Back in August, Ukraine struck a restructuring agreement on some $18 billion in Eurobonds with a group of creditors headed by Franklin Templeton.
Under the terms of the deal, Kiev should save around $4 billion once everything is said and done. That was the good news. The bad news was that Ukraine still owed $3 billion to Vladimir Putin. Here’s what we said at the time:
“..owing Vladimir Putin $3 billion is not a situation one ever wants to find themselves in, but this particular case is exacerbated by the fact that Putin did not loan the money to Ukraine as we know it now, he loaned the money to a Ukraine that was governed by Russian-backed Viktor Yanukovych. Of course Yanukovych was run out of the country last year following a wave of protests (recall John McCain’s infamous speech at Maidan)."
Ukrainian finance minister Natalie Jaresko offered the same restructuring terms to Russia that it offered to Franklin Templeton and T. Rowe. In effect, Jaresko was attempting to tell Vladimir Putin that Ukraine would allow him to take a 20% upfront loss on the $3 billion he loaned to Yanukovych who was overthrown by the current Ukrainian government with whom Moscow is effectively at war.
As you might imagine, Putin was not at all interested. Last month, Moscow "generously" offered to accept $1 billion per year from now until 2018 (so, a "restructuring" at par). Kiev refused, noting that such a deal would violate the country's agreement with its other creditors.
Earlier this week, the IMF ruled that the debt to Russia was intergovernmental (as opposed to private). “In the case of the Eurobond, the Russian authorities have represented that this claim is official. The information available regarding the history of the claim supports this representation,” the Fund said, in a statement.
"The decision means that under new IMF rules Ukraine will now have to demonstrate 'good faith' in at least attempting to negotiate a restructuring of its debt with Russia if it wants to secure the next instalment of a $17bn IMF-led rescue programme," FT noted [7] at the time. "But the 'good faith' bar is one that senior IMF officials do not believe Ukraine has yet met."
That ruling effectively set the stage for Ukraine to declare a default and that's precisely what happened just moments ago.
As Bloomberg reports [8], "Prime Minister Arseniy Yatsenyuk said Kiev is imposing a moratorium on the note due Dec. 20. Yatsenyuk announced the payment freeze at a government meeting in Kiev on Friday."The finance ministry warned Russia on Thursday evening that it could not make the payment (due by Sunday).
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— Arseniy Yatsenyuk (@Yatsenyuk_AP) December 18, 2015 [9]
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— Arseniy Yatsenyuk (@Yatsenyuk_AP) December 18, 2015 [10]
"Considering that Russia has refused, despite our efforts, to sign an agreement on restructuring and to accept our proposals, the cabinet is imposing a moratorium on payment of the Russian debt worth $3 billion," Yatsenyuk said, adding that Kiev "is also imposing a moratorium on the $507 million debt payment to Russian banks of two Ukrainian companies Yuzhnoe and Ukravtodor. From today all payments are suspended till our government or a court makes a decision."
And it looks like a court will have to make "a decision" because Putin is probably going to sue. "Russia said as recently as last week it would take Ukraine to court if the payment was missed," Bloomberg notes.
Earlier this month, Putin ordered Finance Minister Anton Siluanov to file a lawsuit against Ukraine in the event Kiev defaults. “It is strange. If they are so confident in the country’s solvency for the next year, then they could somehow participate during the last four years to share the risks," Putin said, referencing Washington's unwillingness to back Ukraine's guarantees. "Fine. File the lawsuit," he concluded.
So, the stage is now set for what will surely be an amusing court battle between Russia and Ukraine which, you're reminded, are still essentially at war. In a preview of the kind of chuckle-inducing soundbites you're likely to hear in the months ahead, we close with the following quote from PM Dmitry Medvedev:
“I have a feeling that they will not pay us back because they are crooks.”
