Russia is willing to sell its defaulted-on Ukrainian $3bn bonds and end its row with Kyiv, the Russian Finance Ministry said on November 17.
In a what could be seen as a peace offering, Russia’s Deputy Finance Minister Sergey Storchak said Russia was ready for an out-of-court settlement with Ukraine over a $3bn Eurobond issue it bought in the twilight of the rule of ousted president Viktor Yanukovych, and could sell the bonds to a third country if a buyer could be found.
Ukraine sold a $3bn 5.0% two-year Eurobond to Russia as part of a larger $15bn bail out package in December 2013. The new administration of President Petro Poroshenko has refused to honour the debt, which has since become a political football. Ukraine has technically defaulted on the bond.
“Ukraine’s new government restructured $15bn of outstanding sovereign Eurobonds in November 2015 (and added some quasi-sovereign debt later), agreeing a four-year maturity extension along with a 20% nominal haircut in exchange for GDP warrants. Russia did not participate in the debt exchange, leading to Ukraine defaulting on the $3bn bond in December 2015,” Dragon Capital said in a note.
Russia has sued Ukraine in a UK court in what has turned into a messy legal battle. Ukraine is due to appeal sometime in early 2018 against the initial court ruling that found it should honour the bond.
Analysts worry that Ukraine will lose and be told to pay. However, with few assets outside Ukraine it is hard to see how Kyiv can be forced to pay.
But a negative ruling may complicate its relations with the International Monetary Fund (IMF) and its $17bn stand-by agreement. The IMF has already changed its rules to allow itself to lend to a sovereign that has defaulted on a sovereign bond, something that its own charter previous forbade, because of the situation in Ukraine.
Everyone would welcome the sale of the bond and an end to a difficult situation. Without giving any details, Storchak said Russia was ready to “accept cash or debt of a third country” for the bond. Germany has been suggested as one possible buyer.
“The bond does not give Russia any significant financial or political leverage over Ukraine. At the same time, Ukraine stands to mitigate potential risks related to the IMF programme, which could arise if the court issued a negative verdict. The third party consenting to buy the bond would likely need to restructure it on the terms Ukraine agreed with its Eurobond holders in 2015. This would lead to a marginal drop in Ukraine’s debt-to-GDP ratio (-0.6pp) as a result of the nominal haircut but slightly higher interest payments,” Dragon said.