat field at a farm in southern Ukraines Mykolaiv . . .

[+] region, on June 11, 2022, amid the Russian invasion of Ukraine. (Photo by Genya SAVILOV / AFP) (Photo by GENYA SAVILOV/AFP via Getty Images) AFP via Getty Images Farm Crisis Exacerbated by Finance, War For weeks, the Western press has been full of stories about Ukraine being a breadbasket nation unable to export wheat to the world, namely Europe and Africa. Ukraine has always been an agricultural power.

It was the agricultural hub of the former Soviet Union. The yellow in its flag is the color of golden wheat against a bright blue sky. The market is well aware of Ukraine’s farm sector crisis due to the war.

One of the best examples is a private agribusiness player called Ukrlandfarming (ULF). They own two of Europe’s largest poultry farms near Kamenetsk-Podolsky in the western region of Khmelnitsk – unscathed by the war – and another one close to Chernobayvka – which is in the Kherson region – a battle zone. They also own two of Europe’s largest grain storage facilities, known as elevators.

These grain elevators have the capacity to store slightly over 2. 5 million tons of wheat. ULF had a farmland portfolio of nearly 500 thousand hectares (around 1.

2 million acres) with a fleet of agricultural machinery and equipment, grain silos, bio-gas manufacturing facilities and more. ULF claims that since the war began, it has lost its Chornobaivske egg farm near Kherson. ULF claims to have lost millions of dollars worth of operating assets, and more.

They lost control of nearly 30% of their land portfolio, now under Russian occupation or ruined by bombs and bullets. Some 50% of its egg-farming assets and equipment have been destroyed. Those physical losses do not include financial losses caused by their inability to export out of Black sea ports controlled by Russia’s military.

The blockade of the Ukrainian ports was only partially lifted after Turkey managed to broker a deal with Russia in late July to get Ukrainian wheat out to market. The WSJ first reported on ULF’s case back in April when the war was in its early stages. Many Ukrainian agribusiness operations have been laid to waste.

Owner of a farm stands in front of the destroyed animal plant close to the frontline between russian . . .

[+] and ukrainian armies combats in the outskirts of Kharkov. (Photo by Celestino Arce/NurPhoto via Getty Images) NurPhoto via Getty Images The War as an Opportunity While most of the Ukrainian agribusiness company’s creditors agreed to ease payments, Greenwich-based emerging markets fund manager Gramercy has not. They are invested in the company through the Gramercy Distressed Opportunity Fund .

The fund is one of the largest foreign investors in ULF. The Ukrainians are actually being sued by Gramercy, to add insult to injury. It’s been ongoing since 2021.

This makes their debt woes more difficult. The lawsuit has led to further disruption of ULF operations, undermining its chances of recovery while eroding the company’s value, which is used to meet the debt claims of other creditors, both secured and non-secured. Given the circumstances, some in the Ukrainian government that were part of the restructuring plans for the SOEs, said the lawsuit should not come in the way of a temporary hold on payments.

One source, who did not want to be quoted on the record, and was not privy to the Gramercy lawsuit, said, “everything (on debt payments) seems settled except for some ‘small’ corporate claims. But considering that the foreign debt of the Ukrainian government as of July 1 ($60. 1 billion) was smaller than the foreign debt of Ukrainian private businesses ($67.

9 billion), you can figure that less than half of the total debts were extended by these (G7) agreements in August. Even if Ukrlandfarming satisfies Gramercy’s claims…I think more stories like this will emerge sooner or later,” the source concluded. “No business in a nation at war should be considered financially secure to pay creditors and foreign bondholders,” they said.

EBRD expects the Ukrainian economy to contract by 30% this year. The IMF is even more bearish at 35%. There is some talk in Kyiv, and it is unknown how wedded leaders are to this issue, that the next step in economic diplomacy with the U.

S. and Europe is to convince them to start talks about the long-term sustainability of Ukrainian foreign debts, including the private sector. And some in Ukraine have floated the idea of using some $330 billion in ceased Russian Central Bank dollar and euro deposits to pay off loans and overdue interest payments on bonds in some kind of ‘Ukraine restoration fund’ after the war.

Early fall in Greenwich, CT. Local fund company, Gramercy, is in a lawsuit with ULF; a lawsuit that . .

. [+] ULF’s management claims makes it impossible for them to recover from war losses. getty Ukraine vs Greenwich: See You in London? Like many Eastern European dramas, this one includes a beef between a Ukrainian businessman and a Western company: it’s Gramercy of Greenwich versus a once-listed Forbes agricultural (ex) billionaire named Oleg Bakhmatyuk.

They are entangled in several lawsuits. If it keeps up, it may end up eating most of the debt ULF owes its lenders. ULF is in the crosshairs of that legal battle at a time when it has also been in the crosshairs of Russian rifles, tanks and bombs.

ULF investors have been losing money in Ukraine since the 2014 annexation of Crimea. The ongoing war and the devaluation of the hryvnia against the dollar continue to crush that investment. ULFs major lenders, all investors in its corporate notes, agreed in 2016 to a restructuring to protect all investors in the months ahead.

Notably, under the terms of the Notes, a Trustee was appointed to act for all Noteholders. A ten year old picture of Oleg Bakhmatyuk, chairman and owner of Ukrlandfarming. Here, Oleg is being .

. . [+] interviewed in Beijing on Tuesday, May 8, 2012 to discuss ag exports to China.

Photographer: Nelson Ching/Bloomberg *** Local Caption *** Oleg Bakhmatyuk 2012 Bloomberg Finance L. P. The Trustee was granted the ability to sue as it deems fit against ULF to enforce its obligations to those investors.

But, according to ULF lawyers, it appears that Gramercy is seeking to gain an unfair advantage over ULF’s other creditors by trying to get ahead of other creditors, including state-owned ones. It proceeded with its own claim to sue the majority shareholder of the company – Bakhmatyuk — and other parties by arguing that it was not the annexation or war that led to ULFs financial woes, but Bakhmatyuk who “stripped assets” from the company at its most dire time. Gramercy did not respond to written requests for comment last week.

“Gramercy’s complete disregard for its agreements with us is what Gramercy does as a ‘vulture fund’ — namely, purchasing high-risk, distressed debt and then filing a lawsuit to use litigation to unfairly leverage its position beyond its investment,” ULF said in a statement on the matter. “Gramercy has filed litigation like this in dozens of federal and state courts all over the United States. In the end, any dispute regarding Gramercy’s unsecured investment is a garden-variety business dispute that belongs in the London Court of International Arbitration,” the statement read.

The Ukrainian state fared better. On August 10, Ukraine won bondholder approval of a two-year moratorium on debts. “Ukraine’s government – and its people – now stand on the verge of bankruptcy,” wrote Maximilian Hess, a Fellow at the Foreign Policy Research Institute, on the eve of this debt jubilee.

For some, it is still the case. The national currency, the hryvnia, was devalued by the Central Bank in July. Now $1 buys 37 hryvnia, up from 26.

50 a year ago. Naftogaz – one of the most important companies in Ukraine – is in default on bond payments due this year. The country’s sovereign bonds are priced at around 17 cents to the dollar.

That’s an 83% discount from par value. For debt-riddled and war-torn Ukraine, Russia’s annexation of territory and Russia’s recent bombings in Kyiv this week is a force majeure moment that would justify a debt holiday. That will have to include a pause on corporate loans from a friendly state, or Ukraine’s government will be bailing out an exhausted private sector for years to come.

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