Analysts: the moratorium Kiev’s debt to Russia means the default

Analysts: the moratorium Kiev’s debt to Russia means the default


The decision of the Ukrainian authorities to introduce a moratorium on debt repayment to Russia is not only economic, but political in nature. According to analysts, Kiev’s actions reflected badly on the reputation and the economy of the country.

KIEV, December 18. The government of Ukraine on Friday introduced a moratorium on debt repayment to Russia on 3,582 billion. The ban covers not only bonds for $ 3 billion which were purchased by Russia in 2013, but debts of two state-owned companies to Russian banks.

According to experts, this decision is not only economic, but political in nature. Analysts believe that the moratorium will affect the reputation of the country, the ratings of Ukrainian business and financial systems, as well as on the economy.

Disputed debt

Ukraine on 13 November, completed the restructuring part of the debt, which affected securities previously purchased by commercial lenders, to $ 15 billion, of which $ 3 billion was written off.

As part of the restructuring Kiev issued new securities to its creditors. The Russian Federation refused to participate in these negotiations, as insisted that her duty is not commercial, and sovereign. It’s Wednesday and confirmed the IMF. Ukraine, by contrast, argued that the debt to Russia is private, because Eurobonds for $ 3 billion, bought the Russian Federation on the Irish stock exchange, is a commercial tool.

Russia has previously expressed a willingness to restructure the debt of Ukraine at $ 3 billion, which the country must pay in December of the current year, allowing it to repay 1 billion in 2016-2018, subject to the provision of guarantees for it from the authorities of the USA or the EU or one of the international financial institutions. Ukraine, as potential guarantors, on the proposal has not responded. The IMF in their statements noted that waiting for the results of negotiations between Ukraine and Russia.

The maturity of the bonds, purchased by Russia in late 2013, will expire on December 20. The moratorium on payment, actually means a default of Kiev on these debt obligations. Russia previously stated that it will sue if Ukraine will not pay this debt.

From IMF rules should be the priority of redemption of sovereign debt to commercial. Ukraine in case of non-payment of this debt will need to continue receiving money from the Fund (budgeted for 2016) to prove that it in good faith negotiated with the lender. A single round of these negotiations has not passed. Justification for Ukraine, according to Fund documents, could be only a natural disaster or other force majeure, which would give governments the time to conduct these negotiations.

The expected solution

The day before, commenting on the decision of IMF on the recognition of sovereign debt, the Ministry of Finance said that, despite this, Kiev will not be able to pay the debt of the Russian Federation, without violating the primary conditions of the loan. After that, it became clear that a moratorium on these bonds is almost inevitable.

On the moratorium on debt repayment to Russia announced on Friday Prime Minister of Ukraine Arseniy Yatsenyuk. He also reported that the ban also applies to payments on debt obligations to Russian banks, two state-owned companies — CB “South” and the company “Ukravtodor” in the amount of 507 million dollars. In General, under the moratorium were payments of 3 billion 582 million.

The Ministry of Finance of Ukraine, commenting on the decision of the government, said that Ukraine, as before, agree in good faith negotiations to reach mutual agreement on restructuring debt to the Russian Federation.

“Reaching such an agreement will allow Ukraine to continue to meet financial targets agreed with the IMF under the extended financing facility while fulfilling its contractual obligations to other holders of bonds of Ukraine”, — noted in Department.

Thus in the Ministry of Finance emphasize that under the terms of the restructuring, which was hosted by Kiev, Ukraine is forbidden to make payments to creditors who abstained from participating in the exchange on the primary conditions of the loan. “Moreover, Ukraine cannot negotiate with those creditors on terms that offer a higher net present value than that which they would have received if would have participated in the exchange”, — reported in Department.

Kyiv expects that the new Fund’s policy regarding lending with the presence of arrears to official creditors will allow the IMF to continue lending to Ukraine, despite Kyiv’s introduction of a moratorium on repayment of debt to the Russian Federation.

However, according to the Prime Minister of Ukraine, Kiev is ready for litigation with Russia on this issue.

Future prospects

Interviewed experts believe that the introduction by Ukraine of a moratorium on debt payments of the Russian Federation actually means a Declaration of default on sovereign debt. However this move of the government analysts interpreted not only as an economic but also a political move.

“This means the recognition of a default, because the IMF recognized that public debt, Prime Minister (Arseniy Yatsenyuk – ed.) declared about it being in the corner, as all the possibilities of today exhausted regarding the dialogue on this debt. I think the Prime Minister is trying to play on, first of all, the political game by introducing such a moratorium, to capture and hold the loyalty of the Patriotic and radical part of society. Go back to playing in politics,” said the Director of the Institute of analysis and management policy Ruslan Bortnik.

Former researcher of Institute of world economy of the NAS of Ukraine Vsevolod Stepaniuc considers that, most likely, Kiev and Moscow will agree on debt restructuring.

“I see two developments: Russia sues and wins next year, or, more likely, until the end of winter Ukraine will negotiate with Russia about debt restructuring,” said Stepanyuk.

However, he believes that the moratorium will affect the reputation of the country and on the ratings of Ukrainian business, the financial system, the fall in GDP next year. In this regard, according to the expert, Ukraine will find it difficult to obtain loans on the international financial markets. However, the rate of Ukrainian currency, this will reflect little, since, according to Stepanyuk, this direction depends on the monetary policy of the National Bank.

The President of the Ukrainian analytical center Oleksandr Okhrimenko believes that the suspension of payments on the debt to Russia will not affect cooperation between Kyiv and the IMF, however, the next tranche will depend on the outcome of negotiations with Moscow on this issue.

“The partnership is not terminated, but the money the IMF will give only when Ukraine restructures the debt: until the restructuring, the loan will not be”, — said Okhrimenko.