Ukraine says Russia is private bondholder

By bne IntelliNews April 17, 2015

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Ukrainian Eurobonds worth $3bn that were bought by Russia in 2013 currently count as private debt under the rules of the London Club, and their beneficiary is unknown, Ukraine's finance minister Natalie Jaresko told US media.

"At this point we see [that] the Russian-purchased bonds should be treated on equal basis [with Ukraine's other Eurobonds]," Jaresko said in an interview with US broadcaster CNBC, as quoted by Interfax. "We have no reason to believe at this point that they are anything other than a London [private] type of credit. They are not registered with the Paris Club [of official creditors] and at this point we have notified ultimate bondholders through the custodian system, just like we have notified all of Eurobond holders," the US-born minister said.

However, the exact identities of the bondholder's remain a mystery, according to Jaresko. "I don't know who is the ultimate beneficiaries of the debt are. They have not yet come forward. All we know that there are three custodians and, as I said, we have notified them through the clearing system," she said.

Her comments sparked a furious response from Moscow on April 17. "We will not agree to any restructuring, we will wait for Ukraine to fulfill its obligations," Russian Finance Minister Anton Siluanov said, as quoted by Interfax. "If the obligations are not met, we will go to an arbitration court in line with the agreement on the investment of the National Welfare Fund's money into bonds of Ukraine as a sovereign [state]."

The controversy turns on the crucial question of whether Ukraine's $3bn worth of bonds held by Russia and due in December are official debt or not. The answer is important because if the bonds are official and Ukraine doesn’t pay them, the International Monetary Fund (IMF), under its own rules, will have to suspend its $40bn financial aid package to Kyiv.

If the bonds are deemed privately held, then they can be included in a $15.3bn debt reduction deal that Jaresko is currently trying to put together.

IMF spokesman William Murray said during a briefing on March 27 that as Russia's National Reserve Fund, a sovereign wealth fund, holds Russia's Ukraine Eurobond, it should be classified as official debt. 

However, the IMF quickly came out with a statement saying "no decision" had been made on the status of the Russian bond, forcing Murray to in effect retract his comments: "No determination has been made by the fund as to the status of this claim," Murray said in a later statement, which analysts said did little to clarify the issue one way or the other.

Under the IMF's own rules it cannot offer help to countries that have arrears to official lenders – ie governments or other international financial institutions. But if it is classed as a private lender, then Ukraine could theoretically refuse to repay the loan's principle amount, and even if Russia refuses to accept its haircut, the IMF programme for Ukraine can continue unimpeded.

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