bne IntelliNews -

Ukraine could get the next tranche of International Monetary Fund money by the end of February, Ukraine's finance minister Natalie Jaresko said on January 23. She added that this would be in time “to avoid negative scenarios", as reported by Bloomberg from the World Economic Forum in Davos.  Jaresko also said that that cash-strapped Ukraine, which has only five weeks' import cover worth of international reserves, continues to service its international debt.

Christine Lagarde, head of the IMF, said on January 21 that she supported a request by Ukrainian President Petro Poroshenko for Ukraine to receive an Extended Fund Facility from the IMF, in place of its current stand-by agreement, which would allow a longer pay-back term for its debts to the IMF.

Analysts now expect Ukraine to be forced to revise its 2015 budget, widely regarded as unrealistic, in order to receive IMF funding, with swingeing budget cuts anticipated. “In return for extended credit, the IMF would mandate a programme of extreme macroeconomic reforms, including first priority fiscal consolidation,” write analysts at Kyiv brokerage International Capital Ukraine.

Also on January 21, Jaresko acknowledged that Ukraine had consulted its international bondholders about starting talks “with a view to improving medium-term debt sustainability", language usually implying a pending restructuring of sovereign debt with private sector involvement. 

Lagarde was then reported to have talked to Russian President Vladimir Putin on the night of January 22, to discuss restructuring of Ukraine's debt and the IMF's role.  Russia's involvement may be crucial to the success of any restructuring, say market participants.

Russia holds $3bn worth of Ukrainian eurobonds, of which Russia could demand early repayment in March or April, on the official publication of Ukraine's national statistics for 2014. The statistics are expected to show that Ukraine's national debt to GDP ration exceed 60%, in breach of the two-year bonds purchased by Russia in December 2013, triggering cross-default clauses on all Ukraine's debt if it does not make an early repayment on Russian request.

If new funding arrives from the IMF, this could enable Ukraine to pay back the Russian debt, eliminating the need to reach an agreement with Russia over restructuring, according to analysts. Alternatively, Russia could choose to participate in restructuring to retain some leverage. “The 'default' card has been called by the Ukrainians, weakening its place in the Russian hand,” writes Standard Bank's Tim Ash. The next tranche could be as much as $5bn-7bn, says Ash.

The combination of the restructuring hint with news of a renewed IMF programme meant that markets remained calm, having already priced in restructuring expectations, according to analysts at Concorde Capital.

“Markets have taken the restructuring announcement in their stride - largely as expected - albeit some weakness now reflective more of the perceived security - as in military, as opposed to bond – risks,” writes Standard Bank's Ash.