Russia offers to prolong term of disputed $3bn Ukraine bond

Russia offers to prolong term of disputed $3bn Ukraine bond
By bne IntelliNews November 16, 2015

Russia has tabled a compromise proposal for the restructuring of the contested $3bn Ukrainian Eurobond due in December, signalling a potential breakthough in a dispute that has further inflamed tensions between the neighbours in recent months.

The offer on the table is for Ukraine to redeem the bond in three $1bn annual installments starting next year, President Vladimir Putin said on November 16 on the sidelines of the G20 summit in the Turkish resort of Antalya.

"In my opinion we made an unexpected offer to our partners," the Russian leader said. "Not only have we agreed to restructure the Ukrainian debt, but we have offered better conditions than the International Monetary Fund was asking of us," TASS news agency quoted Putin as saying.

"We were asked to postpone the payment of $3bn to next year. I said that we were ready for a deeper restructuring. We are ready not to receive any money this year, $1bn next year, another $1bn in 2017 and [a final $1bn in] 2018," added Putin, who discussed the issue with IMF Managing Director Christine Lagarde on the sidelines of the event.

Putin said he was expecting guarantees for the payment of Ukraine's debt to Russia. "We've requested these guarantees from the US government, the European Union or a major international financial institution," Putin said, noting that the issue should be resolved by early December this year.

There was no immediate reaction from the Ukrainian authorities to the Russian offer. In a first reaction from the IMF, the multinational lender welcomed the staggered repayment proposal as positive. The details now needed to be discussed by the governments of Russia and Ukraine, the IMF wrote in an e-mailed statement, Bloomberg reported.

Earlier in the day, Russian Finance Minister Anton Siluanov called Kyiv's stance on the debt "unacceptable", since the Ukrainian side still insisted on treating this as private debt rather than sovereign debt as Russia regards it.

With the bond due to mature on December 21, Kyiv should repay $3bn "within the clearly set timeline" and "in case Ukraine does not do so [we] reserve the right to apply to court", Russian presidential aide Yuri Ushakov had also said earlier in Antalya. Senior Russian officials have repeatedly stated that non-payment would be treated as a Ukrainian default.

While Ukraine has brokered a 20% write down of $15bn in private bonds with other creditors, Moscow and Kyiv remained at loggerheads over the $3bn Eurobond. Against the backdrop of the armed conflict in the Donbas region, which Kyiv says has been orchestrated by Russia, the issue overshadowed financial as well as political relations between the countries for most of the year.

Russia bought the bond in 2013 from the previous government under Ukraine's former president Viktor Yanukovych, who was ousted from power in February 2014. The new government in Kyiv has threatened not to repay the debt if Russia doesn't bend on the redemption terms, and has altered Ukrainian law to allow for a debt repayment moratorium.

In turn, Russia for months rejected any talk of restructuring the debt and threatened to take the matter to an international court if Kyiv fails to repay in full. Russia also said it may use its influence within the IMF to block the lender's further disbursement of credits to Ukraine.

The IMF had been expected to change its lending policy rules later in November to allow it to continue to support Ukraine with credits if it does not repay the bond.

Generous offer or not enough?

Meanwhile, analysts and commentators were divided on the viability, legitimacy and purported generosity of the proposed Russian terms.

"Russian does not want to go to court and is ready to restructure the Ukrainian debt. The conditions attached are still not realistic, but this is only the start of talks," wrote Sergei Fursa of Dragon Capital. However, he added that the conditions do not correspond to the IMF programme and contradict the agreements with creditors. "All other Eurobond issues were restructured with the condition that no other creditors can get better conditions. And the conditions Putin is proposing are obviously better."

"For Ukraine the conditions are probably acceptable but the government is tied to its obligations according to the restructuring agreement, which say that no one can get better conditions than the others," agrees executive director of CASE Ukraine Dmitro Boyarchuk. "And Russia is again requesting an exception for itself. In a word, these conditions might be acceptable only if the IMF recognises the Russian debt as sovereign."

Bloomberg editors commented that the terms are less severe than those that private bondholders have accepted. "The IMF should take this opportunity to demand that Russia accept a bigger haircut: This debt, after all, was taken on by a corrupt leader against the interests of the Ukrainian people," Bloomberg wrote.

By contrast, the conditions for the Russian restructuring may be close to those reached with private creditors, say analysts at the Bank of America Merrill Lynch, meaning the debt burden is much lighter than previously. The proposed debt repayment schedule is considerably more even, they added, while other experts said it was too early to say for sure.

"How much Ukraine will save from the proposal is difficult to say since you would need to know what interest Russia will charge," Aleksander Kudrin, head of research at Sberbank Invest, told Vedomosti daily. "But the very possibility to enter into talks with the creditor is always a big plus for the borrower, and will help Ukraine return to credit markets faster."

"Putin’s offer is not acceptable for Ukraine under the rules of the debt operation, which forbids better terms to holdout," Alexander Paraschiy of Concorde Capital wrote in a research note. "However, this offer is possible to arrange in other formats, e.g. if the IMF declares that Russian debt is 'official debt'," Paraschiy added. "It’s also possible that the Russian side will agree on deeper restructuring terms."

"I guess the overall sense is that, well at least Russia is offering some solutions, and not trying to force Ukraine into default, for the time being, and this kicks the can down the road a bit," commented Nomura International analyst Tim Ash.