Germany Mediates Russia, Ukraine Bond Talks as Default Looms

  • Kiev says in 'everyday contact' with Russia through Germany
  • Russia threatening to sue Ukraine if $3 billion bond not paid

Germany is helping to mediate talks between Russia and Ukraine over a disputed $3 billion bond that comes due on Sunday.

Ukraine is in “everyday contact” with Russia through its German partners, Finance Minister Natalie Jaresko told reporters in Kiev on Tuesday, without elaborating on what was being discussed. “They are helping us," she said. "They are like brokers."

Russia and Ukraine are at loggerheads over the debt maturing Dec. 20, which President Vladimir Putin bought from ally and former Ukrainian President Viktor Yanukovych two years ago, just months before he was toppled. The government in Moscow has repeatedly called for repayment in full, refusing to accept terms under a wider $18 billion restructuring that included a 20 percent principal writedown. The Kiev-based finance ministry insists it can’t pay.

Germany mediated a meeting between finance ministers of the neighboring countries held on the sidelines of an International Monetary Fund summit in Peru in October, although no resolution was reached, Jaresko said. Germany also helped negotiate a fragile truce between pro-Russian separatists in eastern Ukraine, Russia and the government in Kiev that has held since September.

"If Germany is getting involved, it shows there is willingness on both sides to talk -- that’s an important step forward,” said Otilia Dhand, a senior vice president at the Teneo Intelligence consultancy in Brussels. “There is a reasonably good chance a deal could be reached before Ukraine defaults on the bond, but clearly there is no guarantee that acceptable conditions can be achieved on both sides.”

Germany’s Finance Ministry declined to comment.

Russia and Ukraine have exchanged public blows over the bond this month after an offer by Putin to push back due dates fell through as the U.S. declined to meet a condition to guarantee repayment. Russian Prime Minister Dmitri Medvedev called Ukrainian officials “swindlers” for withholding repayment and stepped up threats to pursue legal action. His counterpart in Kiev, Arseniy Yatsenyuk, said last week Ukraine is “fully armed” and ready to go to court.

IMF Nudge

Ukraine was forced to restructure all of its international debt this year after the conflict with rebels drained reserves and plunged the economy into a recession, prompting the country to seek a $17.5 billion rescue loan from the IMF. Ukraine is barred from giving Russia better terms under the conditions of the restructuring agreement with private creditors and its IMF aid package. The new notes were little changed on Tuesday.

The IMF last week nudged Ukraine towards negotiating with Russia over the bond, saying in a policy document that it will only continue lending to countries that are in debt to other sovereigns if they have engaged in bilateral talks to try to restructure.

A default will take effect if Ukraine doesn’t pay back the $3 billion by the end of a 10-day grace period.

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