When Arseniy “Yats” Yatsenyuk took over the Prime Minister role in Ukraine, he said that his country was going to go through some austere, difficult times. He wasn’t kidding. With the economy expected to contract by 8% this year, and Western bailouts becoming its only salvation, the Ukrainian debt bomb ticks closer to a sovereign default with every passing minute.

On Friday, Standard & Poor’s cut Ukraine’s long term foreign debt rating to CC from CCC-. The rating of CC is one notch above C, which is used when a debtor is in the process of filing for bankruptcy protection.

Standard & Poor’s kept Ukraine’s short-term foreign credit rating at C with a negative outlook.

Ukraine’s Central Bank is down to just $5.6 billion in reserves as of February, according to data from the International Monetary Fund.

Some of the biggest emerging market bond holders are currently stuck holding Ukrainian debt. They honestly think they are going to get their money back.

On Thursday, the WSJ reported that foreign investors holding $10 billion of Ukrainian bonds “joined forces to develop a restructuring plan” for the country’s debt. The plan does not include a reduction in principal, but interest payments onthe other hand will are unpayable.

Ukraine’s short term debt is unsustainable. Its 2015 euro bond yields a killer 178% based on the closing price on the Frankfurt exchange on Friday. Further along the debt curve, Ukraine’s dollar denominated 2023s yield 26.25%.

Ukraine’s immediate future is now firmly in the hands of Western bond funds and the IMF.

“A detailed proposal is being developed by the committee that provides Ukraine with the necessary financial liquidity support it has requested… without any principal debt reductions,” Blackstone Group International Partners LLP and Weil, Gotshal & Manges LLP, which are advising the bondholders, were quoted as saying Thursday in the Journal.

Bond prices have collapsed by more than 50% over the last 12 months as Ukraine grapples with economic reforms, IMF induced austerity, the loss of important real estate following Crimea’s annexation by Russia, and a civil war in four eastern provinces along the Russian border. Russian military have been helping pro-Russia separatists fight the Ukrainian army, leading to violent uprisings, loss of life, and loss of property in Ukraine’s industrial hub states. The economy is in disarray as a result of these losses.

“Nobody knows what is happening in Ukraine,” says Ukrainian lawyer Marlen Kurzkhov, a partner with Gusrae Kaplan in New York. Kurzkhov has been working with high net worth Ukrainians looking to get their money out of the country. ”All I know for sure is that whatever money the IMF gives to them, the government will steal some of it, at least that’s the word on the street. A lot of Ukrainian businessmen are hoping things will blow over, or are dealing with authorities on the ground – whether it’s the Russians, the Ukrainians, or the separatists. It all depends on the person. Some clients have completely lost access to their assets in east Ukraine,” he says without naming names.

Standard & Poor’s says a default is certain.

From the credit watchdog:

Although we note that there is a virtual certainty of a restructuring or exchange offer in the near term, there are no specific details on what the government will propose to investors in talks to seek $15.3 billion in savings. As such, the final outcome–in terms of a potential principal haircut, maturity extension, and coupon reduction for the 29 debt instruments under discussion–is highly uncertain. The treatment of the Eurobond owed to Russia (maturing in December 2015) is likely to complicate matters. The Ukrainian government insists it will be part of the talks, while the Russian government insists that the bond, although issued under international law, should be classified as “official” rather than “commercial” debt given the favorable interest rate and the fact that it was purchased by a government entity. Indeed, if Ukraine has to pay the $3 billion in debt redemption this year, it will make it very difficult for Ukraine to find the $5 billion in expected debt relief in 2015 that underpins the IMF’s 2015 external financing assumptions.”

The IMF approved the provision of $17.5 billion to Ukraine in February as part of a four-year extension that replaced the original deal made in 2014. All told, the IMF program targets a total of $40 billion in loans, nearly seven times what the Central Bank of Ukraine has in reserves.

On top of the $17.5 billion expected from the IMF, the program anticipates an additional $7 billion from other international financial institutions and $15.3 billion from the private sector, though who that may be is unknown. There are no white knights coming to Ukraine’s rescue.

Ukraine received the first $5 billion tranche from the IMF in early March and that is due early next year.

Ukraine has always been a relatively corrupt and unstable economy run by a few wealthy oligarchs.  Transparency International lists Ukraine business and politics as being more corrupt than the Wild East oligarchs running Russia’s economy.

Today, Ukraine is fast becoming a shadow of its former self. It is at real risk of being Balkanized by Russia. And the economy is suffering in the meantime.  The crisis has some large American frontier market bond funds like Templeton Asset Management worried about major write-downs on Ukrainian debt.

In 2008, Ukraine’s GDP was $180 billion. This year, Standard & Poor’s estimates it to come in at just $73 billion, a 50% drop. That has direct impacts on an otherwise educated workforce seeking to integrate with the West.

GDP per capita is expected to fall to around $2,000 this year, an embarrassment which puts the number on par with India. Ukraine’s population is 45 million.

In 2008, Ukraine’s debt to GDP ratio was a solid 20%. Today, it is very high 93% according to Standard & Poor’s.

By Kenneth Rapoza