Ukraine’s Ministry of Finance was committed to securing the settlement of budgetary payments and, as such, received $290 million worth in coupon payments recently on its US dollar bonds with maturity this September. A default was not an option for them because history had shown that restructuring debt can hinder long term success—a lesson learned from 2015 when they were denied entry until 2016.
On the same day, Ukraine sold $270 million worth of ‘war bonds’ with a coupon rate of 10% and 11% and a maturity date of two months and 12 months. The bond sale happened despite Russian troops advancing towards Kyiv and capital controls imposed by the central bank, making it difficult for foreign investors to participate in auctions. Yet, they did so to support Ukraine’s freedom in whichever manner possible.
They were not the first nation to take such an approach to help fund their security operations. War bonds became a household name during World War One. Subsequently, the US Government also sold Liberty Bonds by motivating their citizens to support them using patriotic propaganda.
And while Ukraine is celebrating small victories—like the successful sale of their war bonds—the Russian economy continues to take a deep dive as the Sanctions of the US, UK, and European Union saw the Russian rouble fall by almost 30%.
But what exactly are war bonds, and how will Ukraine utilise them to fund their armed forces while fighting to defend their sovereignty? Heather Carrick, a reporter for NationalWorld, put it simply by saying, “As a government prints more money to fund military operations, inflation grows. But by offering bonds, the amount of money in the economy is reduced.”
What is a war bond?
War bonds are an investment opportunity for people who want to help their country during conflict. The government sells these debt investments with the intention that they’ll be used, at least partly, for financing military operations and production when there is a war happening (or expected soon enough) where it could affect them too much if not dealt with before the conflict escalates. Such bonds are typically available below their actual market value, increasing their appeal to a broader spectrum of investors.
Althea Spinozzi, Senior Fixed Income Strategist at Saxo Bank, reported after the fact, saying, “Ukraine sold $270 million worth of ‘war bonds’ in local currency. Yet, foreign appetite remains untested. The country might have a brief window of opportunity to test foreign demand before volatility intensifies in bond markets.”
The finance ministry has said that this is not the last war bond sale we’ll see, but it’s hard to tell whether Ukraine will issue short term hard currency bonds. If they do, foreign investors might notice and start investing in their country.
The idea of an auction for government bonds can be a tricky one, but it’s something that overseas investors might not want to participate in if the yield offered by these types of debt instruments isn’t attractive enough. And with all things considered—including risk tolerance and time preference—there will always come times when people have different opinions about whether or how they would like such auctions held.
Where have we seen war bonds before?
Bloomberg author, Brian Chappatta, chipped in with a catchy, “War Bonds, Huh. What Are They Good For? Absolutely Nothing.” In Bloomberg’s opinion, US Treasuries are nothing other than war bonds with an extraordinary market value of US$ 17 trillion—and yet it seems some people want more of it.
He stated that Treasuries have helped fund actual wars for almost 20 years. As Mr. Chappatta bluntly put it, “The US budget deficit reached a record $377 billion in absolute dollar terms 2003, the year the Iraq War began, and then further ballooned to more than $412 billion in 2004. The military has remained an outsized part of the federal government’s spending ever since: the Pentagon’s budget.”
So, although it seems as if financial experts and analysts are divided about the validity and effectiveness of war bonds, Ukraine continued with the auction successfully and raised valuable capital to the amount of 8.1 billion hryvnias, or around £202,270,000, to continue fighting the battle at hand.
In times of war, governments sometimes need to appeal to the public for funding. One of the ways a country does this is by selling ‘war bonds’. War bonds are a way for the government to raise money for its war effort, and also a way for citizens to support them. Bonds can be bought by individuals, businesses, or other investors.
War bonds are therefore debt securities issued to finance a country’s war efforts. The government sells the bonds to citizens and other investors, using the money raised to fund the war. They have been used as a tactic for many years and often give the country the boost they need to stay afloat.
The United States issued their first war bonds in 1917 to help them in World War I: They were called defensive bonds and were further referred to as liberty bonds in the United States. The U.S. issued these liberty bonds again after the attack on Pearl Harbor and raised a total of $21.4 billion. Britain also sold National War Bonds to aid their military efforts during this time. They offered a 5% yield, and effective advertising campaigns led to about 120,000 sales.
With time, more and more countries have adopted this method of funding.
During World War II, the United States renamed defensive bonds as war bonds. They again sold the debt securities to over 80 million Americans, generating over $180 billion in revenue to fund their war efforts. Another example from WW2 is when Japan sold their own war bonds after occupying Singapore.
War bonds are issued as government bonds or treasury bills. The government sells the bonds at a discount, and the buyers earn interest. The government repays the bond with its agreed interest (or ‘coupon) over the time agreed time frame.
Ukraine has embraced the concept and is using it to leverage worldwide support in its war with Russia. It sold a first batch of war bonds on March 1st to finance the military and civilian war efforts. Althea Spinozzi, Senior Fixed Income Strategist at Saxo Markets, said the following about Ukraine’s war bond strategy; “Ukraine sold $270 million worth of ‘war bonds’ in local currency. Yet, foreign appetite remains untested. The country might have a brief window of opportunity to test foreign demand before volatility intensifies in bond markets.”
The sale was part of a more extensive fundraising campaign to capitalize on domestic and international backing for Ukraine as the war continues. The Russian government is also attempting to increase sales of war bonds – but first needs to eliminate ‘bottlenecks’ in the banks managing the sales, according to Yuri Butsa, the country’s debt chief. Russia may well issue bonds in Dollars or Euros designed to entice foreign investors.
The March 1st war bond yielded 11% and had a par value of 1,000 Hryvnia, or about $45. Ukraine’s outstanding bonds plummeted to trade at 30-35 cents on the Euro and Dollar during the Russian invasion, placing them firmly in distressed territory.
The Kyiv government might find it challenging to sell traditional bonds using standard criteria. Ukraine’s credit ratings were lowered further into non-investment grade or junk territory, preventing many major institutional investors from buying their debt as the invasion began.
War bonds are controversial. They are by nature unpredictable because they are frequently sold during the most uncertain phases of a nation’s economic and political performance, even when it is on the verge of collapse. Increasingly, investors must be conscious of environmental, social, and governance standards when dealing with these events.
Ukraine’s war bonds allow investors to lend money directly to the country’s embattled government and potentially receive a significant return while doing so. Investors in the retail sector attempted to catch a piece of the action – this can be seen by reading investment forums on Reddit.
According to the finance ministry, this isn’t the last war bond sale. However, the primary question is whether Ukraine will issue short-term hard currency bonds, which would attract a far broader audience of foreign investors. The yield and the risk tolerance in place at the time of the auction will determine whether overseas investors participate.
On the other hand, Ukraine’s bonds are well positioned compared to their Russian rivals. Following the most recent sanctions, the Russian debt market has come to a complete halt. Most banks and dealers now only sell Russian bonds instead of global debt, resulting in overall demand depletion.
Emergency bonds aren’t just used in wartime: In 2020, Larry Kudlow, a senior economic adviser to President Trump, suggested selling debt with a structure comparable to wartime bonds to help the economy recover from the coronavirus epidemic. Finally, the stimulus package was paid for with Treasury bills.
During the pandemic, the EU considered selling what became known as ‘coronabonds’, a contentious risk-sharing instrument. However, the idea did not take off; therefore, the bloc’s 27 members have undertaken their biggest-ever borrowing in a single program known as the NextGenerationEU bond initiative.