Ukraine, Russia Harden Bond Stance as IMF Rules Debt Official

Ukraine Defaults on $3 Billion Putin Bond
  • Fund calls for "good-faith" negotiations between two nations
  • Debt Ukraine says it can't pay is bargaining chip in dispute

Ukraine and Russia remained at odds over dealing with a $3 billion bond owed by the government in Kiev as the International Monetary Fund said the debt qualifies as an official claim, putting pressure on the two countries to start direct restructuring talks.

Finance Minister Anton Siluanov said Russia was still waiting for Ukraine to present a restructuring proposal through the IMF, which in turn has called on the parties to discuss the debt directly. The IMF’s executive board, which represents the fund’s 188 member nations, decided that the bond should be treated as official debt, rather than a commercial bond, the fund said in an e-mailed statement late Wednesday in Washington.

"The biggest hit is that the Russian and Ukrainian ministers of finance will now actually have to sit around a table," Timothy Ash, the head of emerging-market strategy at Nomura International Plc. in London, said by email. "The key point is that the offer to restructure has to be reasonable and in line with IMF debt sustainability lingo."

Direct Negotiations

The ruling follows a policy change by the Washington-based fund that allows it to continue to lend to nations that fail to meet obligations on debt owed to other countries, but enter direct, so-called "good-faith" negotiations with their creditors. Ukraine remains committed to negotiating in good faith a consensual restructuring, while reserving "all its rights" in connection with the bond, it said in an e-mailed statement Thursday.

The debt is the last major hurdle for Ukraine to complete its $23 billion restructuring and is at the crux of disagreement between the two nations following Russia’s annexation of the Crimean peninsula and a separatist insurgency in the Donbas region. The cabinet in Kiev reiterated Thursday that it cannot pay the bond, due Dec. 20, in full without violating terms on its bailout and commitments made to private bondholders.

Russia bought the $3 billion bond from the government of former Ukrainian President Viktor Yanukovych in 2013, months before his ousting. Ukraine, which is preparing to default on the note, has offered Russia the same restructuring terms, including a 20 percent principal writedown, that creditors led by Franklin Templeton accepted in October.

Russian Refusal

Russia refused to take part in the debt-restructuring agreement Ukraine reached with its commercial Eurobond holders, claiming it should be treated as an official lender and receive preferential terms on its debt. Ukraine, which has so far treated the bond as commercial debt, is barred by the terms of its agreement with private creditors to treat the note favorably.

The yield on Ukraine’s dollar-denominated bond maturing 2025 fell 13 basis points to 9.63 percent by 12:49 p.m. in Kiev, retreating from the highest since the note was first traded a month ago. The hyrvnia strengthened 0.4 percent to 23.475 per dollar.

Germany is now mediating negotiations between the countries, which are also preparing for a legal battle in English courts as chances of a default at the end of a 10-day grace period on the debt payment increase. Chancellor Angela Merkel’s government helped secure a meeting between finance ministers of the neighboring countries held on the sidelines of an IMF summit in Peru in October, although no resolution was reached.

Russia has been softening its tone on the debt since refusing to accept terms of the broader restructuring this year, with President Vladimir Putin proposing last month that Ukraine be able to pay it back over three years so long as a western government or bank provide a guarantee. That offer fell through earlier in December. 

Siluanov said Russia is “open to cooperation but” that an out-of-court settlement on repayment is “technically impossible” before the bond’s Dec. 20 maturity date.

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