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Ukraines foreign-currency borrowing costs rose for a second day as Goldman Sachs Group Inc. (GS) said a debt writedown may erase 70 percent of the bonds value and Russia said it may demand the early repayment of a $3 billion bond.

Ukraines dollar-denominated debt maturing July 2017 fell 2.7 cents to 59.87 cents on the dollar by 6:52 p.m. in Kiev after rising 2.2 cents last week as the European Union pledged further financial aid. The yield on the notes rose 229 basis points to 34.20 percent, nearing the record 36.10 percent reached last week.

Representatives from the International Monetary Fund, who are currently reviewing Ukraines loan program in Kiev, may force the countrys government to start talks on debt restructuring of as much as 70 percent of its bonds value before agreeing to an increase in funding, according to Goldman Sachs.

There may still be further downside to asset prices, Andrew Matheny, a Moscow-based economist at Goldman Sachs, said by e-mail today. The market expects a restructuring involving a significant haircut, albeit not one as large as what we estimate.

Ukraine may combine the extension of bond maturities, a writedown of principal and the reduction of coupons to meet the IMFs requirements on debt sustainability, Matheny said. Talks over restructuring may start as early as February.

A mission from the IMF will work in Ukraine until Jan. 29 on an upgraded memorandum on economic policies, the countrys central bank said on its Facebook page today. The Kiev-based cabinet wants to expand the standing $17 billion loan agreement by a further $15 billion to help meet debt payments and increase foreign-currency reserves.

Ukraine depleted its foreign cash pile as the central bank sought to shore up the hryvnia and as the country paid for natural gas imports from Russia. Economic output dropped an estimated 7.5 percent last year in what central bank Governor Valeriya Gontareva has called a full-blown financial crisis.

Ukraines foreign-currency reserves fell to $7.53 billion in December from $9.97 the previous month, the lowest in more than a decade, the central bank said on its website today. Goldman forecasts a further decline to $5.5 billion in January.

The government in Moscow really has every reason to demand early repayment of a $3 billion loan due in December because Ukraines public debt has exceeded 60 percent of gross domestic product, Russias state-run RIA news service reported Jan. 10, citing Finance Minister Anton Siluanov.

The threat of Russia demanding an early repayment is more direct now, Sergey Fursa, a Kiev-based fixed-income trader at Dragon Capital, said by e-mail today. Ukraine may not meet the demand as it may have the legal means to avoid paying ahead of the December deadline, he said.

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Ukraine Eurobonds Drop as Goldman Sees More Than 70% Haircut