For Ukraine to break its vicious cycle, it needs to send a strong message that it is moving forward with its anti-corruption reform agenda. This means establishing a just judicial system while also reforming and removing state-owned enterprises that breed corruption.
To decrease its debt vulnerability and save its economy in the long run, the government should buy back or restructure the GDP warrants while Ukraine’s international reserves, at roughly $30 billion, are at an eight-year high. The Ministry of Finance already repurchased around 10 percent of the notes last year. This will reduce the loan burden going forward, helping to free the country from a progressive warrant system that charges more the more successful the economy becomes. Ukraine should also limit its current selling of securities, at least as long as it has to pay sky-high interest rates because of political risk. If Ukraine does decide to tap the capital markets again, it should be with more thought of lowering the long-term financial burden.
It’s unlikely, however, that this will happen. Zelensky’s staff has had too much turnover to carry out systematic reforms—during his presidency, Ukraine has had three finance ministers alone. What’s more, it will be easy to leave the debt issue for future administrations to deal with.
But that doesn’t make the situation any less urgent. Although still distant, a debt default is a possible consequence if Ukraine keeps loading up on expensive credit. A default is ruinous for a country’s investment climate. Investors worrying about such an outcome may continue pulling out their money from Ukraine, as many have already been doing. Increasing debt will also escalate Ukraine’s political vulnerability, both at home and abroad. If Ukraine’s government decides to continue piling up debt without much-needed reforms, it is only setting itself up for a perfect storm.