bne IntelliNews -

International Monetary Fund (IMF) officials have decided to view $3bn in Russian-held Ukrainian sovereign Eurobonds as official intergovernmental debt rather than private commercial debt as Kyiv insists, Bloomberg reported on June 23.

The move is a setback for Ukraine which has consistently referred to the two-year Eurobonds sold by Kyiv to Moscow in December 2013 under an abortive bailout as private debt, despite Russian protests that is is an official credit. The status of the bond still has to be approved by the executive board of the IMF, according to Bloomberg.

The issue first arose on March 27, when IMF spokesman William Murray said during a briefing 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 clarifying the comment and saying "no decision" had been made on the status of the Russian bond, forcing the spokesman 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.

The decision to recognise the Russian-held bonds as official debt, if final, would ringfence the Russian-held bonds against any restructuring or default by Ukraine, since a default on official debt would bar Ukraine from receiving further funds from the IMF. Kyif has portrayed the debt as a burden passed on by the former "criminal" government of ex-Ukrainian president Viktor Yanukovych, who was ousted from power in protests in 2014. Billions of dollars of state money vanished during his tenure. 

However, Russian President Vladimir Putin said on June 16 he was unconcerned what Ukraine had done with the $3bn and expected prompt repayment on the bond's December redemption date. "We care little who used this money and how. We want to have it back," he told media after talks with visiting Finnish President Sauli Niinisto.

Putin also reminded that Russia was entitled to call in the credit early after Ukraine’s aggregate debt had exceeded 60% of its GDP, as is written into the credit terms. "We are not doing this bearing in mind the difficult economic situation [in Ukraine]," Putin underscored.

Meanwhile, a classification of the bond by the IMF as official may complicate Ukraine's efforts to reach agreement over debt restructuring with the committee of private bondholders led by Franklin Templeton, since the reduction on the principle debt, or haircut, required of this group may increase as a result.

Ukraine paid a $75mn coupon on the Russian-held Eurobonds on June 22, following a $39mn payment on its 2016 Eurobonds on June 17. On September 23, Ukraine has to pay down a $500mn Eurobond, currently quoted at 52.28 cents on the dollar. Ukraine is believed to be demanding a 40% write down in the debt principal, according to media reports.