IMF Staff Said to View Ukraine Russia Bond as Official Debt

International Monetary Fund Logo Over Ukraine Flag

(Bloomberg – – Elena Popina, Marton Eder – June 23, 2015)

International Monetary Fund staff formed a preliminary view that $3 billion in bonds sold to Russia by Ukraine should be classified as official rather than private debt, according to a person familiar with the matter.

Treating the bonds as state aid, as Russia has sought, would exclude them from the bond restructuring Ukraine is negotiating with a creditor group led by Franklin Templeton, potentially placing a greater burden on private bondholders.

A ruling in favor of Moscow would remove another source of conflict for Ukraine, which has been fighting an insurgency against pro-Russian separatists in its easternmost regions for more than a year. It may also raise tensions with private bondholders with whom it has been deadlocked over the need for a writedown to principal. Ukraine paid a $75 million coupon on the bond Monday.

“It makes unclear things clear and brings some order into long-lasting disputes,” Vladimir Miklashevsky, a strategist at Danske Bank A/S in Helsinki, said by e-mail Tuesday. “We shouldn’t exclude full repayment as there is a will to do things correctly: coupons were paid on time. However, if the coffer is empty, a pure will is not enough.”

The status of the bonds is subject to approval by the IMF’s executive board, said the person, who asked not to be identified because the deliberations are private. Russia has said its debt should be treated as official aid and repaid in full when the bonds mature in December, while Ukraine argues that the debt was structured as a Eurobond under U.K. law and is therefore liable to the same treatment as private creditors.

Market Access

Ukraine’s next maturity, a $500 million Eurobond due on Sept. 23 fell 0.41 cent to 52.28 cents on the dollar by 1:12 p.m. in Kiev, retreating from the highest close in a week. The nation’s $2.6 billion July 2017 note rose 1.59 cents to 48.46 cents.

A change in how the IMF regards the Russian bond may make it harder for creditors to argue that a so-called haircut on their principal holdings isn’t necessary to achieve the IMF’s restructuring targets.

Ukraine is pressing bondholders to accept a 40 percent writedown and the government will impose a moratorium in a few weeks if the offer isn’t accepted, a person familiar with the talks said on Friday.

Halting debt payments would have long-term implications for the country’s access to international bond markets, Kristin Lindow, a senior vice president at Moody’s Investors Service, said in an interview Friday in London.

Haircut Odds

“A haircut on their debt is even more likely now,” Regis Chatellier, a London-based director of emerging-market credit strategy at Societe Generale SA, said by e-mail Tuesday. Russia wouldn’t have accepted any kind of restructuring and private creditors are becoming more and more isolated, he said.

A spokesman for the creditor group declined to comment on the repercussions of any change in the IMF’s view on the bond.

The debt, which was sold by former Ukrainian President Viktor Yanukovych before he was toppled in February 2014, is one of several front lines in the conflict with Moscow. Ukraine has accused Russia of supporting separatists in its easternmost regions since the annexation of the Crimean peninsula in March last year. Even as a fragile cease-fire holds, the economy will probably contract by 9 percent this year, according to the IMF.

Ukraine President Petro Poroshenko said last week that the bond was a “bribe” to his predecessor aimed at keeping Ukraine in Russia’s orbit and out of a European Union trade pact. Russian President Vladimir Putin said on Tuesday that he wants it to be repaid.

Washington Meeting

Under the Washington-based fund’s policy, countries receiving loans from the fund can’t be overdue on debt payments to other official creditors. The IMF said earlier this month that it can keep supporting Ukraine even if it stops servicing debt held by private bondholders.

The crisis lender will hold talks with the creditor group and the Ukrainian government next week in Washington, it said yesterday.

“Both sides are pretty determined not to make any concessions on the issue of the haircut,” Moody’s Lindow said. “It would really take both sides relenting on that determination to be able to reach a deal.”

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