• Under new IMF policy, Ukraine must negotiate in 'good faith'
  • Russia expected to avoid acting as restructuring 'holdout'

Ukraine will need to negotiate in "good faith" with Russia over a $3 billion bond due this month if it wants to continue receiving a loan from the International Monetary Fund under a policy change the institution laid out this week.

The IMF’s executive board approved a policy change on Dec. 8 that will allow lending to countries that default on debts to sovereign creditors. The change clears the way for the Washington-based fund to continue lending to Ukraine if it fails to repay a $3 billion bond Russia bought from the government of former Ukrainian leader Viktor Yanukovych in 2013.

But under the new policy, the debtor country will be expected to make "good-faith efforts" to restructure the debt, according to an IMF policy paper released Thursday that lays out the details of the shift. This may mean Ukraine will have to overcome its frosty relations with Russia to try to reach a bilateral agreement over the debt.

The new policy also pushes Russia to the negotiating table, by trying to prevent IMF loan programs from being held up by "holdout" creditors. Sovereign lenders would be expected to accept offers consistent with the IMF’s assessment of a borrower’s debt sustainability and financing needs.

Until now, Ukraine has asked Russia to accept restructuring terms agreed to by its commercial creditors in October, a proposal the government in Moscow has refused.

"Generally, we want debts to be paid on time," IMF General Counsel Sean Hagan told reporters on a conference call Thursday, in which fund officials declined to comment on the Ukraine-Russia dispute. "We want to try to avoid arrears."

The new policy sets a number of conditions on the fund’s ability to lend into arrears, including that prompt IMF support be "essential" and the borrower be pursuing "appropriate" policies. It also requires that lending into arrears not jeopardize the IMF’s ability to execute other bailouts.

The decision to lend into arrears will be made by the IMF’s 24-member executive board, which represents the fund’s 188 member nations. In weighing whether a debtor is acting in good faith, the board will look for evidence the country has approached its official creditor, either bilaterally or through a group of official creditors, and has offered to engage in "substantive" dialogue, among other things.

Specifically, the IMF said in the paper that the debtor "should be willing to engage with official creditors independently from private creditors." That may present difficulties for Ukraine, which has urged Russia to accept the deal it offered private creditors.

Even with the policy change, other hurdles remain for Ukraine to obtain additional disbursements of the IMF bailout loan soon. Local wrangling over taxes has reduced the chances that any more payouts will occur this year.

The IMF changed its arrears policy in 1989 to allow countries borrowing from the fund to continue receiving loan installments even if they miss payments to commercial creditors. But the fund’s executive board left in place its policy of not tolerating official arrears, despite a recommendation by staff that exceptions be allowed.

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