IMF has yet to consider status of “Russian” loan to Ukraine

The IMF board of directors will define the status of a Ukrainian Eurobond worth USD 3 bln held by Russian State Welfare Fund, IMF Managing Director Christine Lagarde told Ukrainian journalists in Kyiv on Sept. 6.

At the same press conference, Ukrainian President Petro Poroshenko said his government won’t offer any special treatment to Russian creditors, as compared to the holders of other Ukrainian Eurobonds. The Russian side didn’t take advantage of the opportunity to join the debt operation talks, which lasted March-August 2015, he said.

Recall, the “Russian” Eurobond due in December was included in the perimeter of the debt operation of Ukrainian govermnet worth USD 23 bln, which includes USD 18 bln in state Eurobonds (UKRAIN and UKRINF). The ad hoc creditors committee, representing all the large holders of Ukrainian Eurobonds at a total value of USD 15 bln (except the Russians), approved the restructuring of Ukrainian debt based on a 20% haircut, maturity extension to 2019-2027 from 2015-2023 and a uniform coupon rate of 7.75% (vs. 4.95%-9.25%).

Alexander Paraschiy: Lagarde’s statement should be of concern to Ukraine’s Finance Ministry and creditors, as it reveals that the future of 1/6 of total sovereign debt subject to restructuring (and 72% of debt due in 2015) is still not clear. In particular, if the IMF board recognizes the “Russian” debt as a state loan, the Ukrainian government will have to repay it smoothly, under IMF rules. Thus far, the Ukrainian government classifies it as a private loan.

Nevertheless, we remain confident that the IMF board will confirm the status of the “Russian” bond as a private loan, for two reasons. First, the board has already recognized it as private loan – explicitly – when it approved the size of the debt operation that Ukraine was performing (the approved amount of USD 15.3 bln in savings from debt maturity extension over 2015-2018 did include the “Russian” debt). We believe it would be embarrassing for the board members of this respectful organization to change their position.

Secondly, we are sure the board understands the consequences of recognizing the debt as a government loan. In essence, the need to repay USD 3 bln will negate all the benefits of the approved debt restructuring for Ukraine. Namely, instead of USD 3.6 bln in savings from the haircut and the postponement of USD 14.4 bln in repayments to 2019-2027, Ukraine will face only a USD 3.0 bln haircut and the need to repay USD 3.0 bln just this year. Needless to say, that may not be appreciated by the non-Russian Eurobond holders. With such a “rider,” they may choose to vote against the restructuring deal at their bondholder meetings.

It’s possible the Russian government, which is a member of the IMF, will argue its position, but again, we do not see enough reasons for the IMF to spoil Ukraine’s bailout efforts in one fell swoop. The sooner the IMF board decides on the status of “Russian” debt, the smoother Ukraine’s debt operation will be completed.