Russia to buy USD 3 bln of Ukraine’s two-year Eurobonds this week

The Russian Federation government is ready to buy two-year Eurobonds to be issued by Ukraine for USD 3 bln at a coupon rate of 5%, Russian Finance Minister Anton Siluanov informed journalists on Dec. 17. The Eurobonds will be listed on the Irish Stock Exchange, according to Siluanov. Earlier that day, Russian President Vladimir Putin announced the Kremlin’s decision to allocate USD 15 bln from Russia’s National Welfare Fund for Ukrainian Eurobonds.

Alexander Paraschiy: We have three days to be assured of the seriousness of the Russian government’s claims. If the deal is done as described (and if there are no put options on the new bonds), it will remove the default risks for the 2014 bonds of Ukraine and Naftogaz. At the same time, it will significantly increase Ukraine’s sovereign risks for September-December 2015. In addition to the potential USD 3 bln debt maturing at that time, Ukraine will also have to repay USD 500 mln and EUR 600 mln in other Eurobonds, as well as a USD 750 mln in syndicated loan to Russian banks.

A possible loan of USD 15 bln comprises a significant portion  of Russia’s Welfare Fund, which has a current NAV of USD 88 bln. So far, we do not know what the Ukrainians have promised to Russia to facilitate this loan, which is a very disturbing aspect of these Russian-Ukrainian deals. We only know that it was not a hike in domestic gas tariffs, no fiscal consolidation and deal for the Customs Union (precursor to the Eurasian Union), as Putin assured the public yesterday.

Yet we don’t rule out that unannounced agreements were reached as precursors to the Customs Union. For example, before the Dec. 17 summit, both Ukraine’s Presidential Administration and the Cabinet of Ministers discussed preparations for a “strategic partnership agreement” as a precursor to the Customs Union, which rather mysteriously wasn’t mentioned by officials or reporters in Moscow yesterday.

What is certain is Ukraine will fully depend on Russian lending, and Russia will be able to take advantage of that exclusivity to not let Ukraine draw close to Western institutions (we can forget about the EU Association Agreement). Without knowing any potential concessions the Ukrainian side made in Moscow yesterday (we believe there must have been some), we understand that late 2015 can become a period when Ukraine may have to choose between default or signing up for the Eurasian Economic Union led by Moscow.