Bond offer to Ukraine to prevent IMF changing lending rules, says Russia's Siluanov

By bne IntelliNews November 18, 2015

Russia's surprise offer to restructure its $3bn Ukrainian Eurobond aims to prevent the International Monetary Fund (IMF) changing rules that forbid lending into arrears on debts to other governments, Finance Minister Anton Siluanov told journalists on November 18.

"Our offer aims solely to avoid creating a precedent by changing the order of [debt] settlement between states receiving funding from the IMF with their official creditors," Siluanov said. "If the proposal is accepted, there will be no need to change the corresponding rules," he added in comments reported by Prime news agency.

The statement is the first acknowledgment by a Russian official that Moscow opposes proposed changes to IMF lending rules intended to facilitate continued lending to Ukraine in the event Kyiv defaults on the Russian-held bonds.

After months of insisting that Ukraine must redeem the bond in full when it falls due in December, Russian President Vladimir Putin said on November 16 that Russia could restructure Kyiv's $3bn debt. Under the proposed terms, Kyiv would allowing repayment of $1bn per year for the next three years until 2018, if the US, EU or IMF guaranteed the debts.

Currently the IMF does not lend to countries that are in arrears on debt payments to other states, meaning that Ukraine's threat to default on the Russian-held Eurobond in December could block a four year $17.5bn extended funding facility provided to Ukraine by the IMF.

The restructuring offer set analysts speculating that Russia is hoping to improve its image, shed the EU and US sanctions imposed over Ukraine, and regain access to world credit markets amid broader international solidarity against terrorist threats.

"Russia is trouncing the US in the spin war going on at the moment - spinning this one exactly the way they want it - or to use a US baseball metaphor, Putin is knocking this one out of the park and making it look like the West is not even in the game," analyst Tim Ash of Nomura International commented in a note.

"Anything is possible in life, but I just cannot see how the US (which is supplying aid and military kit - anti mortar radar- to the Ukrainians against the Russians) will sign off on guaranteeing debt payments from Ukraine to Russia," he added, noting that the US was reluctant to provide three recent $1bn loan guarantees to Ukraine.

To now "see that go out the door and back to Moscow would just be weird to say the least", Ash wrote.

"Finally it has become clear what the goal of Putin's debt restructuring proposal is," writes Alexander Paraschiy of the Kyiv-based brokerage Concorde Capital. "To block changes to IMF lending policy slated for next week so that Ukraine is not allowed to default on the debt."

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