IMF Says Ukraine Bond Owned by Russia Is Official Sovereign Debt

International Monetary Fund Logo Over Ukraine Flag

(Bloomberg – bloomberg.com – Andrew Mayeda – December 17, 2015)

The International Monetary Fund’s executive board ruled that a bond sold by Ukraine to Russia should be considered official sovereign debt, putting pressure on Ukrainian officials to start restructuring talks with their Russian counterparts.

Russia bought a $3 billion bond from the government of former Ukrainian President Viktor Yanukovych in 2013. Ukraine, which is preparing to default on the bond due Dec. 20, has offered Russia the same restructuring terms, including a 20 percent principal writedown, that creditors led by Franklin Templeton accepted in October. Russia has insisted on payment in full.

The IMF’s executive board, which represents the fund’s 188 member nations, decided that the bond should be treated as official debt, rather than a commercial bond, the fund said in an e-mailed statement late Wednesday in Washington.

The bond was acquired by and is held by Russia’s National Wealth Fund, an agency acting on behalf of the Russian government, according to a staff paper considered by the board.

The board approved a policy change on Dec. 8 that will allow lending to countries that default on debts to sovereign creditors. The change clears the way for the Washington-fund to continue lending to Ukraine if it fails to repay the bond.

But under the new policy, the debtor country will be expected to make “good-faith efforts” to restructure the debt. This may mean Ukraine will have to overcome its frosty relations with Russia to try to reach a bilateral agreement over the debt.

The new policy also pushes Russia to the negotiating table, by trying to prevent IMF loan programs from being held up by “holdout” creditors. Sovereign lenders would be expected to accept offers consistent with the IMF’s assessment of a borrower’s debt sustainability and financing needs.

Russia refused to take part in the debt-restructuring agreement Ukraine reached with its commercial Eurobond holders, claiming it should be treated as an official lender. Ukraine, which is treating the bond as commercial debt, is barred by the terms of that debt restructuring to pay Russia in full.

Russia has been softening its tone on the debt since refusing to accept terms of the broader restructuring this year, with President Vladimir Putin proposing last month that Ukraine be able to pay it back over three years so long as a western government or bank provide a guarantee. That offer fell through earlier in December. Asked if there was a chance for an out-of-court settlement, Russia Finance Minister Anton Siluanov said earlier Wednesday: “We’re open to cooperation but technically it’s impossible.”

Article ©2015 Bloomberg L.P. All Rights Reserved. Article also appeared at bloomberg.com/news/articles/2015-12-17/imf-says-ukraine-bond-owned-by-russia-is-official-sovereign-debt

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