Russia said to plot strategy to block IMF lending to Ukraine

Russia bought the bond from the government of former Ukrainian president Viktor Yanukovych in December 2013, before he was overthrown and Russian forces annexed Crimea in a move that set off a conflict that has already claimed 8,000 lives. Ukraine proposed the security be included in a restructuring of debt held by private creditors. Russia has refused to accept the terms, insisting the bond is a loan between governments, rather than commercial debt, according to Bloomberg.

The IMF is considering easing a policy that bars loans to borrowers who are behind in payments to official creditors, proposing to allow such lending as long as the borrowing nation meets its obligations under the IMF program and bargains in good faith with the creditor country, said another person familiar with the matter.

Read alsoRussia says worried IMF reforms coincide with "politicized" Ukraine restructuringFaced with this situation, Vladimir Putin’s administration may withhold its assurance that Ukraine can repay its debts to Russia, said the first person, who has direct knowledge of the Russian strategy. Russia could also argue that Ukraine hasn’t negotiated in good faith, the person said. The people asked not to be identified because the discussions aren’t public.

The Kremlin hasn’t yet decided whether to pursue these paths at the IMF, said the person familiar with Russia’s strategy.

The strategy would probably face resistance from the U.S. and its Group of Seven allies, but the Kremlin could chip away at support among big creditor countries such as China and Saudi Arabia.

Russia’s protests over the $3 billion bond are unlikely to be heeded by the IMF, said Anders Aslund, a senior fellow at the Atlantic Council in Washington. “This is the kind of thing you say when you don’t have an argument,” he said. “The trouble lies elsewhere,” Aslund said, citing domestic resistance to the Ukraine government’s efforts to broaden the country’s tax base as an example of something that represents a greater challenge to the IMF program.

Russia Deputy Finance Minister Sergey Storchak said Tuesday that “we want to resolve the issue without big consequences for Ukraine as a potential borrower from financial markets,” though the “alternative is either court or payment.”

Ukraine Finance Minister Natalie Jaresko said the nation has met “almost all of the conditions” for the IMF program, though it needs to adopt a new tax code and anti-corruption legislation. “Assuming we can submit an appropriate budget and stick to the deficit target of 3.7%, I don’t see any major issues,” she said in an interview Friday.

Russia has vowed to take Ukraine to court if President Petro Poroshenko’s administration follows through on its promise to default on the loan. Putin’s government isn’t willing to bend on the bond unless the U.S. and European Union relax economic sanctions against Russia, said the person familiar with the Russian position.

The bond, which matures December 20, has features of both commercial and official debt. While it took the form of a tradeable Eurobond, it was sold at a 5% coupon, compared with a rate on 2017 debt at the time of about 12%.

The IMF changed its arrears policy in 1989 to allow countries borrowing from the fund to continue receiving loan installments even if they miss payments to commercial creditors. But the fund left in place its policy of non-tolerance toward official arrears. That means that if a country misses a payment to a sovereign creditor, it would be disqualified from further IMF aid.

The IMF disbursed $5 billion in funds to Ukraine in March and another $1.7 billion in August. Fund staff members completed a mission to Kiev on Oct. 2 as part of a review to determine if the country can receive the next loan installment. The IMF originally targeted Sept. 15 for the third disbursement when the bailout was approved in March.

A U.S. Treasury official, briefing reporters Tuesday on condition of anonymity, said Ukraine has taken steps consistent with the IMF to address its debt situation, and it’s imperative that the IMF continue to provide appropriate support to Ukraine.

Read alsoIMF names conditions for further cooperation with UkraineWhile voting against or even abstaining from an IMF lending program is a rare move, Russia probably doesn’t have the support among other member nations, even prospective allies like China, to block the Ukraine program, said Andrea Montanino, a member of the fund’s executive board from 2012 to 2014.

“Russia will be isolated,” said Montanino, now director of the Atlantic Council’s global business and economics program in Washington.