UKRAINE’S economy, racked by war, is in free fall. In the second quarter of this year its GDP shrunk at an annualised rate of 15%, after shrinking by 18% in the first. Its public debt is probably worth 100% of its GDP. Small wonder, then, that Ukraine wants to cut some of the debt it owes. After months of bitter negotiations, Ukraine and its creditors may reach a deal this week. On what issues do Ukraine and its creditors disagree, and what is likely to happen? Debt negotiations have been drawn out. For months, no one—not even Ukraine’s finance minister, Natalie Jaresko—was entirely sure who owned Ukraine’s debt. It is now known to include Franklin Templeton, a big asset manager, which owns about $9 billion of Ukraine’s bonds, and BTG Pactual, a Brazilian firm. From the start everyone has recognised that Ukraine needed some debt relief. The big question was the form that such relief might take. For months the creditors argued that Ukraine’s problems would be solved by “maturity extensions”—that is, pushing out the date when bonds needed to be repaid.

But this suggestion does not work, since it conflicts with the demands laid down by the International Monetary Fund. The IMF has kept Ukraine alive with a series of loans, worth about $7 billion in total since last year. The IMF provided the money under the assumption that the government in Kiev will write off $15.3 billion of debt and interest by 2018, and that it will have reduced its public-debt-to-GDP ratio to about 70% of GDP by 2020. The goal is to reduce debt repayments in any given year to no more than 10% of GDP. All this means that Ukraine does not just need maturity extensions, but reductions in the total amount of outstanding debt. Ukraine’s government wants a 40% reduction in the total amount of debt it owes. More recently, its creditors have suggested a much smaller haircut—of just 5%, according to some reports.

Ukraine may soon reach a deal with its creditors. If it is does not, then it may declare that it will not meet future bond repayments (including one for $500m on September 23rd). But even if a deal is reached, Ukraine’s finances will be in dire shape. One creditor has not taken part in any negotiations—and that creditor owns a $3 billion bond that matures in December. There is a bizarre clause in that particular bond, which allows its holder to force Ukraine to default at any time after its public debt load has passed 60% of GDP. That creditor, unfortunately, is Russia.

Dig deeper:

Done right, debt relief can boost growth (June 2015)

What Russia is up to in Ukraine (February 2015)