Ukraine insists Russia can’t get better treatment in loan dispute

The Ukrainian government can’t make timely repayment of the USD 3 bln in Eurobonds (held by a Russian fund) without violating its financing targets agreed with the IMF and breaching its obligations under the “most favored creditor clause” included in the new Eurobonds as part of the completed debt operation, the Finance Ministry said in a Dec. 17 statement. This is regardless of the fact that the IMF recognized these Eurobonds as official debt, MinFin said. Ukraine anticipates that the IMF’s recently adopted policy on lending into official arrears will allow the IMF to continue lending to Ukraine regardless of any suspension of payment on the “Russian Eurobond,” as Ukraine “has indeed negotiated in good faith,” the statement said.

MinFin also reminded the public that the Russian bondholders were the only holdouts in restructuring Ukraine’s sovereign Eurobonds. “Ukraine may not settle with holdout creditors on terms that have a net present value higher than the net present value at issue of the sovereign bonds the holdout creditors would have received had they participated in the exchange operation,” MinFin stated. The non-payment to holdouts “won’t constitute a cross-default under the new bonds”.

Alexander Paraschiy: With this statement, MinFin made it clear that the IMF’s recognition of the “Yanukovych debt” as Ukraine’s obligation to the official lender does not change Ukraine’s intention to demand from Russia similar restructuring conditions that the other Eurobond holders have agreed upon. We believe such a statement could not have been made without the IMF’s backing. Extending IMF lending is critical for Ukraine, and it’s particularly critical that the IMF continue to officially recognize that Ukraine is “making good faith efforts”.

Based on what the IMF’s representatives said in their Dec. 10 conference call, we conclude that Ukraine’s actions do not perfectly match the criteria of “good faith efforts” with Russia as the official creditor.  However, an official decision on that issue “allows for the exercise of discretion” by the IMF, its officials also said during the conference call. As the Fund’s Dec. 16 recognition of the “Yanukovych debt” as official (ill-grounded, in our view) suggests, the “discretion” is a very important word in the IMF’s decision-making process. We hope that the IMF’s “discretion” on “good faith efforts” will be in Ukraine’s favor, given that a decision otherwise will undermine the entire loan program and could undermine Ukraine’s geopolitical future.

The MinFin statement confirms our view that Ukraine has no intention to repay this debt when it’s due on Dec. 20. Very likely, the government will resolve today to impose a moratorium on servicing this debt.