IMF recognizes Ukraine USD 3 bln Eurobond as official debt to Russia

The IMF executive board decided on Dec. 16 that Ukraine’s USD 3 bln Eurobond due on Dec. 20 is “an official claim for the purposes of the Fund’s policy on arrears,” according the Fund’s press release. The IMF board conducted its view, which was requested by the Russian government, without a meeting, under its “lapse-of-time procedure.” The IMF based its decision on the conclusion that the National Welfare Fund, the buyer of the Eurobond, was acting on behalf of the Russian government. In particular, the Russian side proved that the Eurobond was purchased by the Russian fund (whose investment guidelines prohibit investing into paper with Ukraine-level credit ratings) based on a specific decision of Russian government “to provide assistance to Ukraine.” On top of that, Russian authorities proved to the IMF that this Eurobond was “at all times 100 percent owned by the Russian government”.

Alexander Paraschiy: The IMF’s decision is a surprise to us. We did not expect the IMF board to recognize that it mistakenly included this Eurobond in Ukraine’s USD 23 bln debt operation, which encompasses non-official creditors. The only thing that this IMF decision changes is that Ukraine now is not limited in offering any restructuring conditions on this bond.

Recall, the Russian fund was the only holdout in Ukraine’s attempt to restructure all of its USD 18 bln in sovereign Eurobonds. The terms of restructuring did not allow Ukraine to offer any better conditions to the holdouts, as compared to what was agreed to by the holders of USD 15 bln in Eurobonds. With this decision of the IMF, Ukraine’s key creditor and the initiator of the debt operation, the Russian fund is no longer considered to be a holdout in the restructuring of the “commercial” Eurobonds.

This clarified status of “Yanukovych debt” means Ukraine will have to comply with the IMF’s recently adopted policy on lending into arrears to official creditors, otherwise it won’t be able to get new loan tranches from the IMF. Among the policy’s key criteria, Ukraine has to demonstrate it is “making good faith efforts” to try to reach an agreement with Russia on the debt restructuring. Thus far, Ukraine has been demonstrating its wish to negotiate (as this is also a key requirement for the IMF’s policy on lending into non-official arrears), while it officially has treated the Russian fund as a commercial creditor. Now Ukraine will have to change its official rhetoric in treating the Russian debt holder, but not necessarily will it have to pay this debt on time. We expect Ukraine won’t repay this Eurobond next week and the negotiations on this debt restructuring will continue in 2016. Any near-term payment of this debt won’t be popular among the Ukrainian public.