Putin orders his ministers to talk with Ukraine on its debt operation

Russian President Putin asked his finance and economy ministers to hold consultations and find out what are the intentions of the Ukrainian government with respect to its sovereign debt, according to a May 20 report on the Cabinet meeting on the Kremlin’s official website. He also asked PM Dmitry Medvedev to “take it under control in order for the government to understand what is going on there.”  Putin criticized the position of the Ukrainian government, which in his view preannounced a sovereign default, which he deemed “unprofessional.”

Recall, the day before, Ukraine’s parliament granted the right to its government to decide on avoiding servicing certain public debt, including the USD 3 bln Eurobond maturing in December 2015, which was purchased by Russian National Welfare Fund. The ruling was a part of Ukraine’s attempt to convene a major debt operation, initiated on March 13, aimed at restructuring USD 23 bln in sovereign and quasi-debt.

Russian Finance Minister Anton Siluanov reported to Putin at the meeting that Ukraine is fulfilling all its debt servicing obligations thus far, and the next payment (coupon on the USD 3 bln Eurobond) is scheduled for June 20. To protect Russia’s rights in case Ukraine chooses to avoid payments, Siluanov mentioned the option of appealing to the IMF. Later in a press conference, he also stated that Russia will consider appealing in the international courts.

Alexander Paraschiy: Before yesterday’s government meeting, Russian top officials only stated that they do not see any alternatives to a smooth repayment of the USD 3.0 bln Eurobond by Ukraine. Putin’s order to talk to the Ukrainian side, therefore, should be considered as an attempt to start some dialogue on debt restructuring.

This also suggests that Russians consider the risk is high that Ukraine will avoid servicing smoothly the USD 3.0 bln Eurobond. Clearly, for Ukrainian side, the bond’s reprofiling is a top priority as it accounts for 40% of total debt under the debt operation that is due in 2015-2016. Moreover, it would be fair and logical that holders of this bond are treated pari-passu with holders of other Eurobonds that are subject to the debt operation.

Putin’s criticism of the recent moves in fact reflects very positively on Ukraine’s decisions. The Russian president would rather have seen Ukraine botch the operation as Russia did in August 1998, which is announce a sovereign default just a couple of days after former President Yeltsin’s assertion that everything was under control.