Russian PM expects Ukraine won’t repay USD 3 bln debt

Russian Prime Minister Dmitry Medvedev fiercely criticized the IMF’s decision that allows the Fund to provide loans to Ukraine even if it defaults on official debt.  Ukrainians “are refusing to return money, while our Western partners are not only not helping us, but hindering us,” he told a Dec. 9 press conference, as reported by Interfax. He was referring directly to Ukraine’s USD 3 bln Eurobond that matures in ten days and is owned by a Russian state fund. The Russian side had argued that this debt is official, meaning default on it should have halted Ukraine’s cooperation with the IMF, if not for the Dec. 8 decision of the Fund’s executive board to change its lending policy. Medvedev also expressed his expectation that Ukraine won’t repay this debt, claiming that the Ukrainian government leaders are “swindlers.” He claimed Russia will sue Ukraine and will seek to initiate cross-default on all of Ukraine’s debts.

In his response to Medvedev, Ukrainian PM Arseniy Yatsenyuk repeated that Ukraine is ready to restructure the Eurobond on earlier announced conditions (including the 20% haircut and about a four-year maturity extension). “Our offer to the holdouts remains on the table,” Yastenyuk stated. “Russia cannot and will not receive restructuring conditions other than those given to other creditors”. 

Alexander Paraschiy: Medvedev’s contemptuous reaction leads us to conclude that Ukraine and the IMF did right thing in removing the last argument of the Russians on their way to claim back the USD 3 bln debt. We share Medvedev’s expectation that Ukraine will not pay on time the USD 3 bln Eurobond. However, unlike his view that it’s the Ukrainians who are “swindlers,” we believe it was a swindle by the Russians when in late 2013 they offered a two-year, USD 15 bln loan (of which only USD 3 bln was disbursed) to a country in default, without any conditions placed on the use of these funds. It was apparent at that time that Ukraine wouldn’t be able to repay in two years this debt, equal to 27% of the then-annual budget revenue and 80% of then-gross international reserves.

In fact, the USD 3 bln was not a bribe to former President Yanukovych for not signing the Association Agreement with EU, as it’s commonly referred to, but a trap that was aimed at exchanging the forgiveness of this USD 15 bln debt for geopolitical concessions, namely joining the Eurasian Union. Therefore, it looks apparent that the Russian side had no intention to get its money back and Ukraine could go the route of legally establishing its status as odious debt. Securing such a court ruling, which would free Ukraine from this obligation, would renew internal respect for the current Ukrainian government. Though we admit that such a task will demand enormous efforts from the Ukrainian side, including the hiring of professional lawyers, not just ordinary advisors on debt restructuring.