• Russia proposes Ukraine pay $1 billion a year through 2018
  • Putin seeks U.S., EU guarantees on Ukraine's $3 billion debt

President Vladimir Putin offered to restructure a disputed $3 billion bond owed by Ukraine, the latest sign that Russia’s standoff with the U.S. and Europe may be relenting in the wake of last week’s terrorist attacks in Paris.

Speaking Monday at a Group of 20 meeting in Antalya, Turkey focused on rebuilding ties to fight extremism, Putin proposed lifting a December deadline and spreading payments over three years. That’s the first time Russia has said it’s ready to soften its stance on the debt it bought from former Ukrainian leader Viktor Yanukovych in December 2013, months before he was overthrown and Russia annexed Crimea.

The gradual improvement in relations was highlighted by Putin’s meeting with Barack Obama at the G-20 summit for the first time since the Russian president surprised his American counterpart in September by sending warplanes to prop up Bashar al-Assad, the Syrian leader the U.S. wants deposed. The offer was also made before the European Union discussions early next year over renewing sanctions against Russia over Ukraine, whose war has poisoned ties between the former Cold War foes.

Easing Tensions

“Putin making friends is probably a slight stretch but he’s probably trying to ease tensions between Russia and the West," Max Wolman, who helps manage $13.5 billion in emerging-market debt at Aberdeen Asset Management Plc., said by e-mail. The move increases the chances of the penalties against Russia being lifted, he said.

Russia proposed letting Ukraine pay back $1 billion annually from 2016 to 2018 and is waiting for guarantees from the U.S., the EU or other global financial organizations on the repayment, Putin said. Until now, Russian officials had insisted that Ukraine must pay the bond in full on Dec. 20, and threatened legal action if its neighbor missed the deadline. A Russian restructuring would affect the budget and require additional borrowing, Deputy Finance Minister Sergei Storchak told reporters in Antalya.

The proposal calls into question the implications for Ukraine’s other bondholders, including Franklin Templeton, which reached a $15 billion restructuring agreement with the government in August that involved writing down 20 percent of the face value of their holdings. Ukraine said it wouldn’t give Russia better terms than its other creditors.

Russia refused to participate in the deal, saying the debt was official and should be treated differently to the private creditors.

‘Profound Restructuring’

Ukraine changed terms on its Eurobonds in order to qualify for a $17.5 billion International Monetary Fund loan granted to help lift its economy out of a recession worsened by separatist unrest in its easternmost regions. The restructured notes, which started trading last week, rallied after Putin’s comments, with the yield on the 2027 security falling 12 basis points to 8.89 percent.

“We agreed with our partners that we’ll discuss details of our proposals comprehensively in the nearest future,” Putin said on Monday. “We were asked to delay this payment to next year. I said that we’re ready to go for a more profound restructuring.”

Better Terms

The proposal is a positive step and the details now need to be discussed between Russia and Ukraine, an IMF spokesperson said on Monday. Ukraine’s Finance Ministry said "it hasn’t received any direct information and has no comment at this time." Spokespeople for the Ukrainian president and prime minister weren’t available.

Under the conditions of its debt restructuring, Ukraine is prevented from giving holdouts better terms than those agreed to by other bondholders. This means Putin’s proposal would need to get the consent of Franklin Templeton and other creditors, according to Vadim Khramov, an analyst at Bank of America Merrill Lynch in London.

“It’s not clear how that would be done legally, as Russia officially did not participate in the restructuring,” Khramov said.

While Putin’s proposal may help defuse tensions with Ukraine and warm ties with the U.S. and the EU, it won’t reverse the souring of east-west relations, according to Dmitri Petrov, a strategist at Nomura International Plc in London.

“I really don’t think that fundamentally the deterioration of relationship is being resolved," he said Monday by phone. “Generally, I don’t think that this changes the fact of sanctions. It reduces the risk of downside for further sanctions.”

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