The process of resolving a sovereign debt crisis took a major step forward in August, when Finance Minister Natalia Yaresko announced that the government had reached an agreement with a group of hedge fund investors for a debt restructuring deal that will reduce Ukraine’s debt pile by about $3.6 billion and delays bond repayment by four years. The news was received positively in the markets, as it clears the way for the disbursement of emergency IMF financing under a $17.5 billion Extended Fund Facility (EFF) arrangement concluded back in March.

Unfortunately, the deal provides only temporary breathing space for the government as it grapples with what is otherwise a desperate situation. Not insignificantly, Ukraine owes $3 billion to Russia that is not covered under the recently concluded debt-restructuring agreement, and, if Moscow decides to play hardball, Ukraine could be facing a debt crisis as soon as December, a time of year when Russia’s ability to inflict pain will be enhanced by its control of Ukraine’s gas supply. Moreover, failure to make loan payments to Russia could also jeopardize assistance from the IMF, which is statutorily prohibited from lending to sovereign borrowers in default.

The possibility that President Petro Poroshenko and Prime Minister Arseniy Yatseniuk might be forced to make unpalatable concessions to Moscow in order to stave off a fresh debt crisis has serious negative implications for the stability of the governing coalition, which has already seen the departure of one of its members over the issue of devolving greater power to the regions, as required under the terms of a cease-fire agreement concluded with Russian-backed separatist rebels who have established de facto control of two eastern provinces. The threat of the self-proclaimed governments of Donetsk and Luhansk to hold unauthorized elections will test the resolve of political leaders in Kiev to defend Ukraine’s territorial integrity, and will almost certainly lead to the downfall of the current government if they fall short.

The collapse of the reformist coalition would once again plunge the country into a political crisis, which Russia might attempt to exploit by formalizing its control over the Donbas region, a move that would almost certainly provoke a militant response from nationalist political forces. Political instability would also undermine the government’s ability to implement the reforms required to ensure the steady flow of financial support from the IMF, without which there is a good chance that the economy would enter a renewed downward spiral.