Ukraine’s sovereign bonds have rallied sharply in recent weeks as investors grow increasingly optimistic about a potential peace agreement between Kyiv and Moscow, raising hopes of a stabilisation in the country’s war-battered economy.

Prices of Ukraine’s international bonds maturing in 2032 have risen to around 28 cents on the dollar, up from 19 cents in October, according to Bloomberg data. The gains reflect growing market confidence that negotiations over a possible settlement to Russia’s full-scale invasion of Ukraine, now entering its third year, could make progress in the coming months.

“The market is increasingly pricing in an end to the war,” said Viktor Szabo, investment director at Abrdn, quoted by Reuters. “There is a strong rally in Ukraine bonds, and that reflects hope that some sort of resolution is coming.”

The rally follows recent reports of behind-the-scenes diplomacy involving Western and Global South nations exploring pathways to a ceasefire or broader peace agreement.

A lot of progress was made in the peace talks in recent months with a 27-point peace plan (27PPP) thrashed out the Moscow meeting on December 3 between Russian President Vladimir Putin and US special envoys that the Kremlin says is largely acceptable.

Ukraine replied following the Mar-a-Lago meeting on December 28 between US President Donald Trump and Ukrainian President Volodymyr Zelenskiy when a 20-point peace plan (20PPP) was agreed and submitted to the Kremlin on Christmas Eve.

Special Envoy Steve Witkoff says that there is now “only one item left” to agree one as the first trilateral talks between Russia, Ukraine and the US kicked off at the Abu Dhabi meeting on January 24, which is the question of control over the Donbas. The delegates are due to resume these talks over February 4-5, and investors are watching closely in hope of a breakthrough.

However, other investors remain sceptical. Timothy Ash, the senior sovereign strategist at BlueBay Asset Management in London and a long-time Ukraine observer, argues that t4he Trump-led peace talks have stalled.

“Ukrainian Eurobonds have been amongst the best performing in EM space this year, so someone seems to believe the narrative coming from Witkoff et al, that talks have been constructive, and that 90% of issues have been resolved,” Ash said in an emailed note. “My read here is that these peace talks are just a sham, phoney process where Russia, Ukraine and Europe are just playing along with Trump for their own interests but all are buying time.”

Ukraine reached a standstill agreement with international bondholders in August 2022, suspending payments on about $20bn in Eurobonds for two years. That arrangement expired in August 2024, and discussions around a comprehensive debt restructuring are expected to intensify as Ukraine’s wartime economic outlook remains uncertain. Credit rating agencies treated the standstill as a selective default, although the agreement was voluntary. Analysts say a resolution to the war would be key to any long-term restructuring deal or return to international capital markets.

“The risk is still very high,” said Richard Briggs, emerging market portfolio manager at GAM. “But the return potential is also very high if things go well. So, some investors are positioning for a restructuring that’s more favourable than previously expected.”

Warrants restructured

Kyiv has already scored one big win by successfully exchanging its GDP warrants for bonds as part of a debt restructuring deal done last year. That has allowed Ukraine to climb from the bottom of the S&P rating table after the agency raised Ukraine's foreign currency long- and short-term sovereign credit ratings from SD to CCC+.

The decision was made after Ukraine completed the exchange of GDP warrants for new securities maturing in 2032 at the end of December 2025.

The agency also assigned these securities a CCC+ rating. Ukraine had had an SD rating since August 2024, after negotiations began on restructuring external debt and implementing a moratorium on interest payments.

Ukraine finalized the main restructuring of external commercial debt amounting to $20.5B (78% of its commercial external debt) in September 2024, but it was only at the end of 2025 that an agreement was reached with the GDP warrant holders.

Following the 2024-2025 restructuring, Ukraine's external commercial debt service needs have been significantly reduced to an average of $1bn annually over the next three years. The first principal payment on external bonds is not expected until 2029.

The stable outlook reflects a balance between the government's manageable debt obligations and anticipated ongoing support from the EU, which signed off on a €90bn EU loan in December that has secured the government’s funding for at least the next two years, according to a recent note by the Kyiv School of Economics (KSE).

“The forecast now incorporates nearly $160bn in expected external grants and loans over 2026–28,” KSE Institute said. “This materially alters the balance of macroeconomic risks and ensures the financing of the state budget through 2028, despite exceptionally high wartime needs.”

KSE’s updated outlook is based on a central assumption that the war will end by late 2026. Among the key new funding streams is the EU’s €90bn loan package, an anticipated new programme from the International Monetary Fund, and resources earmarked in the EU’s next Multiannual Financial Framework. This support helps to close the $65bn fiscal financing gap previously identified by the IMF for 2026–29.

KSE estimates that the cumulative general government deficit over 2026–28 will reach $113.2bn, largely due to persistently high defence and security spending, which is expected to peak at $103bn in 2026. In 2025, the government spent 43% of GDP on defence alone. Confirmed and likely budget financing sources amount to $112.2bn, covering nearly all projected needs.

“The price action is speculative,” said one emerging markets strategist, speaking to Bloomberg on condition of anonymity. “But it’s based on real diplomatic momentum, even if a final agreement may still be some way off.”