IMF reportedly preparing plan to allow Ukraine default to Russia

Russian Finance Minister Anton Siluanov believes the IMF is preparing a plan to help Ukraine avoid repayment of a USD 3.0 bln debt to a Russian state fund in December 2015, as reported by Russian president’s website. Siluanov told Russian President Putin on Oct. 13 that the IMF is preparing to change its regulations to allow those countries supported by an IMF program to have payment arrears on official debt. “It’s clear that it is being done exclusively to freeze (Ukraine’s) payments to Russia”, he clarified.

Putin, in his turn, said it would be more efficient for the IMF to provide an extra loan to Ukraine to help it repay the USD 3 bln debt, “instead of changing its policies to the benefit of a particular country”.

Recall, Ukraine issued a two-year, USD 3.0 bln Eurobond in December 2013, which was purchased by the Russian “National Welfare Fund” as part of Putin’s promised financial support to then-president Yanukovych. The current Ukrainian government, with the support of the IMF, is offering to restructure this debt on the same conditions as 13 other issues of Eurobonds, worth USD 15 bln. The Russian side insists that this Eurobond should be treated as official debt, meaning Ukraine’s default on it prohibits the IMF to provide new financing. Ukrainian side, in its turn, insists that this is a commercial debt.

On Oct. 10, VTB Bank President Andrey Kostin told a Russian TV network that IMF Managing Director Christine Lagarde is supporting Russia’s classifiation of the USD 3.0 bln debt as “inter-governmental.” Though he admitted that the IMF’s board, which is the only decision-maker on this matter, hasn’t declared its opinion yet. Officially, neither Lagarde, nor other IMF officials commented on this.

Alexander Paraschiy: Siluanov’s findings suggest that Ukraine and the IMF have a “Plan B” to allow Ukraine to default on the “Russian” Eurobond, even in case it’s recognized as official debt. However, in our view, even the chances that the IMF board recognizes it as official debt aren’t high. Clearly, both the IMF and Ukraine are interested in the Russian side participating in Ukraine’s debt operation, and they are doing all their best for this to happen.

The only tangible way for Russia to force Ukraine to repay this debt is to go to international court, which would be time-consuming. In any case, Russia is unlikely to get its money back in this or the next year, even though it has reportedly accounted for this inflow in its 2016 budget. However, Russia, as usual, can try to pressure Ukraine in other sectors. For instance, at yesterday’s meeting with Putin, Siluanov mentioned the “special” natural gas prices just approved.