Why Ukraine Deserves a Haircut

LONDON – In addition to its many other troubles, Ukraine now finds itself in a showdown with its creditors. Investors holding high-yielding bonds – many of them bought at heavy discounts after Russia’s annexation of Crimea last year – are demanding to be paid in full. Ukraine’s government, for its part, argues that the country’s financial difficulties – in particular the economic effects of the conflict and the plunge in the value of the hryvnia – have made its debt burden unsustainable.

The outcome of this standoff could determine Ukraine’s future, as much as the military confrontation with Russia. Recent developments have put the country on a path that would have been unimaginable until very recently. For the first time in Ukraine’s post-Soviet history, it has a government that is willing and able to carry out real reform. Ukraine’s progress, however, could not be more fragile. Without some form of debt relief, it could easily be lost.

A little over a year ago, Ukraine did not have an elected president or a representative and functioning parliament. The political landscape was deeply fragmented. Civil society had been energized by the Maidan revolution that ousted former President Viktor Yanukovych, but it was in turmoil. Debate over the association agreement with the European Union, along with the Russian-backed rebellion in the east, had stoked tensions over distinctions that previously played little or no role in people’s lives.

But since parliamentary elections in October, Ukraine has begun to pull itself together. Russia’s intervention has to some extent backfired, strengthening support for a European orientation. Eastern Ukraine may have voted differently from the rest of the country, but the overwhelming majority of voters came out in favor of Europe. The electorate also said no to the more virulent forms of nationalism, leaving the right-wing extremist parties marginalized.