Russia tries to prevent IMF from changing policy in Ukraine’s favor

Russian Finance Minister Anton Siluanov told journalists on Nov. 18 that his ministry has submitted a restructuring proposal of Ukraine’s USD 3 bln Eurobonds to the IMF, Interfax reported. “I personally sent a letter to Ms. Lagarde,” he said, referring to the IMF managing director. “They said they would study it.” He also stated that the Russian side will only meet with its Ukrainian counterparts after a positive reaction from the IMF.

Recall, Russian President Putin declared on Nov. 16 that his nation is ready to receive from Ukraine payments on the USD 3 bln loan, originally maturing at the end of this year, in three annual installments of USD 1 bln starting next year. This loan, in the form of Eurobonds, was part of Ukraine’s USD 18 bln debt operation. The Russian bondholder, a state fund, was the only holdout in the operation.

Interestingly, Siluanov admitted that Russia’s offer on debt restructuring is “directed exclusively” towards preventing the IMF from amending its “lending into arrears” policy, as reported by the PRIME Russian news agency on Nov. 18. Recall, under its current policy, the IMF cannot lend to nations that have debt arrears with official lenders, while the IMF may change this policy to Ukraine’s benefit next week.

Meanwhile, the IMF confirmed that Lagarde discussed the Ukrainian debt with Putin earlier this week, in which the Russian side “explained, in short, its suggestions to ease the debt burden and financial situation in Ukraine in the framework of the IMF program,” as Interfax-Ukraine reported on Nov. 19.

Alexander Paraschiy: We derive two important conclusions from Siluanov’s statement: first, Russia does not consider Ukraine to be a negotiating party on the debt issue. Second, and most important, the key goal of Putin’s offer is to block the IMF from changing its “lending into arrears” policy. That way, if the IMF board recognizes the USD 3 bln debt as “official” and at the same time won’t allow Ukraine to default on this debt, due on Dec. 20, Ukraine will not be able to receive a new tranche from the IMF until it agrees with Russia on the debt restructuring. In which case, Russia will gain a huge bargaining advantage over Ukraine in negotiating the debt.

We still expect the IMF board will adopt its decision in favor of Ukraine: either it will not declare the debt to the Russian fund as “official,” or it will declare it official and change its policy to allow Ukraine not to repay it on time.