In line with our expectations, Ukrainian corporate Eurobond prices trended higher over the past month, further diverging from sovereign quotes.

Ukraine’s direct and guaranteed public debt stood at $116bn as of end-February, down 0.5% or $0.6bn m-o-m but up 3.0% (+$1.1bn) YTD and 24% (+$23bn) y-o-y.

Ukraine has received another $1.25bn grant from the US, the second tranche of a $9.9bn aid package being channeled via the World Bank PEACE project. Meanwhile, the government announced another $2.7bn of pending grant financing, consisting of $2.5bn coming from the US and $160m from other donors. The funds will be disbursed via the World Bank’s International Development Association and go towards financing social payments.

There were no significant battlefield developments yesterday, with Russian assaults still being focused on Bakhmut and the Donetsk city suburbs of Avdiyivka and Maryinka but making no appreciable gains. In Bakhmut in particular, the heaviest fighting was reported ongoing inside the town as Russian encirclement efforts on the western outskirts remained stalled. According to today’s update from the Ukrainian Center for Defense Strategies, Russian forces established a number of crossings over the Bakhmutka river, which separates Bakhmut into the eastern (smaller) and western (larger) parts, with street battles slowly moving into the western part of the town.

The Ministry of Finance placed UAH 2.8bn ($77m) of hryvnia-denominated bonds and $301m of USD paper at a primary auction yesterday.

Metinvest published its 2022 financial results, reporting a 54% y-o-y drop in sales, to $8.2bn, on a 61% slide in the metallurgical segment, to $5.7bn, and a 26% decline in mining segment sales, to $2.6bn. EBITDA shrank by 73% y-o-y to $1.9bn, with metallurgical EBITDA down 92% to $267m and mining EBITDA off 63% to $1.5bn. An underlying breakdown shows that a reduction in own sales was the main driver of the EBITDA drop (-$6.6bn y-o-y), followed by a lower contribution from JVs (-$900m). Net operating cash flow fell by 75% y-o-y to $1.4bn, including a -$68m change in the working capital. Net investing cash outflow was down 77% to $302m, and net financing cash outflow halved to $1.9bn as the company paid $1.8bn of dividends over the period. End-2022 cash stood at $349m (-70% y-o-y), total debt shrank by 7.4% to $2.1bn, and net debt increased 70% to $1.7bn, implying a Debt/EBITDA of 1.1x (vs. 0.3x in 2021) and Net Debt/EBITDA of 0.9x (vs. 0.2x at end-2021).

Tuesday extended the pattern of largely stalemated fighting that started to emerge last week. In Bakhmut, Russian forces, having hit the wall on the western outskirts of the town and unable to cut off the remaining Ukrainian supply lines and complete their encirclement, intensified assaults inside Bakhmut. Russian units apparently made small advances of several hundred meters towards central Bakhmut in the last several days, but it caused no critical deterioration for Ukrainian forces. According to independent OSINT mapping sources, the central and western part of Bakhmut roughly measuring 4x4 km is either a gray zone or Ukrainian-controlled. According to an Institute for the Study of War assessment, Russian forces took control of an additional 5% of Bakhmut over the past week and currently control c. 65% of the town (total area: 42 km2; est. pre-war population: 71,000). More importantly, the high ground west of Bakhmut remains under Ukrainian control, continuing to pose a (thus far) insurmountable obstacle to the Russian encirclement effort.

According to minutes of the latest NBU Monetary Policy Committee (MPC) meeting, its members unanimously supported keeping the key rate flat at 25% p.a. for the sixth consecutive meeting despite quicker than expected disinflation. At the same time, 8 out of 11 MPC members opined that the NBU could start cutting its key rate earlier than 2Q24, as envisaged by the Bank’s current base-case scenario. Three members suggested this autumn or even summer as a potential starting period. A majority of the MPC supported the idea that the key rate’s path should be aligned with liberalization of F/X controls, a plan for which the NBU is developing.

The State Statistics Service reported a raft of real sector indicators for October-December 2022 and the full year. Retail turnover slid by 21% y-o-y in 2022 following 11% growth in 2021. Industrial production (IP) fell by 37% last year after rising by 1.9% y-o-y in 2021. Cargo transportation dropped by 43% y-o-y, on top of -0.2% in 2021, while passenger transportation slumped by 50% y-o-y after jumping 28% in 2021. Finally, construction shrank by 65% y-o-y after expanding by 6.8% in 2021.

