The two sides had been under pressure to reach a deal because a moratorium on foreign debt payments, announced immediately after the Russian invasion two years ago, was set to expire in early August. A default would have severely complicated Ukraine’s relations with Western governments and the International Monetary Fund, whose assistance is vital to Ukraine’s continued defense of its territory.

Compromise on burden sharing

The deal so far is an “Agreement in Principle” that must be ratified by two-thirds of bondholders to become legally effective. Under the deal, Ukraine’s private creditors will write off up to 60 percent of the principal owed to them.

The haircut could, however, be as low as 37 percent if Ukraine’s economy does significantly better than currently expected (in other words, if the war ends and some degree of reconstruction is possible). That’s because of clauses in the new bond terms that tie repayments to Ukraine’s GDP from 2028 onwards.

The deal is a pillar of a complex burden-sharing strategy to keep the Ukrainian state alive after Russian President Vladimir Putin unleashed the largest land war — and land grab — in Europe since World War II.

Most of that burden is currently being borne by Western donors, who have pledged some $50 billion in aid this year. In addition, Western governments are seeking new ways to boost financial support for Ukraine without dipping into their own taxpayer dollars. G7 finance ministers are meeting Wednesday to finalize a further $50 billion loan to Ukraine, using profits from frozen Russian assets.

But Kiev has also had to give up its pound of flesh. Last week, the government submitted a bill to the Verkhovna Rada that would raise taxes on an already hard-hit population by 140 billion hryvnias ($3.4 billion).