Some investment analysts and policy advisers criticized the Ukrainian government’s move to cover Naftogaz’s $1.67 billion eurobond obligation on Oct. 1. The payment was part of the state-owned energy giant’s $4.8 billion debt servicing schedule for the year.

Since the hryvnia is at its weakest against the U.S. dollar, all payments in the American currency are extremely expensive these days.

The eurobond settlement should have been postponed – or “restructured” in financial jargon, said Viktor Kryvenko, a policy advisor at the Finance Ministry and parliamentary candidate with Samopomich, a party that is betting on a younger generation of politicians.

The logic is, according to Kryvenko, local demand for the dollar should be satisfied and the budget is in a critical state.

“It may have been easier to restructure,” said an Oct. 3 note to investors by the London branch of South Africa’s Standard Bank. “Difficult choices had to be made in terms of spending priorities – debt service over public spending and higher taxes on the energy sector. The price has likely been deeper recession, and less energy security.”

Meanwhile, Oleksandr Valchyshen, head of research at Investment Capital Ukraine, a major bond trader, says restructuring would be “suicide”. Maintaining the confidence of foreign institutional investors is more important for the Ukrainian government than saving $1.67 billion.

Yuriy Korolchuk, an analyst at Institute for Energy Strategies, says restructuring was simply not an option because each side wouldn’t agree on the conditions. “This is why the International Monetary Fund gave money, so the government could repay its debt,” he emphasized.

Had investors even agreed to reschedule the payment – they’d have to be provided with a much higher interest rate compared to 9.5 percent that went with the eurobond’s issuance in 2009, given the country’s current credit rating of CCC, which can be described as“extremely speculative” or “default imminent.”

In August, the yield on this particular security was above 30 percent which basically reflects how much investors want to earn on a Ukrainian government-backed debt.

Initially Naftogaz borrowed $500 million through a eurobond in 2004 and $1.1 billion through loans over the next five years. Overall, $1.6 billion was due in 2009. But Ukraine didn’t have the money, which is why then-Prime Minister Yulia Tymoshenko’s Cabinet decided to issue another Naftogaz eurobond that year and promised investors to pay it back in 2014.

This is also a part of another story. Ukraine’s underdeveloped eurobond legislation obliges an issuer to place as much as 75 percent of the bond on the illiquid domestic market for local investors, whose appetite is critically low and borrowing even $100 million at current market conditions is a mission close to impossible.

To bypass this legal norm, Ukrainian companies borrow from the global market through subsidiaries established in foreign jurisdictions, but Naftogaz is a state-run company and this was not an easy option for it. As a result, Tymoshenko gave a special order to the central bank to allow Naftogaz to issue a eurobond in 2009 without placing any of it on the local market, basically circumventing legislation. She decided to make an exception instead of changing the rules that just don’t work.

By Ivan Verstyuk