GlobalCapital's Toby Fildes talks to Yuriy Butsa, the man charged with making sure Ukraine continues to access domestic and international financial markets, in the thick of fighting a war with Russia.
Speaking just as the country launched its third set of War Bonds, the government commissioner for public debt management had stern words for international banks still making up their minds on what to do with their Russian businesses. But he praised firms that had decided swiftly to exit Russia and get behind Ukraine.
Despite being attacked by one of the largest military forces in the world, Ukraine still has an encouraging set of financing options to help it get through these dark days.
In addition to the War Bonds, which have so far raised $658.6m equivalent, Butsa raises the potential of a Ukrainian diaspora bond programme, perhaps similar to that of Israel. It may be able to issue USAID-backed bonds like it raised in 2014-16, or use crypto-currencies.
Meanwhile, international partners such as the European Union, G7 countries, World Bank, IMF, European Bank for Reconstruction and Development and European Investment Bank have hastily arranged packages of financial support.
Just like Ukraine's president, Volodymyr Zelensky, Butsa is confident of his country's victory over Russia and is already contemplating the efforts needed to rebuild his country — efforts he is at pains to highlight will be paid for by Russia. And just like the president, Butsa is prepared to take up arms and shoot Russia soldiers if need be.
GlobalCapital: First and foremost, I hope that you and your family are safe and well?
Yuriy Butsa: Thank you for asking — everyone has taken some measures to stay safe and everyone is fine as of now.
Where are you calling from?
Well, we’re not disclosing where we are right now, unlike normal, although everyone from our team is in Ukraine obviously. But locations are different — some have stayed in Kyiv, some have moved out.
I must say, for good or bad, Covid times have helped us deal with this situation more easily because we’ve been in the remote mode and functioning very well over the last two years. So since the invasion, we haven’t had to put team members at risk by insisting they all come and work in the same place. Everyone is working from locations of his or her choice and everyone is used to this remote process, as a result of lockdowns over the last two years.
I imagine being used to working remotely has also helped your communications with the market — both domestic and international — during these extraordinary times?
All the domestic primary dealers had contingency plans in place, I’m sure partially due to having become accustomed to a remote way of life over the last two years.
We had the first local bond auction five days after the war started and despite a few minor technical glitches at the beginning, all the banks’ systems were up and running and ready to participate in the auction.
As for international investors, although we had done some physical investor relations work and attended a small number of conferences during the last two years, they were also used to the remote way of doing things. Most of our interactions since 2020 have been online through investor calls, and we’ve managed to do deals virtually. So we haven’t seen much change in how we go about things.
Obviously, they were quite surprised that we were operating, but we haven’t had a problem reaching out to domestic or international investors since the war began.
Do you have any contingency plans if you have to leave Kyiv or even Ukraine? What happens then?
We have all our systems up and running and can continue to do so without any physical attachment to any particular location in Ukraine. So that contingency plan is in place. But at this moment in time, the situation is not getting worse for us to enforce those contingency plans. We continue to have our staff operating in diversified locations and do not rely on one particular location.
What are your short and medium term plans to raise money?
We plan to do business as usual in terms of auctions. Obviously, we’ve had to decrease the number of bonds we offer since the war began.
Today’s auctions show that demand for our local bonds is steady even though it’s the third week of the war.
Before the one today, we did one on March 1 and another on March 8, one of which was a very short bond and specifically for investors stuck with capital controls who couldn’t repatriate. During these three auctions we have raised $658.6m-equivalent for the state budget of Ukraine.
They have been branded War Bonds, although technically speaking they are not specifically for war financing but for budget financing in times of war. The proceeds were not used to buy weapons but to pay pensions and salaries to healthcare workers etc. It was not our branding — but we will continue to issue them.
So you’ll continue to issue those War Bonds but they’ll continue to pay for pensions and salaries and not military hardware?
Yes, we have all the budget systems up and running. Obviously, there are some issues with less revenue collection and some specific spending has been prioritised, but we are borrowing to cover the budget gap.
We are concentrating on both commercial and concessional borrowing. Obviously, commercial borrowing is a bit more tricky on the external front, but domestically we see a lot of participation from the banking community and investor community and they want to support us. International investors have also reached out to us and said they will participate in the auctions.
We have tried to mobilise all the support. A very important channel for us is the retail bond systems that several market participants have launched. We have seen turnover picking up here, as people can invest in our instruments through their own accounts.
We are also looking at a way to reach the Ukrainian diaspora. It’s quite complicated because of the regulations in each country but we are looking at different ways to tackle it.
But predominantly we are relying on concessional financing.
With the diaspora bond idea, is one of your international banking partners helping you explore this option?
Yes, we are working with some of our international partner banks which have retail networks and distribution in countries that are hosts to large parts of the diaspora. Our obstacle is that retail investors are non-qualified investors, which makes it difficult for them and us.
But we are looking at the experience of Israel, which has a diaspora bond programme up and running. We will talk to them in detail about how they managed the process and got it working.
Alternatively, we have had an idea from the market about using crypto-currencies to raise money. We haven’t explored it in depth yet, but we will start to look at the details of the initiative very soon.
Has the international support for your War Bonds been as high as you would have wanted?
It was hard to expect huge participation by international investors — although there were more of them in the second auction — because a lot of investors have had to sort out their systems to take part. But those who already had the infrastructure set up could access us, and they did.
There has been a lot of interest from investors who had not participated in our domestic bonds before but usually invested in external bonds. We are working on ways to make sure they can invest in our domestic bonds in the future — we are busy trying to make access as simple as possible.
You mentioned concessional financings. Are you expecting to issue a USAID bond, or something similar from Europe, in the near future?
