IMF Eases Lending Policy in Move Helping Ukraine in Bond Feud

  • Fund to allow lending to countries in arrears to sovereigns
  • Russia calls decision 'rushed and biased,' vows court battle

The International Monetary Fund loosened its policy on lending to countries that default on their debts to sovereign creditors, easing one potential obstacle for bailout money continuing to flow to Ukraine if the nation fails to repay a Russian-held bond this month.

The IMF’s executive board on Tuesday approved a change that will allow the Washington-based fund to continue lending to countries that fail to pay debts held by other nations. Previously, the IMF prohibited itself from lending to borrowers that fall into so-called official arrears.

IMF spokesman Gerry Rice said in a statement that more details will be available in the "next day or so" on the scope of and rationale for the policy shift.

The change clears the way for the IMF to continue lending to Ukraine if it fails to repay a $3 billion bond Russia bought from the government of Ukrainian leader Viktor Yanukovych in December 2013. Yanukovych was overthrown early the following year and Russian forces annexed Crimea in a move that set off a conflict that has killed 8,000 people.

Ukraine wants the bond, which matures Dec. 20, to be restructured under an agreement reached with its commercial creditors that would write down the principal of the debt.

Putin’s Offer

Russian President Vladimir Putin last month offered to restructure the bond by spreading out payments over three years. Russia set a Tuesday deadline for a response from the IMF, saying the impasse can only be resolved “in the framework” of the fund-led program of assistance for Ukraine because the nation lacks the financial means to pay. The IMF has said it’s up to Russia and Ukraine to negotiate directly.

"The decision to change the rules looks rushed and biased," Russian Finance Minister Anton Siluanov said in Moscow. "It’s being made solely to the disadvantage of Russia and to legalize the opportunity for Kiev not to pay its debts."

He said Russia has no choice but to "use all means to defend our rights as a creditor. "We’re preparing documents to submit to court."

The IMF disbursed $5 billion in funds to Ukraine in March under a $17.5-billion bailout, and another $1.7 billion in August.

Even with the IMF policy change, other hurdles remain for Ukraine to obtain additional disbursements of the bailout loan soon. Local wrangling over taxes has reduced the chances that any more payouts will occur this year.

IMF staff members completed a mission to Ukraine on Nov. 20 without reaching a preliminary agreement to release the next loan installment, also expected to be $1.7 billion. The fund urged the Ukrainian government to pass a budget that reduces the nation’s deficit and public debt to safer levels. IMF officials also want Ukraine to broaden its tax base and shore up its banking system.

The IMF changed its arrears policy in 1989 to allow countries borrowing from the fund to continue receiving loan installments even if they miss payments to commercial creditors. But the fund’s executive board left in place its policy of not tolerating official arrears, despite a recommendation by staff that exceptions be allowed.

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