The decision by a group of bondholders to reject the debt-restructuring plan proposed by the Ukrainian Railways joint-stock company (Ukrzaliznytsia JSC) has intensified financial pressure on the company, which is seeking to restructure nearly USD 1.1 billion in bonds because of strain on its cash reserves, a decline in freight and passenger volumes, rising costs, and maintenance needs.
According to Bloomberg, the debt-restructuring plan proposed by Ukrzaliznytsia initially envisaged cutting the amount of debt owed to bondholders by 20% and included a "principal adjustment mechanism," which would alter the amount paid to investors based on the freight volumes traveling over the rail operator's network, according to the statement from the company. "It is very important for us not to restructure the debt just for the sake of it but to restructure it on terms that will be acceptable to our company in the long term," said the company’s CEO Oleksandr Pertsovskyi. "These must be manageable financial costs because if this is not a sustainable restructuring but something that merely provides relief for one or two years, then the problem will not be solved." Pertsovskyi stressed Ukrzaliznytsia is currently operating amid a significant drop in freight volumes and rising energy prices, which is why financial costs must be realistic and allow the company to "breathe."
However, a group of bondholders rejected this proposal, instead demanding an increase in rail freight rates. We analyzed how Ukrzaliznytsia's freight base and rail freight rates (the infrastructure component) have changed over the past five years. The dominant trend is clear: rising freight rates - which have already exceeded pre-war levels - are leading to a drastic reduction in freight volumes because some cargo is being diverted to road transport and the financial situation of the company's customers is deteriorating.
Further increasing rail freight rates would intensify this trend, resulting in a decline in freight revenue. According to experts at the state-owned market research company Ukrpromzovnishekspertyza, a 37% rate increase would reduce Ukrzaliznytsia's freight base by 15% (27 million tons) per year as a result of shippers switching to road transport and a production decline due to Ukrainian products losing competitiveness in foreign markets. Consequently, instead of the expected UAH 27 billion, Ukrzaliznytsia’s tariff revenues will increase by only UAH 11 billion. Meanwhile, the state budget will lose UAH 36 billion in revenues from taxes and fees. "This is a classic 'death spiral' of tariff policy, in which every new increase only worsens the situation for all market participants and drives the system into an even deeper crisis," said Oleksandr Kalenkov, president of the Ukrmetallurhprom association of metallurgical enterprises. Kalenkov estimates that Ukrainian businesses have overpaid UAH 200 billion since 2012 because of the failure to resolve the issue of cross-subsidization of passenger transportation and implement reforms at Ukrzaliznytsia.
During the war years of 2022–2025, Ukrzaliznytsia incurred losses of over UAH 67 billion from passenger transport operations, while generating an operating profit of UAH 59 billion from freight transport. In other words, billions of hryvnia in profits from freight transport operations were used to cover these losses. However, this mechanism has now been exhausted because Ukrzaliznytsia's freight base has shrunk significantly, meaning that the profitable freight segment can no longer bear this burden, and losses from passenger operations continue to increase by billions of hryvnia. Funds from the freight segment, which should be invested in infrastructure and reconstruction, are being used to cover losses from passenger transport operations. This undermines Ukrzaliznytsia's development opportunities and its very competitiveness. The relevant ministry also acknowledges that businesses can no longer bear the primary financial burden and that a change in the model is necessary.
Before the start of the Russian aggression, Ukrzaliznytsia made coupon payments totaling USD 70-75 million on its 2019 bond issue (USD 595 million, maturing in 2024) and its 2021 bond issue (USD 300 million, maturing in 2026). The company continued to make coupon payments during the war, including USD 36 million in 2022. Subsequently, following the commencement of restructuring negotiations, Ukrzaliznytsia capitalized the accrued coupon payments from July 2022 to June 2024, thereby increasing the outstanding principal by USD 108 million and USD 52 million, respectively. Consequently, by the beginning of 2025, the revised principal amounts were USD 703.2 million (due in 2026) and USD 351.9 million (due in 2028).
For now, the parties are emphasizing the importance of maintaining constructive dialogue and their "intention to continue good-faith engagement" to reach an agreement. However, a realistic scenario for breaking the "debt deadlock" would involve full state financing of passenger transport in line with European Union practices, a substantial "haircut" for bondholders, and the rescheduling of payments until martial law ends and the country's economic situation normalizes.
