Russians make no contact with Ukraine on resolving USD 3 bln debt issue

Ukraine’s Finance Ministry has not yet sent any offer to its Russian counterpart to restructure the USD 3 bln Eurobond due on Dec. 20, Russian Deputy Finance Minister Sergei Storchak told journalists on Dec. 1, as reported by the Interfax news agency. He said the Russian side is cooperating on this issue with the IMF. “I have had no contact with the office of Jaresko,” said Storchak, referring to Ukrainian Finance Minister Natalie Jaresko. “On the issue of the USD 3 bln debt restructuring, everything is going according to plan”, Vitaliy Lisovenko, the Ukrainian official responsible for debt restructuring, told the Vesti-Biznes Ukrainian news site on Nov. 30.

Recall, the Russian fund that owns the USD 3 bln Eurobond did not participate in the two bondholder meetings that Ukraine’s MinFin initiated in October to ask for the bond’s restructuring. All the other holders of Ukrainian sovereign Eurobonds, worth USD 15 bln, agreed to exchange them into a set of new bonds and GDP warrants. Later on, Russian President Putin announced his readiness to postpone the repayment of the USD 3 bln debt in three equal annual tranches starting in 2016, while Ukraine’s MinFin did not reply to that, only stating that it didn’t receive any offer.

Alexander Paraschiy: At this stage, it’s not clear exactly what is the plan of Ukraine’s Finance Ministry, which seems to view the absence of contact as advantageous to its goal of postponing the debt’s repayment as much as possible. It’s also not intimidated by the option to default on Dec. 20. Thus far, a critical event could occur on Dec. 8 when the status of this debt could be considered by Ukraine’s main creditor, the IMF. Only the IMF board’s recognition of this bond as “official” debt (which should be treated separately from other Eurobonds) will open up an opportunity for Ukraine’s government to start negotiations with Russia. Without that, Ukraine is limited in offering to Russia any restructuring terms better than what the holders of USD 15 bln in Eurobonds have agreed upon.

We continue to believe that the IMF board won’t recognize this debt as “official.” If that happens, the board will have to recognize that it was wrong by having included this debt in Ukraine’s debt operation in March 2015. However, even if the IMF acknowledges its mistake, the restructuring negotiations are very likely to finish beyond the date of the bond’s maturity. Recall, the IMF might also change its lending rules to allow Ukraine to postpone a repayment of its official debt.