Russia, Ukraine Lurch Toward Court Battle Over Bond Dispute

  • Russia may seek Ukraine default on all debt, Medvedev says
  • Prime minister calls IMF policy change politically biased

Russia’s dispute with Ukraine lurched closer to a court battle after the Prime Minister Dmitry Medvedev accused the government in Kiev of being ready to cheat his country over a $3 billion bond maturing this month.

Calling Ukrainian officials “swindlers,” Medvedev accused the International Monetary Fund of hindering his government’s ability to get its money back after the lender changed its policy on Tuesday to let it keep giving Ukraine bail-out aid even if it defaults. He stepped up threats to pursue legal action against the government in Kiev, while his counterpart Arseniy Yatsenyuk said Ukraine is “fully armed” and ready to go to court.

“They refuse to return our money, and our Western partners not only aren’t helping us, they’re a hindrance,” Medvedev said in an annual interview with Russian media shown on state television Wednesday. “We won’t put up with this. We’ll got to court. We’ll seek default on the debt and we will seek default on all of Ukraine’s obligations.”

The rift over the debt that Russia bought from Ukraine’s former president two years ago, months before he was toppled, has widened with the IMF decision, which clears the way for Ukraine to default without disrupting its $17.5 billion rescue loan. An offer by President Vladimir Putin to push back due dates on the bond fell through this month after Russia said the U.S. declined to meet a condition to guarantee repayment. He ordered his government to file a suit against Ukraine if the debt isn’t paid.

Russia refused to take part in a debt-restructuring agreement Ukraine reached with its commercial Eurobond holders in October, claiming it should be treated as an official lender. Ukraine, which is treating the bond as commercial debt, is barred by the terms of that debt restructuring to pay Russia in full. The deal, which includes a 20 percent principal writedown, “is still on the table” for Russia, Yatsenyuk said Wednesday.

Suit Probability

“The probability that it’s going to end up in court is increasing, even if it’s probably not a preferred solution on either side,” Otilia Dhand, a senior vice president at the Teneo Intelligence consultancy in Brussels, said by phone.

Russia could try to take legal action to keep Ukraine from making payments on its other international bonds, as holdouts in Argentina’s restructuring have done. Andrew Wilkinson, a partner at law firm Weil, Gotshal & Manges LLP, who worked on Ukraine’s bond restructuring, has said provisions were made to block Russia from going down that route.

Ukraine’s dollar-denominated bonds climbed on Wednesday after the IMF’s policy change increased the likelihood of the country receiving more aid from the fund. Russia plans to call for an IMF board meeting to confirm its status as a sovereign borrower, Finance Minister Anton Siluanov said Tuesday after the shift. Medvedev said the fund’s move was politically biased.

“That seriously undermines trust in the decisions that the IMF makes,” he said.

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