Ukraine declares moratorium on USD 3 bln Eurobond, guaranteed loans

Ukraine’s Cabinet of Ministers adopted on Dec. 18 a resolution to temporarily suspend any payments on most of those debts from its USD 23 bln debt operation that have not yet been restructured. They include the USD 3 bln Eurobond due on Dec. 20, owned by a Russian state fund, and four state-guaranteed loans of Ukravtodor and Yuzhne Aerospace Design Bureau, at a total value of about USD 1.5 bln.

“Ukraine remains committed, without prejudice … to negotiating in good faith a consensual restructuring of the December 2015 Eurobonds, which will allow it to remain in compliance with the financing targets agreed upon with the IMF under the Extended Fund Facility, while meeting its contractual commitments to other bondholders,” Ukraine’s MinFin commented in its Dec. 18 press release. It stressed the Russian fund was the only holdout in Ukraine’s Eurobond exchange process, completed in November, and MinFin may not offer better restructuring conditions to Russia, as compared to the other Eurobond holders. “The Ukrainian government expects that the IMF’s new ‘lending into official arrears’ policy will allow the IMF to continue financing Ukraine,” the press release said.

“This is not surprise to us,” Russian Deputy Finance Minister Sergei Storchak said in response the same day, as cited by the Interfax news agency. He also stated that the moratorium means nothing to the Russian side. “More important will be the fact of non-payment, which will be recognized on the expiration of the ten-day grace period,” he said. Russia may appeal to a U.K. court upon the expiration of the grace period, Storchak said, highlighting that Ukraine has no chance to win such a court battle.

Russian Finance Minster Anton Siluanov confirmed on Dec. 19 that Russia will demand the repayment of this debt in courts if the money doesn’t arrive by Dec. 31. He also stated that Ukraine did not offer anything to Ukraine “based on the recognition of the official status of this debt”, Interfax reported.

Alexander Paraschiy: This is exactly what we expected. Russia’s feigned calm on the moratorium, in contrast to the hysteria followed by the IMF’s adoption of the “lending into official arrears” policy and its “intention to wait” ten days, reflects a consistent pattern of fully ignoring any rulings of the Ukrainian government, viewing them as illegitimate. Therefore, we see no chance that Ukraine and Russia will find any common ground beyond the courts.

Meanwhile, the only thing that’s important for Ukraine is that the IMF will continue to treat the government as “making good faith efforts” to resolve the debt issue, and therefore, continue lending to Ukraine. Siluanov’s comment on the absence of any Ukrainian approach to Russia as an official creditor is clearly directed at undermining Ukraine’s status as having made a “good faith effort,” which is important to the IMF. As Hugh Bredenkamp (an IMF representative and one of the authors of a paper that recognizes the USD 3 bln debt as official) explained during an IMF conference call on Dec. 10, the “good faith” concept means that the debtor (Ukraine) should approach the creditor (Russia) as the official lender. Ukraine has not done that so far, which does not necessarily mean the IMF won’t treat Ukraine as if it’s “making good faith efforts” (that’s clearly subjective criteria). But such a risk exists, especially if Russia submits an appeal to the IMF.