EU aid to Ukraine aims to pressure bondholders

Ukraine has to take anti-corruption measures to assuage Western fears that money invested in the country will be salted away

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The European Union has granted its first significant loan to crisis-riven Ukraine, in a move seen as a strong message to big Western investors to cut the country some slack on its debt repayments.

EU officials agreed to lend £1.3bn to aid an economy that has contracted by nearly 18 per cent in the past year. In return, Ukraine has to take anti-corruption measures to assuage Western fears that money invested in the country will be salted away; there have been persistent rumours that some past loans to the country have disappeared.

Ukraine is now trying to negotiate a reduction in repayments on $23bn (£15bn) of loans from Western private investors. Having stalled for around a month, talks between the two sides recommence in London next week, with Lazard advising the Ukrainian Government. Blackstone is advising the creditors, which include big investors such as Franklin Templeton, BTG Pactual Europe, TCW Investment Management and T Rowe Price. BlackRock is also a creditor but is not part of the group being advised by Blackstone. Ukraine has been insisting bondholders accept a writedown. The creditor group says no such “haircut” is necessary.

Michael Ganske, head of emerging markets at the fixed- income fund manager Rogge Global, said: “The EU’s loan is sending a signal that multilateral support is there for Ukraine, and the private sector should accept debt restructuring. This is not a normal creditor agreement. You have the political involvement of the US, the EU, Russia – it is much more complex.”

He said Russia would be hurt by a Ukraine default because it too is owed $3bn. However, Moscow could also make political capital from such an outcome, Mr Ganske added. “Russia could say, ‘Look, they’re not even able to manage their economy’.”

Continued military action adds to the politicised debt talks, with Russia, Kiev and the West engaging in PR battles over the violence. This has extended to the leak of a supposed Russian forensics report to Novaya Gazeta, the Russian newspaper published by the Lebedev family, owners of The Independent titles. The report suggested that the downing of  flight MH17 last year was the work of the Ukrainian military, not separatists – as has been widely claimed by Kiev and the West. 

It was said to have been compiled by engineers including those who had worked on the Buk missile system used in the attack. It concluded that, from the angle of the blast damage, the missile was fired from an area called Zaroschenskoe, where it claimed a Ukrainian anti-air unit was posted at the time. 

The veracity and authenticity of the leaked document has been widely questioned, and the official air crash investigation by Dutch authorities continues.