For months, the West’s most respected military experts have been insisting that Vladimir Putin’s war machine is close to running out of steam in Ukraine. However, it is a prediction that seems completely at odds with the reality of life for millions of Ukrainians living close to the frontline. 

Deploying terrifying winged explosives, Russia has in fact stepped up attempts to wipe Ukraine’s cities off the map. During the course of last week alone, Moscow fired 800 glide bombs at Ukrainian targets, injuring dozens of soldiers and innocent civilians, according to President Volodymyr  Zelensky. 

Weighing more than a tonne, the devastating devices have been given the nickname “the building destroyer” because of their ability to reduce entire multistorey buildings to rubble. Kharkiv clings on courageously but the bombardment has flattened major towns such as Avdiivka, Vovchansk and Chasiv Yar. 

It is in the face of this relentless onslaught that Ukraine has made the bold decision to go to war again – only this time the country is taking on the West’s most powerful financiers. It is a battle that will be determined not by heavy artillery and bombs, but by Zoom calls and spreadsheets.

In the middle of a conflict that OECD officials say is causing a humanitarian, social and economic crisis for the Ukrainian people, some of the world’s most influential moneymen are demanding that Kyiv begins to honour its debts. 

They include the world’s largest asset manager, BlackRock, led by ethical investing champion Larry Fink; France’s Amundi, and Pimco, the American bond fund goliath.

Both sides agree that Ukraine shouldn’t have to repay its outstanding borrowings in full, as the war has been punishing its economy enough. Growth has shrunk by a quarter and spending on its military spiralling to $40bn (£30bn) a year – equivalent to nearly a quarter of its GDP. This has left the country nursing a $44bn hole in its budget. 

In the meantime, Ukraine is being propped up by IMF credit, a huge $50bn loan that G7 leaders approved last month and will be funded by Russian assets tied up abroad, and a $60bn military aid package from Washington.

The question that must be quickly resolved is precisely how much the Ukrainian government should eventually have to find. A first round of negotiations lasting a gruelling 12 days failed to end in an agreement last month, with both parties blaming the other’s unrealistic expectations. 

Kyiv is now in a race against the clock to resolve the dispute. A two-year moratorium that creditors granted the country shortly after Russia’s invasion runs out on August 1st. If a deal can’t be hammered out before the deadline, the consequences could be disastrous.

“There will be political and symbolic costs to Ukraine being in default,” warned a source close to the talks. 

“Ukraine needs at some point to have the ability to raise money from the private sector and this is important in the context of the reconstruction of the country – it is staggering figures needed.”

The World Bank estimates the cost of rebuilding Ukraine at nearly $500bn.

Sergii Marchenko, Ukraine’s finance minister, has made his country’s position clear. 

“Strong armies must be underpinned by strong economies to win wars,” he said after talks stalled. “Ukraine has shown remarkable resilience in the face of Russia’s full-scale invasion but it is a fragile balance, which depends on the continuation of consistent, substantial partner support. Timely debt restructuring is a critical part of this support.”

A committee of bondholders said it was “committed to working with Ukraine to structure a transaction which may attract the requisite support from market participants”. But it warned that Kyiv’s proposed haircut “was significantly in excess of market expectation”.

Ukraine owes a total of $20bn to international bondholders, across 11 dollar-denominated and two euro-denominated bonds, according to the latest government data. Once outstanding interest is included, the overall sum jumps to nearly $24bn, according to JPMorgan calculations published in April.

Discussions are being overseen by some of the most experienced sovereign debt negotiators the West has to offer. Marchenko, a slim, square-jawed PhD graduate, and his colleagues at the finance ministry, are being counselled by a team from Rothshild’s Paris office. 

Specialists there are also involved in attempts to restructure Sri Lanka’s $12bn of overseas debt as the country battles its worst economic crisis since independence from Britain in 1948. They also helped Ukraine clinch the current two-year standstill on bond repayments that expire at this month’s end.

Creditors have enlisted the expertise of London-based bankers at PJT Partners, a firm the Ukrainian government also knows well from the aftermath of Russia’s annexation of Crimea in 2014. 

The following year, as Ukraine’s economy reeled from the aftershock, PJT persuaded a different cohort of major overseas bond investors to accept a 20pc haircut on their loans by including something called a “value recovery instrument” – essentially IOUs tied to the strength of future economic growth. 

A decade later, that agreement is being used as a blueprint for the current discussions. 

Kyiv is urging bondholders to take steep hits of as much as 60pc on their loans, in a move that would reduce its debts by up to $12bn. The government says significant debt relief is essential in its attempts to defeat the Kremlin and rebuild Ukraine once the war ends. A generous deal is also not just in its own interests, but the wider West as well, it claims.

“I know we are asking private creditors for a substantial effort on their part, but without a restructuring, Ukraine will not be able to sufficiently finance our defence and embark on our bold recovery and reconstruction agenda – which we know is a shared common objective across our public and private sector partners,” Marchenko said.

In an attempt to ramp up pressure on creditors to accept its plan, the finance ministry points out that they have the support of both the IMF and the country’s bilateral creditors, which include the US and the so-called Paris Club of the world’s richest creditor nations. It says official creditors have told bondholders they should receive only “symbolic” payments up to 2027.

It is a long way from what investors envisage. A source involved in the talks said there was dismay at the deal Kyiv brought to the table given that creditors haven’t received a single payment for the last two years. The committee warned it “was significantly in excess of market expectations” and “would risk substantial damage to Ukraine’s future investor base”. 

Their counter-offer proposes a 22pc discount but the government says that is incompatible with debt reduction targets that the International Monetary Fund has set as one of several conditions of payouts from a $16bn bailout program. A representative of Kyiv said it was “shocking” that creditors had failed to take the IMF’s demands into account. 

Without a restructuring, Ukraine will have to repay $13.4bn to bondholders over the next four years. 

“Given that Ukraine currently finances all civilian expenditures of the state budget with foreign assistance, it would be unreasonable to expect Ukraine to spend extremely limited resources to repay these debts,” says Maksym Samoiliuk, an economist at the Center for Economic Strategy in the Ukrainian capital.

Privately, both sides remain hopeful that the gap can be bridged before the existing debt repayment freeze expires in the coming weeks. 

Ukraine is hoping to win over bondholders with a deal that gives it breathing space while the war is still raging, replacing existing loans with a series of new bonds that will pay notional interest of 1pc for the first 18 months then progressively increasing to 6pc. 

In echoes of a 2015 deal, it is also offering warrants that would pay out more if Ukraine beats tax revenue targets over the next two years. These could reduce the losses that bondholders suffer to about 25pc over time, it estimates.

“It’s a bit like bartering in a Moroccan bazaar,” says one seasoned debt market expert. “Eventually you meet somewhere in the middle.”