Russians upbeat in run-up to IMF decision on Ukraine debt

By bne IntelliNews November 24, 2015

The legal department of the International Monetary Fund has concluded that a $3bn Ukrainian sovereign Eurobond held by Russia is official,  not commercial debt, a Russian official with knowledge of the matter told news agency RBC on November 23. Deputy finance minister Sergei Storchak confirmed the news to RBC.

An IMF representative told RBC that “it is not the legal department, but the IMF executive committee that determines the status of the bonds, and the latter has not taken a decision on the matter yet.” The IMF representative called on Russia and Ukraine to hold direct talks over the debt. 

The dispute refers to a two-year $3bn Ukrainian sovereign Eurobond bought by Russia in December 2013 as part of an abortive bailout for Ukraine, and due for repayment on December 20, 2015. Ukraine has said that the debt is commercial and can only be restructured under the same terms as accepted by commercial creditors. Ukraine's commercial creditors have accepted a 20% cut in face value of their debt and four year prolongation. Ukraine says it will default on the bond unless Russia accepts these terms.

The status of the bond is crucial because were Ukraine to default on official debt to another government, payment of further crucial installments in a $17.5bn IMF programme would cease, since the IMF is barred under current rules from lending to countries in default on official debt. However, IMF officials have also indicated they might change these rules to accomodate the Ukrainian case, but there is little time for such a decision left before the December 20 payment deadline.

"Even after such a report, it’s still not clear whether the alleged determination of 'official status' of the $3bn Eurobond has the official backing of the IMF’s legal department, or if it is just the personal conclusion reached by some of the IMF’s lawyers," writes Alexander Paraschiy, head of research at Kyiv brokerage Concorde Capital in a note.

Other reports in Russian state media also suggest the IMF is close to recognising the debt as official. The IMF is set to recognise Ukraine's $3bn Eurobond held by Russia as official, not commercial debt, Russian state-owned paper Rossiiskaya Gazeta also claimed on November 23. The paper cited a finance ministry aide, Svetlana Nikitina, without quoting her exact words.

The claim followed similar reports on November 20. "At the same time, the IMF agreed with the status of the debt of Ukraine. We reiterate that this is a sovereign debt, and it cannot be regarded together with commercial debts," Nikitina told state news outlet TASS on November 20.

Some analysts disputed the interpretation of Nikitina's words. "Nikitina only said that the IMF has decided on the status of this debt, offering no details. That this debt is 'sovereign' (not official, as interpreted by some international media) was Nikitina’s interpretation of the Russian position," writes Concorde's Paraschiy. "We agree with Nikitina that the $3bn bond is Ukraine's sovereign debt indeed, but this does not mean it's official."

Backing the Ukrainian arguments, ratings agencies Moody's and Fitch who upgraded their Ukraine rating over the previous week to one step above restricted default, appear to have largely concluded that the $3bn debt would not be recognised as sovereign.

After months of refusing to restructure the $3bn debt, Russian President Vladimir Putin made a surprise offer to Ukraine at a G20 summit in Turkey's Antalya on November 5. Putin offered Ukraine to repay the Eurobond in three $1bn installments starting 2016. Putin claimed that this was a better offer to Ukraine than originally envisaged by the IMF, having originally proposed Russia simply to postpone repayment to 2016.

"I guess the aim [of the reports] is to pressurise the Ukrainians to cut a deal around the [3x$1bn] offer seemingly made by Russia at the G20. On that we still have not heard very much - nevertheless the Ukrainians will be annoyed by this leak from Moscow, as the assumption was that the final decision would have been made by the IMF board at its next meeting, presumably responding to IMF Staff recommendations," wrote Tim Ash of Nomura International in a note. 

Earlier, Ukraine officials were quoted by newswires saying they had not received any official offer from Moscow, while Russian officials said it was up to Kyiv to contact Moscow over restructuring.

Analysts regard it as politically nearly impossible for Ukraine's authorities to repay the debt to Moscow, given likely hostility of Ukrainian civil society to any such move.

"The IMF board will have a hard choice in determining the status of the bond, which it implicitly recognized as non-official in March 2015 by allowing it to be included in Ukraine’s debt restructuring," writes Paraschiy. "Ultimately, we expect the IMF’s decision will enable Ukraine to delay repayment of the bond to the Russian fund and continue its extended funds facility program with the IMF," he concludes.

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