Ukraine Readies for Russia Court Battle After Debt Vote Passes

Updated on
  • Holders of all but one bond vote in favor of restructuring
  • Second vote on bond held by Russia scheduled for Oct. 29

Ukraine's Prime Minister Arseniy Yatsenyuk

Photographer: Krisztian Bocsi/Bloomberg

Ukraine said it is ready to go to court over a bond owed to Russia after the government in Moscow failed to participate in an $18 billion restructuring that was approved by all other investors.

Russia didn’t take part in voting Wednesday on an agreement that involved accepting a 20 percent writedown on a $3 billion note due Dec. 20, Prime Minister Arseniy Yatsenyuk said at a press briefing in Kiev. He urged Russia to vote at a second poll that will take place on Oct. 29. Russia, which has threatened to take Ukraine to court if the bond isn’t paid in full, said on Thursday its position hasn’t changed.

Passage of the restructuring on most of the bonds ends Ukraine’s seven-month battle to lower its debt to meet conditions for a $17.5 billion International Monetary Fund bailout and revive an economy battered by war with pro-Russian rebels. It also isolates the Russia bond, which the government in Moscow maintains is an official loan and shouldn’t be included in the restructuring.

"This increases pressure on Russia to agree to a deal that received a very clear voice of approval” from private bondholders, said Fyodor Bagnenko, a Kiev-based bond trader at Dragon Capital. "It looks like we shouldn’t count on an easy compromise."

A majority of investors in 13 securities, totaling $15 billion, voted on Wednesday in favor of the deal, paving the way for a bond exchange next month. Holdouts will not be given better restructuring terms and any investor who doesn’t accept the deal may face a moratorium, Ukrainian Finance Minister Natalie Jaresko said in an interview earlier this month.

“If they think they are unique, we are ready for a court case with the Russian Federation,” Yatsenyuk said today, urging Russia to accept the terms.

Russian President Vladimir Putin called this week for the IMF to help Ukraine pay back the debt, while Finance Minister Anton Siluanov said he is considering a plan for a possible default and is prepared to take Ukraine to court. Putin’s spokesman, Dmitry Peskov, said Thursday Russia’s position is unchanged.

Ukraine’s dollar bonds handed investors 47 percent this year, outstripping any other sovereign securities, after a Franklin Templeton-led creditor group reached more generous terms in negotiations to restructure the securities than most investors had anticipated.

Better Terms

Bonds rallied in August after the agreement was announced as the writedown was lower than the 40 percent initially sought by the government and the deal offered higher average interest payments. Ukraine will continue servicing its bonds even during a four-year freeze on principal and investors will receive warrants tied to economic growth, potentially allowing them to recoup some of the losses from the writedown.

Russia’s rejection of the restructuring could threaten IMF funding because the crisis lender’s policy doesn’t allow it to lend to countries which are in arrears on payments to other sovereigns. The IMF has yet to say whether it regards the bond as official- or private-sector debt. Russia bought the security from the government of former Ukrainian President and Putin ally Viktor Yanukovych shortly before his ouster in early 2014 and Russia’s annexation of Crimea.

"Russia is unlikely to participate” in the upcoming vote, said Dmitry Polevoy, a Moscow-based economist for Russia and Ukraine at ING Groep NV. "Repaying the bond is politically unacceptable to Ukraine, which will be hoping to continue receiving IMF funds while going into arrears on the debt."