Photo from UNIAN
After receiving a 20% haircut from the creditors’ committee, Ukraine starts negotiating with its second-biggest creditor, Russia, on a $3 billion eurobond that former President Viktor Yanukovych sold to Russia shortly before his ouster in February 2014 is due in December, Bloomberg reports.
While Ukraine seeks to reach a similar deal with the Kremlin, Moscow says it will reject such terms, deeming the debt as an official-sector loan, according to Bloomberg.
The International Monetary Fund, with which Ukraine is engaged on a $40 billion bailout, has yet to decide how to categorize the bond.
Against the background of more than tense diplomatic relations with Russia, Ukraine faces three possible scenarios regarding the bond, according to Bloomberg.
Scenario 1: Pay Up
Ukraine may have no choice but to pay the bond in full or risk losing its bailout should the IMF decide it’s official debt. IMF policy dictates it won’t lend to countries that are in arrears on such obligations, while missing payments to private creditors doesn’t exclude it from maintaining a program.
The preliminary view by staff at the crisis lender is that the bond should be classified as official debt, a person familiar with the matter told Bloomberg in June. A final decision will be taken by the IMF’s executive board, which will discuss the matter only when Ukraine is in arrears to Russia, according to Nikolay Gueorguiev, the IMF Mission Chief to Ukraine.
Paying the bond would deplete Ukraine’s already scarce international reserves and put an IMF savings target at risk. The fund has asked Ukraine to make $15.3 billion of savings in public-sector financing in the next four years.
Scenario 2: Restructure
Ukraine could pursue restructuring without the risk of losing its bailout if the IMF decides the bond is private-sector debt.
Even if the IMF decides it’s official debt, the fund could change its policy on lending regarding arrears as the IMF was considering extending the policy that allows lending to governments in arrears to the private sector to include official debt.
The downside to this scenario is that Russia is unlikely to accept, having repeatedly said since the beginning of the year that the bond isn’t private debt. Ukrainian President Petro Poroshenko has described the bond as a "bribe."
Scenario 3: Default
Ukraine may prefer to default if it can be sure the IMF will continue lending. The potential blowback from such a move includes a Russian lawsuit that would probably lead to a showdown in British courts as the bond is governed by English law.
Refusal to pay could also further strain Ukraine’s relations with Russia at a time when it is trying to maintain a fragile cease-fire in its east and negotiate new pricing for gas supplies, Bloomberg reports.