Russia conducted another relatively limited combat drone strike against civilian targets overnight, with the Ukrainian military reporting destroying 14 out of 15 Iranian-made Shahed-136/131 UAVs. During the previous drone attack less than a week ago, the Ukrainian air defense shot down 16 out of 21 Iranian loitering munitions. Thus far in March, Russia has conducted three standalone drone attacks, all limited in scale, and only one mass missile strike again the Ukrainian civilian infrastructure. This month’s Russian drone attacks have been half the size or even smaller than the January and February strikes, in which the number of UAVs destroyed ranged from 33-45 per strike (see chart below), suggesting that supplies of Iranian drones to Russia remain limited compared to much more abundant deliveries last fall. Thanks to the consistently high destruction rates of Russian drones, these attacks remain less of a threat to the domestic civilian infrastructure than missile strikes, for which Russia recently started to employ a higher share of super- and hypersonic missiles which Ukraine’s existing air defense capabilities cannot intercept.

The Ukrainian Finance Ministry said in a statement on Friday that the IMF assessed the country’s debt as unsustainable and that Ukrainian authorities were committed to undertake a treatment of external public debt. The authorities will assess a number of restructuring scenarios aiming to restore market access as soon as possible. The external debt restructuring will strive to achieve three goals: (i) restore debt sustainability, (ii) preserve liquidity and reduce the funding gap throughout the duration of the IMF program, i.e. over 2023-2027, and (iii) create conditions for the commercial sector’s participation in post-war reconstruction. Accounting for high uncertainty and in view of the previously agreed deferral of payments on sovereign Eurobonds until August 2024, the Finance Ministry plans to start talks with commercial creditors in early 2024 with the aim to complete debt restructuring no later than mid-2024.

DTEK Energy announced the results of its latest bond buyback tender, saying that $193.5m of the 2027 Eurobond principal was validly tendered and that the purchase payments would equal $80m. Settlement is expected on or about Apr. 14, 2023.

The weekend saw the Donetsk region front line remain practically unchanged despite Russian forces maintaining active offensive operations in the Bakhmut and Avdiyivka sectors. The line of contact up north in the Luhansk region and in the southern Zaporizhya and Kherson regions was virtually static too, with much less ground movement and mostly artillery duels. Judging from Ukrainian General Staff daily battlefield updates, the overall intensity of fighting must have lessened substantially, with the number of repulsed Russian assaults dropping to around 60 on each of Friday and Sunday, the lowest tallies since the beginning of March and less than half of 124 attacks on average per day reported in the first week of this month. In the Bakhmut sector, Russian forces managed less than 20 assaults per day over the weekend, according to a spokesman for Ukraine’s Eastern Group of Forces, down from 35-50 earlier this month, yet the intensity of shelling did not diminish. On Avdiyivka, Ukrainian military sitreps remained unchanged in describing as “futile” the ongoing Russian attempts to envelop this industrial town adjacent to the city of Donetsk (c. 50 km south of Bakhmut). Russian sources reported no appreciable gains for their troops on the eastern front either, in particular admitting that Ukrainian forces maintained their positions on the western outskirts of Bakhmut, preventing it from being encircled since Russian forces launched their concerted envelopment effort in January.

Ukraine’s short- and long-term reconstruction needs totaled $411bn as of Feb. 24, 2023, according to a joint study prepared by the World Bank, European Commission, Ukrainian government, and United Nations. This total consists of $128bn of immediate and short-term needs for the next three years, including $18bn required in 2023, and $283bn of medium- to longer-term needs for up to 10 years. The study emphasized that out of this year’s needs of $18bn, around $14bn would be required for “implementation priorities”, namely restoring critical infrastructure, with $10.5bn to be financed from the state budget. 

Ukraine’s gross external debt (GED) rose by 1.8% or $2.3bn y-o-y in 2022, to $132bn, equivalent to 89% of GDP, up from 65% as of end-2021. The NBU estimated external debt amortizations falling due in 2023 at $39bn, or 30% of the outstanding GED stock, down 19% or $9.3bn y-o-y. At the same time, external amortizations adjusted for trade loans, overdue arrears and overnight interbank loans add up to only $10bn this year, on top of $2.7bn of interest payments.

Russian assaults remain primarily focused on the towns of Bakhmut and Avdiyivka in the Donetsk region. The situation in both locations remains very dynamic, especially in Bakhmut, with some positions reported changing hands several times during the day. In Avdiyivka, some Russian sources claimed that Russian units increased their envelopment of the town, but there was no confirmation of it elsewhere. Overall, the front lines in both sectors have been little-changed thus far this week. The Ukrainian General Staff’s latest sitreps described the situation in Bakhmut as “continuing positional battles” and that in Avdiyivka as “failed Russian assaults.” Meanwhile, unofficial local reports of the past few days about Russian assaults in Bakhmut slightly decreasing in intensity are also being reflected by mainstream media. A Reuters story this morning, citing the new agency’s reporters on the ground north of Bakhmut, said the “intensity of the Russian bombardment noticeably lessened from two days earlier.”