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Ukraine’s state-owned gas company Naftogaz has asked its international creditors to defer payments on its debt for two years, fanning expectations that the government may soon do the same.

Naftogaz which has a $335-million bond maturing as well as two interest payments due on July 19, said Russia’s invasion had left it short of cash as many of its customers were now unable to pay their bills.

In its request for the payment freeze, Naftogaz said the five-month old war had resulted in a “significant economic and business decline in Ukraine” and that the missed bill payments had “negatively affected its liquidity position.”

“The Issuer, at the request of the Borrower, has launched this Consent Solicitation in order to seek approval from Noteholders to facilitate preservation of available cash … to support Ukraine’s strategic priorities,” Naftogaz’s gas financing arm Kondor Finance said in a statement published late on Monday.

Bondholders have until July 21 to vote on the plan, which will defer all of the company’s main international bond payments until July 2024. In addition to the one due next week and in 2024, it also has one bond that runs until 2026.

Naftogaz is a major source of income for Ukraine, accounting for almost 17 per cent of the country’s total state budget revenue last year and employing over 50,000 people before the war.

Its underground storage facilities hold over 30 billion cubic meters of gas making them the third largest in the world after the United States and Russia. It also has Europe’s second largest oil transportation pipeline network.

Naftogaz’s plan will also raise expectations that the government itself may look to do something similar ahead of a near $1-billion sovereign bond payment due in September, although it has so far said that it intends to make the payment.

Ukrainian Railways, another state-controlled firm, confirmed on Tuesday that it had made $36-million in interest coupon payments on two of its bonds due in 2024 and 2026.

Authorities however estimate a fiscal shortfall of $5-billion – or 2.5 per cent of pre-war GDP – a month, which economists calculate pushes Ukraine’s annual deficit to 25 per cent of GDP compared with 3.5 per cent before the conflict.

On top of that researchers from the Kyiv School of Economics estimate that it will now take over a $100-billion to rebuild Ukraine’s bombed infrastructure.

Naftogaz’s deferral plan “might be blueprint for Ukraine,” said Viktor Szabo, a portfolio manager at investment firm abrdn in London, adding the government’s September-maturing bond had slumped around 12 cents on the news.

That left it at under 40 cents on the dollar, or 40 per cent of its face value. Naftogaz’s bonds meanwhile were being quoted as low as 11 cents.

Yerlan Syzdykov, global head of emerging markets at Amundi Asset Management, which holds Ukraine’s sovereign bonds, said it would make sense for Ukraine to halt bond payments now via what is known as a “standstill” agreement.

“The sooner they do this the more sense it makes,” Syzdykov said.

Lutz Roehmeyer at Capitulum Asset Management, which holds both Naftogaz international and Ukraine sovereign bonds added there were lots of questions that could not be answered at this stage, for example what size will Ukraine’s economy be down the line.

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