• Russia said last week it has begun procedures for legal action
  • Both sides say they are still open to out-of-court talks

Ukraine says it’s ready to defend itself against any lawsuit initiated by Russia last week over a defaulted $3 billion debt.

The government in Kiev is confident it can successfully defend itself against any claim after failing to repay the bond last month, the Finance Ministry said in an e-mailed statement on Monday. Russia said on Jan. 1 it had begun procedures to start legal action against Ukraine.

QuickTake Ukraine's Other War

The start of legal action deepened a standoff that has frozen political and economic ties between the two former-Soviet neighbors since Russia bought the bond more than two years ago. Still both sides said in their latest statements they remain open to out-of-court talks after attempts by Germany to mediate indirect negotiations over the debt fell through last month when Ukraine imposed a moratorium on payment.

“A court battle looks inevitable now, although it is interesting that Russia left an opening in their statement for a settlement out of court,” said Simon Quijano-Evans, a London-based emerging-market strategist at Commerzbank AG. ”This is unfortunately a bad start to the year for Ukraine’s bonds.”

Most Ukrainian bonds retreated on Monday, with the yield on dollar-denominated debt maturing in September 2019 climbing nine basis points to 10.21 percent.

Ukraine is barred from paying Russia back in full under a debt-restructuring agreement reached with private creditors last year that was key to meeting conditions for a $17.5 billion International Monetary Fund bailout. Russia refused to take part in those negotiations.

Official Debt

The Finance Ministry in Moscow said in its statement last week that Ukraine has not attempted to negotiate in good faith over the debt because it treated Russia as a commercial-sector, rather than an official, creditor. While the note was structured as a tradeable Eurobond, the IMF ruled in December that it was official debt. 

President Vladimir Putin offered in November to allow Ukraine to settle the debt in three $1 billion installments from 2016 to 2018, but the proposal fell through after the U.S. refused to offer the financial guarantees that Russia requested.

Any hearing in the case would be held in the U.K. as the bond is structured under English law.

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