We have discussed the idea with the US for a while now, and as you know we issued these types of bonds in 2014 , 2015 and 2016, which had guarantees from the US government via the US Agency for International Development.
Since the situation deteriorated late last year and especially since the war started, we have been engaged in deep discussions with international partners such as the EU, G7 countries, World Bank, IMF and European Investment Bank. We have received the first disbursements already.
In addition, the US Congress has approved $13.3bn in emergency aid for Ukraine last week. [Of this, $2.65bn has been channelled to USAID]
We are now waiting to hear from them on how they will disburse this money, and whether it will be similar to what they did between 2014 and 2016, or different, because as far as I understand, they have not had this bond instrument in place for the last six years. The September 2016 USAID bond might have been one of the last ones from the programme.
So they are sorting out their internal mechanics, we are in touch with the US administration, specifically the US Treasury. But this is effectively the only way, at a time of active war with Russia, we can access the international bond market right now.
We are ready to explore similar options with other countries, including the European Union. They have a simpler solution for financial assistance, where they issue their own bonds and pass on the proceeds to us. But we are of course open to discussing alternative methods, and with more countries.
Would you consider bilateral lending from China if it was offered?
There are no such discussions, as we are focused on bilateral lending from the G7 countries, which is enough for covering our financial needs without compromising Ukraine’s debt sustainability. But in terms of grant support we are open to co-operation with all those countries which stand by and with Ukraine.
How are you working with the multilateral development banks such as the European Bank for Reconstruction and Development, EIB and World Bank/IMF?
As I mentioned earlier, we are working closely with these institutions. We saw the first disbursements from the World Bank last week, for example, and sorted out the solution with the EIB repurposing existing facilities for immediate use.
The EBRD is a slightly different case as they don’t finance the budget directly, but we work very closely with them on, for example, support for state-owned enterprises and private sector institutions.
What are your plans with existing international bonds in terms of coupons and maturities? How can you manage this?
We do not have any plans not to service the debt. The cost of not servicing the debt is much higher than servicing it, to be honest. Our first repayment is not due until September so we have a lot of time to go, and we hope conditions will have normalised for us by then.
Given the strength of international feeling towards Ukraine, is a consent solicitation to materially change some of the terms of repayment an option for you?
We have not discussed this. At the moment, our top priority is to ensure stable budget financing, so we haven’t even started to think about about any form of management of our existing debt.
Although you have said you are not even contemplating any restructuring of your $94.7bn of external debts right now, is it not inevitable that you will have to in the future, given the cost of the damage inflicted by Russia?
Massive support from our international partners and frozen Russian assets that can be used to repay the damage Russia is doing to Ukraine should help us to cover all the financing needs for rebuilding our country and speed up our return to market financing.
What do you think about Western banks’ response to this war? Has it been adequate?
We have had a lot of positive signals from the international banking community and we have worked with a couple of international banks on different solutions and they have been really very helpful and fast with their suggestions and feedback.
We have also been keeping a close watch on the banks vis-à-vis their operations in Russia. We can see that there are different dynamics. Some banks were very quick and open to say they were stopping servicing their Russian clients and we appreciated that very much, as it has helped put more pressure on Russia.
From some other banks we did not hear of their intentions, or heard that they were cautious. Obviously, we are taking note of that.
But I must say that our key partners have been quick to move away from Russia. The same must be said for the rating agencies, which have quickly made their minds up.
We have also been making the case to the banks for them to kick out Russian bonds from their indices, because of the fact that, first and foremost, Russia is the unprovoked aggressor, but second, they are heading to default already.
What would you say to the banks you think have taken longer to work out their positions in Russia?
I would say that they should stop thinking only about the cost-benefit analysis for their businesses. Everyone is suffering financially. They need to consider their moral values before thinking about their balance sheets.
What should Western banks and investors do to help you right now?
First, we need more financial support — not only through their own balance sheets but also through channelling all the investors and being quick to capture extra demand.
Second, help us with communication with the investor community — which is something they are already doing very well. And also help with communication with their national governments, to help with generating more governmental support.
When you say capture additional demand how would you do that? A new sovereign bond?
It’s an interesting question because I am not sure we could launch a classical Eurobond without a guarantee like the one we have discussed already, or some form of alternative credit enhancement structure. The classical bookbuilding exercise would probably not work at this moment and would not capture the retail element of demand.
Do you intend to stay where you are and if the Russians arrive take up arms and fight them?
To be honest, I am going to stay doing what I’m doing because I think that is the most useful action I can do for Ukraine. At the moment, arranging the financing for Ukraine is the most useful thing I can be doing. But if you were to ask me what I would do if a Russian soldier was standing in front of me, and I had a gun? It’s a no-brainer.
What would be your message to international investors and the international banking community?
To all those who haven’t woken up yet to what Russia is doing, you need to wake up quickly and realise that dealing with Russia is now no different from dealing with North Korea. That is the reality. Russian securities as well as Russian businesses are the most toxic thing out there.
This will remain the case until Russia changes its mind, or is defeated and covers all the costs that it has so far inflicted on this country.
Is it too early to think about the costs and responsibility of rebuilding Ukraine?
It’s not too early. We are already discussing it. You see, the Russians are employing classic terrorist tactics of hitting the cities and the schools and hospitals here. We have a special taskforce counting the damage done to the infrastructure. So that when it comes to the court cases against Russia everything is documented and the world will know the true price that Russia will have to pay — the price of reconstruction of Ukraine.
The latest number I have heard out of the Ministry of Economy is north of $120bn of damage inflicted. Unfortunately, that number is growing. Of course, Russia has a lot of frozen reserves that can be used for the reconstruction.
Additional reporting by Francesca Young