A Simple Act of Good: Forgiving Ukraine’s Foreign Debt Obligations

Daniel J. Quezada, Editor-in-Chief

Ever since the first missiles flew and the first tanks rolled across Ukraine’s borders in late February of 2022, it would be easy to assume that everything not related to repelling the invasion froze in place. For most of the world, the overwhelming majority of media coverage about Europe’s largest country by land area became focused on the movements of troops, the flows of millions of refugees generated by the conflict, and the myriad reports of war crimes being committed primarily by Russian troops throughout the country. Given far less attention, however, are the ways in which the nuts and bolts of statecraft continue to function independent of the largest land war that Europe has seen in decades. 

In war or peace, prosperity or poverty, the cogs of international finance are case and point. Even if only counting debt accrued since the 2014 Russian annexation of Crimea, The Guardian’s Owen Jones writes that Ukraine’s government is responsible for over $60 billion in external debt, a figure nearly a third of the country’s pre-war GDP[1]. This debt is not static, either, and is likely to drastically increase with each passing day as the Russian military inflicts further damage on Ukraine’s infrastructure and cityscapes [2]. The debt that the Ukrainian government holds continues to accrue in no small part because sovereign debt is an incredibly lucrative business for hedge funds and other businesses looking to turn immense profits on a short basis. As the war has severely damaged Ukraine’s macroeconomic stability, their central bank bonds (similar to United States treasury bonds) have traded at far below their full value. If repayment continues in these conditions, the repayment can generate immense returns for the holders of these bonds, giving those in the financial centers of the Global North plenty of incentive to keep the repayment cycle churning.

The history of what happens when unsustainable debts like those of Ukraine’s come due show just how dire the stakes are. In the world of international economics, defaulting on debt is one of the most devastating decisions a state can make. Even one singular default can cause a country’s bond rating to be lowered, which can wreak disastrous havoc on a country’s economy in the short term and make future borrowing substantially more difficult. The historical record is grim. Whether it is Mexico, Jamaica, or the Russian Federation itself, sovereign debt defaults or restructurings have been the impetus for radical reorderings of national economic governance that have prioritized the interests of foreign creditors over the material well being of the citizenry. At the present, Ukraine’s sovereign debt load places it in a precarious position on the precipice of default as Russia’s invasion has made its formal economy largely non-functional.

Does this rapacious cycle of debt peonage bordering on war profiteering have to persist? Is there precedent for international financial institutions unilaterally canceling a country’s debt? Indeed there is, and one need only look back two years to the International Monetary Fund and World Bank Group’s 2020 G20 Debt Service Suspension Initiative (DSSI), in which 73 low and middle income countries had over $11 billion in debt either suspended or entirely forgiven for financial difficulties as a result of the COVID-19 pandemic. Although this was not a wholesale cancellation of these countries’ debts, it was still a phenomenal humanitarian gesture that gave struggling economies breathing room to commit more funds to combat the pandemic rather than satisfy the accounts of primarily nWester bankers. The same could, and should, be true for Ukraine and other countries beset by warfare. With a reconstruction budget that grows every day as Russia continues its offensive, it should be an international imperative to give the Ukrainian government as much financial leeway as possible. 

International financial institutions and national governments have substantial leverage to suspend (or, preferably, altogether forgive) Ukraine’s immense foreign debt obligations, and should heed the calls of international solidarity campaigns in Ukraine and elsewhere to do so. Eliminating this debt would immediately remove one of the country’s largest financial obstacles and free up its capacity to rebuild a country bombed into oblivion by a war of aggression. This solution will without a doubt involve a great deal of courage by elected leaders in the United States and elsewhere to stand up to the immensely wealthy hedge funds and other private capital that profit handsomely off of foreign debt, but is nonetheless the right thing to do for Ukraine and all nations beset by catastrophes outside of their control. 

[1]  Jones, Owen. “There’s an Easy Way to Help Ukraine without Military Escalation: Cancel Its Foreign Debt | Owen Jones.” The Guardian. Guardian News and Media, March 21, 2022. https://www.theguardian.com/commentisfree/2022/mar/21/help-ukraine-without-military-escalation-cancel-foreign-debt-russia.

[2]  “Calls for Ukraine Debt Relief Grow as IMF and World Bank Provide Fresh Loans amidst Crisis.” Bretton Woods Project, April 6, 2022. https://www.brettonwoodsproject.org/2022/04/calls-for-ukraine-debt-relief-grow-as-imf-and-world-bank-provide-fresh-loans-amidst-crisis/.

[Image Credit Ukraine Ministry of Defense CC-BY-SA 2.0]