Ukraine state debt breaks 60% of GDP threshold set in ‘bail bond' terms

By bne IntelliNews September 29, 2014

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Ukraine's state debt in August 2014 broke the 60% of GDP maximum limit stipulated in the covenant of $3bn eurobonds sold to Russia in December 2014, according to statistics published by Ukraine's ministry of finance. This could allow Russia to demand early repayment of the debt, playing Ukraine under additional financial pressure.

Ukraine’s USD-denominated state debt in fact increased only fractionally by 0.4% on the month - a mere $286m - in August to hit $69.5bn , according to Finance Ministry data released on September 26.  But given the rapid slide in the value of the hryvnia, this led to a 12.9% increase on the month to UAH945.8bn.  Along with a contraction in GDP, this took total debt to nearly 63.3% of GDP, breaching the terms of a two-year $3bn Eurobond Ukraine sold to Russia in December 2013, due for repayment in December 2015

Russia now looks likely to demand early repayment of the bond in 2014, according to comments made by Russia's finance minister Anton Siluanov on September 26. However, Siluanov appeared ready to wait for complete third quarter statistics to be published, rather than basing the decision on the August results.

Siluanov told journalists that Russia would wait for official third quarter statistics before reaching a decision on early repayment. "We will receive GDP statistics for the third quarter sometime in November. We'll figure it out."  Asked whether Russia would demand repayment on official confirmation that the 60% threshold had been crossed, Siluanov answered: "This will be Russia's decision. We will see when the clause is activated and then decide how to proceed." 

"[Ukraine] would likely struggle to fund early repayment, on its own account or via the IMF, if early repayment was demanded in 2014 as the next IMF disbursements under the existing IMF Stand-by arrangement are not planned until December 2014," wrote Standard Bank's Tim Ash in a research note.

But Ash believes that Russia might be ready to haggle over repayment. "Russia might still have no intention of seeking early repayment of the 2015 bail bonds, but might simply be seeking to further pressurise the administration in Kyiv to compromise towards delivering on Moscow’s strategic objectives -- No Nato, No EU and No successful pro-Western reform administration in Ukraine."

Concorde Capital analysts see fears over Russia demanding early repayment as overblown. "The easiest way for the Ukraine government to not grant an opportunity for Russia to demand any repayment is to stop making its GDP figures public," wrote Aleksandr Paraschiy. 

According to Paraschiy, official reporting of Ukraine’s 3Q GDP is slated for December 10, not for November as Russia's Siluanov apparently believes, meaning Ukraine would have to pay in early January 2015, only eleven months before the scheduled maturity date. "For this reason, the threat that Russia will demand early repayment is not very critical for Ukraine. The repayment should be made by December 2015 regardless, that is, if Ukraine’s government chooses to obey its commitments to the government of the aggressor-state," Paraschiy wrote.

There has been speculation that Ukraine could dispute the bonds in court, because of Russia's aggression towards Ukraine that has contributed to Ukraine's GDP collapse. "Ukraine might seek to use the ‘Odious’ debt argument to nullify the Russian bail bonds, but any such action could be time-consuming, and unlikely to prevent an earlier credit event," wrote Ash.

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