IMF may revise its lending policy to Ukraine’s benefit on Nov. 23

The IMF board of directors is going to consider revising its lending-into-arrears policy at its Nov. 23 meeting, Ukraine’s Deputy Finance Minister Artem Shevalyov told Interfax-Ukraine on Nov. 6. “In case of a policy change that will envisage the IMF’s ability to lend amid the existence of official debt, the IMF’s program in Ukraine might continue regardless of the situation with ‘Russian debt’,” he said. Recall, a Russian state fund, which holds USD 3 bln in Ukrainian Eurobonds maturing on Dec. 20, refused to accept the bonds’ restructuring, claiming that this bond should be treated as official, not private debt. Before that, the commercial holders of USD 15 bln in Ukrainian Eurobonds agreed to restructure them with a maturity extension of about four years and an exchange of 20% of debt into GDP warrants.

According to the current IMF policy of lending-into-arrears, the fund may continue lending to a nation – which has failed to pay on time to a private lender – if such a country “is pursuing appropriate policies and making a good faith effort to reach a collaborative agreement with its creditors.” Thus far, this policy cannot be applied to existing arrears on a country’s official debt, meaning the IMF cannot continue its EFF program with Ukraine if the USD 3 bln debt is recognized as official and Ukraine does not repay it on Dec. 20. According to Shevalyov, Ukraine’s position is that the USD 3 bln Eurobond is commercial (not official) debt, but in case the IMF board changes its policy, “the debt’s status will not have any impact on IMF lending.”

Alexander Paraschiy: This development is in line what the Russian finance minister, an IMF spokesman and the international media earlier reported. Clearly, the IMF is not interested in forcing Ukraine to repay its USD 3 bln bond to Russia this year, as such a repayment will weaken the country’s liquidity, one of the key targets that Ukraine reached with its completed debt operation. Therefore, we believe the IMF board will indeed accept the lending policy changes to allow Ukraine to default to Russia on Dec. 20. In such a case, the only way for Russia to force a quicker repayment from Ukraine could be an appeal that Ukraine was not “making a good faith effort to reach a collaborative agreement”.