Russia to claim Ukraine’s debt in court, IMF decision expected today

The Russian Finance Ministry received last week an official rejection from the U.S. government to provide a guarantee on Ukraine’s USD 3 bln Eurobond due on Dec. 20, the kommersant.ru newspaper reported on Dec. 7, citing the ministry’s release. The guarantee from the U.S., EU, or any first tier international bank was a necessary condition for the Russian side to agree on a three-year postponement on the debt’s repayment. “We have no other choice but to initiate legal action against Ukraine in case the borrower does not fulfill its obligations in full on Dec. 20,” the Russian MinFin said, as reported by kommersant.ru. This would mean a “sovereign default of Ukraine,” according to the source.

Recall, the holders of Ukraine’s USD 3 bln Eurobond, the Russian National Welfare Fund, refused to participate in two bondholder meetings in October aimed at restructuring this bond as part of Ukraine’s debt operation initiated in March 2015. The holders of the other USD 15 bln in Ukraine’s Eurobonds approved the exchange of their bonds, maturing in 2015-2023, into new bonds, maturing in 2019-2027, and GDP warrants. The new bonds do not have any cross-default clause with respect to the old Eurobonds, like those held by the Russian fund.

As another important development in the dispute over the USD 3 bln debt, the IMF board has scheduled a meeting for today to “reform the policy on non-toleration of arrears to official creditors.” If the IMF board changes its policy, the risk that Ukraine won’t receive the next IMF tranche after not repaying USD 3 bln to Russia will fade away.

Alexander Paraschiy: It would be strange if the U.S. government’s refusal to provide any guarantee would close entirely the window of opportunity for Russia to restructure Ukraine’s debt. At least, we did not find any information that the option to get a guarantee from the EU, any EU country or a respectful international bank is ruled out as a result. In any case, this unfolding of events is what we were expecting before, as a court hearing regarding this debt was always our base-case scenario.

Meanwhile, we are lookoing forward to the IMF’s decision on changing its lending policy later today. Even though Ukraine has not recognized the USD 3 bln Eurobond as official, inter-government debt (nor has the IMF board), a decision in favor of Ukraine will enable the country to avoid repayment with little risk to its solvency and liquidity. It will also give a bit more bargaining power to Ukraine’s MinFin in further restructuring talks with the Russian fund.