Russia said it will take Ukraine to court if the government in Kiev fails to make its next coupon payment after passing a law allowing it to stop servicing its debt.
“In June, a $75 million payment is due,” Finance Minister Anton Siluanov told reporters in Moscow on Wednesday. “We’ll see, if they miss the payment, we will use our right to go to court.”
Ukraine has failed to bring Russia to the table as it begins negotiating with creditors to reduce its $23 billion of international debt. Russia says the $3 billion bond that comes due in December shouldn’t be included in the restructuring because it was bought from the regime of former Ukrainian President Viktor Yanukovych as part of a government aid agreement.
Ukraine raised the pressure on creditors to accept a writedown on their holdings on Tuesday when it passed a bill enabling the government to halt payments if it can’t reach agreement with bondholders by its June 15 target. Failure to cut a deal risks future tranches of a $17.5 billion International Monetary Fund loan that Ukraine needs after a conflict with pro-Russian separatists pushed it into the worst recession since 2009.
“If Russia takes Ukraine to court, that might be an incentive for other creditors to go down the same route,” Jakob Christensen, an economist at Exotix Partners LLP in London, said by phone on Wednesday. “I would wait until after June 20 to go forward with” any moratorium, he said.
Russia will hold consultations with the IMF about protecting its interests as the fund pushes ahead with aid program for Ukraine, Siluanov said.
Ukraine’s sovereign bonds advanced on Wednesday after falling the most in two months yesterday. The nation’s $1.6 billion of notes maturing in July 2017 climbed 0.97 cent to 45.90 cents on the dollar at 5:53 p.m. in Kiev.
The Russian bond is governed by English law and any disputes related to it would be settled in an English court, according the bond prospectus. The bond has a covenant allowing the holder to demand its money back if Ukraine’s public debt tops 60 percent of economic output, which the IMF said took place last year.
“At the request of our Ukrainian partners and the IMF, we are not using this right as we do not want to aggravate the already difficult economic situation of our partners and neighbors,” Russian President Vladimir Putin said at a government meeting in Moscow on Wednesday. “However, I would like to understand what our partners plan to do.”
The nation’s debt levels are “unsustainable” and there is “no alternative” for creditors but to accept maturity extensions, coupon reductions and principal writedowns on their holdings, Finance Minister Natalie Jaresko said on Tuesday.
“I wouldn’t assume that Ukraine is not willing to default on the Russia bond,” Anna Gelpern, a Georgetown University law professor and fellow at the Peterson Institute for International Economics, said by phone on Tuesday. “They’ve said that they want to restructure them on the same terms as everybody else.”
Ukraine’s biggest creditor is Franklin Templeton, which along with three other companies owns $8.9 billion of the nation’s debt.
The government may await completion of the first IMF review on June 15 and make the June 20 coupon payment to Russia before imposing a moratorium, Andrew Matheny, an economist at Goldman Sachs Group Inc., said in an e-mailed note on Wednesday.