Germany Asks Ukraine to Boost Debt Terms After Russia Rebuff

  • Russia said to reject revised offer made by Ukraine at Davos
  • Moscow has threatened legal action over $3 billion default

Germany is asking Ukraine to propose a new offer to resolve a dispute with Russia over a $3 billion bond default after President Vladimir Putin’s government rejected a proposal put forward last month.

The Finance Ministry in Berlin, which is mediating talks between the two former-Soviet neighbors over the debt, is urging Ukraine to compromise, according a person with knowledge of the negotiations, who asked not to be identified because the details are private. The latest offer to resolve the dispute was "unacceptable" because it contained terms that were worse than those given to private creditors in a $15 billion restructuring last year, Russia’s Finance Ministry said in an e-mailed response to questions Tuesday.

The mediation effort is a sign that Ukraine is trying to reach an out-of-court compromise to a dispute that’s deepened the rift between the neighbors that began in 2014 when Russia annexed Crimea. The eastern European nation is in the midst of a political shakeup that’s roiling its bonds as the International Monetary Fund warns a $17.5 billion bailout risks failure if the government doesn’t kick start an overhaul of its economy.

“An out-of-court settlement would be definitely preferable, as a court ruling and its subsequent implementation would likely be lengthy, complex and could additionally spoil Russian-Ukrainian relations,” Gunter Deuber, an analyst at Raiffeisen Bank International AG in Vienna, said in an e-mailed note.

The government in Moscow refused to take part in Ukraine’s debt overhaul last year because it wanted to be treated more favorably than private investors, who agreed to accept a 20 percent principal writedown. A spokeswoman for Ukraine’s Finance Ministry didn’t immediately respond to a request for comment on the status of mediation efforts.

Lawsuit Threat

Since Ukraine failed to redeem the bond on Dec. 20, Russia has threatened to initiate legal proceedings in the U.K. The filing of the lawsuit has been delayed, Russian Finance Minister Anton Siluanov told reporters in Moscow on Feb. 5. Both sides said last month that they are open to out-of-court discussions.

Ukraine is barred from paying Russia back in full under the terms of its restructuring agreement, which was reached to enable the country to qualify for IMF aid to avert bankruptcy as separatist unrest hobbled its economy. The terms of that funding also require Ukraine to negotiate in "good faith" with Russia over the defaulted bond.

In comments on Tuesday, Svetlana Nikitina, an aide to Siluanov, said Russia received a letter from Germany’s Finance Ministry with a solution to resolve the debt dispute.

Since there’s been no offer directly from Ukraine, it "could in no way be regarded as an attempt to begin good-faith negotiations," she said. "The conditions of the offer were such that they could not be considered seriously, since they are worse that those offered to commercial creditors."

Bond Slump

Putin proposed in November to allow Ukraine to settle the debt in three $1 billion installments from 2016 to 2018, but the plan fell through after the U.S. refused to offer the financial guarantees that Russia requested. Ukrainian Finance Minister Natalie Jaresko made the country’s latest offer at the World Economic Forum in Davos last month, according to the person familiar with the negotiations.

The country’s restructured Eurobonds have slumped since a reform-minded economy minister resigned on Feb. 3 after accusing presidential party members of corruption. IMF Managing Director Christine Lagarde said on Wednesday failure to "invigorate governance reforms and fight corruption" is putting the aid programme at risk.

The yield on bonds maturing in September 2019 climbed 23 basis points to 12.38 percent at 1:07 p.m. in London, extending the increase since they were issued in November to 3.7 percentage points.

“At the moment, with concerns over domestic political stability in Ukraine, the country does not need further uncertainty” around the bond dispute with Russia, Timothy Ash, head of Europe, Middle East and Africa credit strategy at Nomura International Plc in London, said in an e-mailed note.

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