Putin Pans Ukraine's Debt Moratorium As "De Facto Default", Threatens Court

In exactly a month, Ukraine will owe Russia a $75 million debt coupon payment. Finance Minister Anton Siluanov told reporters in Moscow today that "if they miss the payment, we will use our right to go to court." Then it got serious, as Vladimir Putin instructed Russian Prime Minister Dmitry Medvedev to assume control of Ukraine's repayment of its $3-billion debt in Eurobonds that Russia bought in 2013, slamming Ukraine's bill allowing them to impose a moratorium on foreign debt repayments as a de facto announcement of default. As one market participant warned, "I would wait until after June 20 to go forward with" any moratorium, as "if Russia takes Ukraine to court, that might be an incentive for other creditors to go down the same route."

As we previously noted, on Tuesday, Ukraine's parliament adopted a bill allowing Ukraine to freeze repayments of its foreign debt. As RT notes,

Experts agree that Tuesday vote meant a technical default for the country and would impede Ukraine’s ability to raise private investment from the EU and the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB), a European source told TASS on Wednesday.


"Suspension of debt payments not coordinated with creditors results in a technical default, and in the case of Ukraine, it threatens to undermine Kiev’s ability to attract private investment through EU programs,“ the source said.


As part of the underpinning of Kiev’s bailout plan, the International Monetary Fund said in March that Russia would not receive the $3 billion bond repayment from Ukraine this year.

IMF is looking for cooperation from creditors to accept a restructuring on Kiev’s debt. That includes Russia.

“It is rather clear that the IMF is assuming that Russia’s $3 billion bond is included in this year’s $5.2 billion financing from a ‘debt operation’,” said Charles Blitzer of Blitzer Consulting and a former IMF staff member.

The IMF is avoiding the term ‘restructuring’ replacing it with ‘debt operation’.

Vladimir Putin is unimpressed, as Sputnik reports, blasting that Ukraine’s bill allowing to impose a moratorium on foreign debt repayments is a de facto announcement of default...

“This de facto announcement of a looming default demonstrates that the level of responsibility and professionalism [of the country’s leadership] appears to be low, despite the fact that the country is being ran from the outside.”

The bill, which is yet to be signed into law by the country's president, can be applied to Ukraine's payments on the $3-billion Eurobond issue bought by Russia in late 2013. However,

The Russian bond is governed by English law and any disputes related to it would be settled in an English court, according the bond prospectus.


The bond has a covenant allowing the holder to demand its money back if Ukraine’s public debt tops 60 percent of economic output, which the IMF said took place last year.


“At the request of our Ukrainian partners and the IMF, we are not using this right as we do not want to aggravate the already difficult economic situation of our partners and neighbors,” Russian President Vladimir Putin said at a government meeting in Moscow on Wednesday.


However, I would like to understand what our partners plan to do.”

And so far, as Bloomberg notes, Ukraine has failed to bring Russia to the table as it begins negotiating with creditors to reduce its $23 billion of international debt.

Russia says the $3 billion bond that comes due in December shouldn’t be included in the restructuring because it was bought from the regime of former Ukrainian President Viktor Yanukovych as part of a government aid agreement.


Failure to cut a deal risks future tranches of a $17.5 billion International Monetary Fund loan that Ukraine needs after a conflict with pro-Russian separatists pushed it into the worst recession since 2009.

“Our goal is to find an outcome that is acceptable for the Russian Federation,” Putin said during a meeting with government members.

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In conclusion this is far from over...

“If Russia takes Ukraine to court, that might be an incentive for other creditors to go down the same route,” Jakob Christensen, an economist at Exotix Partners LLP in London, said by phone on Wednesday. “I would wait until after June 20 to go forward with” any moratorium, he said.


Furthermore, as we have noted previously, Ukraine’s biggest creditor is Franklin Templeton, which along with three other companies owns $8.9 billion of the nation’s debt (where a knife-catching bond manager was exposed as a glorified BTFD'er).

The nation’s debt levels are “unsustainable” and there is “no alternative” for creditors but to accept maturity extensions, coupon reductions and principal writedowns on their holdings, Ukraine's American Finance Minister Natalie Jaresko said on Tuesday.

“I wouldn’t assume that Ukraine is not willing to default on the Russia bond,” Anna Gelpern, a Georgetown University law professor and fellow at the Peterson Institute for International Economics, said by phone on Tuesday. “They’ve said that they want to restructure them on the same terms as everybody else.”