IMF changes lending rules to keep supporting Ukraine

IMF changes lending rules to keep supporting Ukraine
By bne IntelliNews December 9, 2015

In a move slammed by Russia as "hasty and biased" because of a $3bn bond Kyiv is due to redeem from Moscow, the International Monetary Fund (IMF) announced it will change its lending policies to allow it to keep supporting countries that fail to repay official debts.

"The IMF's executive board met today and agreed to change the current policy on non-toleration of arrears to official creditors," the lender's chief spokesman Gerry Rice said in a statement on December 8, news agencies Reuters.

This provides an opportunity to continue supporting Ukraine if the country misses its December 20 repayment of the $3bn Eurobond to Russia, as observers have anticipated for months.

IMF policies prohibit it from lending to countries that are in arrears to other governments. This means the Fund's own lending regulations potentially undermine its aid package to Ukraine. Russia, which rejects attempts by Kyiv to restructure the debt, has said that as an IMF member it will obstruct the Fund's lending to Ukraine if it does not fully redeem the bond on time.

In a first official reaction from Moscow, Russian Finance Minister Anton Siluanov called the IMF policy change "hasty and biased".

"It was made solely to prejudice Russia and for purposes of legalising the opportunity for Kiev not to pay its debts," the minister said in remarks reported by TASS news agency.

Despite IMF requests for Russia to restructure Ukraine's debt, Moscow refuses to recognise the bond as private, insisting that it is sovereign debt. In October, a range of private creditors voted in favour of Ukraine's $18bn debt restructuring deal, while Russia refused to participate.

Fund head Christine Lagarde has met with both Russian President Vladimir Putin and Ukrainian President Petro Poroshenko in recent months, but the countries resisted exhortations to resolve the debt issue themselves. Following the Russian annexation of Crimea in 2014 and Moscow's support for separatists in eastern Ukraine, Kyiv still refers to Russia as an "aggressor country" in its dealings with the IMF.

Timothy Ash, a Nomura strategist in London, said in a note to clients that the IMF's latest move could be seen as "a victory for Ukraine, and something of a defeat for Russian diplomacy". According to Ash, a crucial role was probably played by the United States, punctuated by the visit to Kyiv by US Vice President Joe Biden visited Kyiv on December 6-8.

And "with Biden in Ukraine, the messaging from the US to the Poroshenko administration now will be we helped you out with this change in IMF policy over the $3bn Russian loan to ensure that IMF and Western financing stays on tap, now help yourself by passing an IMF compliant tax and budget code so as not to jeopardise that very same programme", Ash wrote.

Ukraine's dealings with the Fund have been complicated by lack of progress on required reforms in taxation, agriculture and other areas.

The latest IMF mission to Ukraine concluded its work on November 20 and left Kyiv after confirming that the next $1.7bn tranche of its support package has been delayed amid disagreements over Ukraine's tax reform plans. The IMF is also waiting for approval the state budget for 2016 before releasing more funding from the $17.5bn extended funding facility (EFF) agreed with Ukraine in March.

Ukrainian Finance Minister Natalie Jaresko said previously that both the tax reform proposals and the 2016 budget will likely be voted on by the parliament in a single package.

Moscow girds for court battle

Meanwhile, Siluanov said his ministry is already preparing documentation to fight the IMF decision in court. He noted that Russia had made a significant concession last month, when it proposed that Ukraine repay the debt $1bn a year rather than in full as scheduled in December. Ukraine rejected the offer.

"We made a conciliatory gesture - suggested an option of settling Ukraine's debt problem and approached the IMF because we understood Kiev does not solve its debt problems on its own," the Russian minister said.

However, prior to the IMF's decision to change its lending policy, the United States said it was not prepared to offer guarantees of Ukraine's staggered repayment of the $3bn debt, as Russia had requested under a compromise deal.

"Reluctance of the United States to resolve the issue with replenishment of the IMF's capital, which  would be highly useful for tackling Ukraine's debt problems, appears glaring against such a background," Siluanov added.