History of accumulation of the Ukrainian sovereign debt, defaults and its effects on the economic development of the country

9 July 2015 by Zakhar Popovych

1992 the National Bank of Ukraine began to issue loans and state guarantees for foreign loans to Ukrainian state-owned enterprises. Because of the absence of any transparent mechanism and arbitrariness of the assessing of credit projects it resulted in huge corruption and ineffectiveness of the use of credit recourse. Decisions on crediting were made without any competitive procedure and clear methodology by the monetary board of the Cabinet of Ministers of Ukraine – a small group of corrupt officials.

Borrowings were systematically made without real evaluation of the ability of the state budget to service the debt. Under such conditions during the 7 years (from 1992 to 1999) state guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). were issued for total amount of $2.4 bln loans. Most of the enterprises-borrowers never pay back their debt and declare fictitious bankruptcies.
There is reason to believe that this policy has been a deliberate attempt to stimulate the primary accumulation of capital in private hands. In any case, there is no doubt that the irresponsible policy of foreign creditors and international financial institutions has contributed not only to the retraction of Ukraine into the debt bondage, but also to the corrupting of local elites and the formation of an oligarchic class.

The natural result of such a policy was the sovereign default of Ukraine in the year 1999. 1999-2000 year bonds were reissued with payments scheduled in 2001-2004. For foreign holders of bonds were issued special Eurobonds. Foreign commercial debt obligations were exchanged to Eurobonds with an annual rate of 10-11%, which were repaid by 2007. It was no haircut. However, the government gained time to maneuver and tried to develop a more balanced debt policy. Since 2000, due to the failure of the Ukrainian government to implement the “market reforms” demanded by IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

the lending was minimized. Ukraine received $0.5 billion only from $1.8 billion envisaged for 2001-2003. Since 2002, Ukraine ceases to borrow from IMF, and from the end of 2004 strictly limited the cooperation with IMF and the use of IMF technical advisory services. Up to 2008 new credit programs were not opened [1] [2].

So, after the 1999 default Ukraine for some time released from active cooperation with the IMF and almost ceased to consider its recommendations. However, after the year 1999 the country enjoyed the decade of economic recovery and grows, the only one in its post-Soviet history. The period of grows ended only in 2008, when country mostly reached its 1990 GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
level [3]

Default of the year 2015 is very different from the previous one because of different government policy and another level the cooperation of the current government with the IMF. The consequences of current quiet “technical” default “by mutual agreement” with creditors could be even much worse. Perhaps the timely unilateral declaration of default would be the best and to improve the government’s position in negotiations with lenders on restructuring and write-down (haircut) of the debt [4].

Considering the possible effects of the implementation of the Ukraine-EU free trade agreement and IMF recommendations, prospects for economic growth in Ukraine are very uncertain. Most likely, the revision of the agreement with the EU and the rejection of austerity measures will be required for the resumption of economic growth [5] [6]


[1Кравчук О., ІСТОРІЯ ФОРМУВАННЯ БОРГОВОЇ ЗАЛЕЖНОСТІ УКРАЇНИ http://commons.com.ua/formuvannya-zalezhnosti/

[2Попович З., Маємо другий неоголошений дефолт

[3Popovych Z., Economic grows and perspectives of the innovative development in Ukraine, Economy of Ukraine, 2004, 12(509), pp.41-47

[4Попович З., Гошовський В., ЧОМУ ОДИН ДЕФОЛТ БУВАЄ КРАЩЕ, НІЖ ДЕСЯТЬ РЕСТРУКТУРИЗАЦІЙ. До питання про недосконалість міжнародної системи реструктуризації державних боргів http://commons.com.ua/chomu-odin-defolt-buvaye-krashhe/


[6Кравчук О., Можливі соціально-економічні наслідки євроінтеграції для України

Zakhar Popovych

Ph.D. in Economics
Center for Social and Labour Research,
Dobrov Center for Science and Technology Potential Studies
of the National Academy of Sciencies of Ukraine



8 rue Jonfosse
4000 - Liège- Belgique

00324 60 97 96 80