Growing demand for Ukrainian dollar bonds: the role of the US elections

24 October 11:18
РОЗБІР ВІД Komersant Ukrainian

The Ukrainian financial markets have seen increased demand for Ukrainian securities, especially US dollar bonds, which reflects optimistic investor sentiment. One of the reasons for this is the expectation of Donald Trump’s potential victory in the US elections. Investors hope that he will be able to help bring the war to a quicker end, which increases the attractiveness of Ukrainian debt. To find out more about the situation on the Ukrainian securities market and investors’ expectations, Komersant UkrainianKomersant Ukrainian asked Oleg Ustenko, an economist and former advisor to the President of Ukraine.

According to Bloomberg, Ukrainian bonds have risen by almost 6% this month, becoming one of the best performing assets on the market, with their value approaching 50 cents to the dollar.

Warrants linked to Ukraine’s economic performance are trading above 70 cents on the dollar, the highest level since a full-scale Russian invasion in 2022, when they fell below 15 cents.

Funds are buying the bonds in the hope that a Trump presidency will help bring about a faster peace, said Dmytro Bozhko of Dragon Capital in Kyiv.

“This idea is widespread in the market. The focus is especially on contingency bonds maturing in 2035 and 2036,” he said, referring to bonds issued after the debt restructuring deal in August.

An agreement between bondholders and Ukraine’s government in August to restructure $20bn of unpaid debt is adding to investor optimism. However, some say they are buying the debt despite a possible Trump return, not because of it.

Oleg Ustenko, an economist and former advisor to the President of Ukraine, notes that this trend is caused by a number of factors that could affect the country’s long-term financial stability.

“On the one hand, what we really see in the market, and we see the growth in demand for Ukrainian securities. But, in my opinion, there are several things,” Ustenko said.

According to him, from a global perspective, Ukraine has every chance of getting out of the war and achieving significant economic growth.

“The first thing is that in the global, long-term perspective, it is expected that Ukraine will eventually get out of the war, Ukraine will demonstrate such significant economic growth that it will mean that GDP in absolute terms will increase, if it increases in absolute terms, our debts will remain at the same level… That is, it means that in principle the debt-to-GDP ratio will decrease. This is the first thing,” the expert said.

The second issue concerns Ukraine’s debt restructuring, which was carried out in August 2024. This demonstrates that the country is paying attention to the medium and long-term debt service prospects, including the $20 billion Eurobond.

“Even with the restructuring that we did in August of this year on our European bonds, we have shown that this is always on our mind, what the country is thinking in terms of this medium and long-term perspective, how the debt will be serviced. This is what was done in August, the restructuring of the European bonds – worth $20 billion – means that attention is being paid to this policy and, accordingly, even if there is talk of holding a conference in the post-war period to review our debt in general, this will most likely not concern our private debt, or rather the public debt that is in private hands, as August of this year demonstrated. Accordingly, this means that we can trust it and buy it,” the expert adds.

Ustenko also emphasises that Ukrainian debt, in particular European bonds, is trading at a significant discount.

“The third thing I would point out is that, no matter what, all our securities, our debt obligations, and we are talking about European bonds, are trading at a huge discount. The discount is quite high for all the securities, including those that belong to the group that were issued back in 2015, when the first major restructuring took place. And the new securities that have been issued now, the securities that have been exchanged one for another, all this gives the impression that if something is traded at a huge discount, this discount is, let’s say, much lower than it was at the beginning of the war,” the economist said.

According to him, at the beginning of the war, the discount was 80%, and now it is half that, but it is still significant.

“It is also true that when there is such a discount, everyone understands that the risk is still high. There is no such thing as securities being traded at a high discount and no risk. Everyone understands that the risk is high. But, if we talk about the long-term perspective, investors believe that it is possible to buy it, to take such a risk, because the profit that can be made on this investment will cover the risk that exists,” Ustenko explained.

Investors are willing to take these risks because they believe that the potential profit can exceed the likely losses.

“I would also add that the general expectation around the world is that instruments of this kind are not profitable enough, but here there is a fairly high level of profit and again risk, and in an environment where there are many funds that diversify their portfolios, they agree to buy even high-risk securities – our securities,” he added.

Ustenko also notes that some investors may be acting on expectations related to a possible Trump victory. Given that investors may be optimistic about the situation, the expectation of an end to the war plays an important role in their perception of the possibility of Trump’s victory.

“In terms of whether we can say that it is because they expect Trump to win, I would assume that some investors are in the logic that Trump, if he wins, he promised there that even before he gets to the oval office, there will be agreements reached, the war will be over. Some investors may think this is partly irrational, because everyone, and especially investors, are trying to take a more optimistic view. Their natural optimism means that they see this information,” he explains.

Further assessment of the situation shows uncertainty.

“If we continue to assess, everything that is happening can be split 50/50. Trump comes to the oval office, or Harris. And, given this, those who are more optimistic about Trump’s victory – not just the development of everything, but Trump’s victory – and trust what he says, they believe that they can buy despite the risk, but then they will consider this level of risk to be lower for them compared to other development scenarios,” Ustenko concludes.

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