Ukraine said it won’t repay $3 billion in bonds due to Russia, moving a step closer to a court battle amid a new wave of economic tension between the two ex-Soviet neighbors.
Prime Minister Arseniy Yatsenyuk said Kiev is imposing a moratorium on the note due Dec. 20, which Russian President Vladimir Putin bought two years ago as part of an abortive bail-out for Ukraine’s former leader just months before he was toppled. Russia said on Friday it will wait until a 10-day grace period on the bond that expires on Dec. 30 before starting legal action, Bloomberg reported.
Ukraine, its finances reeling from a two-year-old conflict with Russian-backed separatists in the east of the country, had pushed Russia to join a $18 billion restructuring with commercial creditors this year. But Russia argued the debt was sovereign, despite its unusual eurobond form, and proposed its own repayment terms.
The default “is just confirmation of the unimproved relations between the countries,” said Simon Quijano-Evans, the London-based chief emerging-market strategist at Commerzbank AG. “The hope is that backstage negotiations will succeed in finding a solution. Otherwise, a legal case would probably ensue, unnecessarily complicating the ongoing political discussions surrounding eastern Ukraine and the sanctions.”
Upping the Ante
Russia has stepped up the economic pressure in recent weeks, moving to impose trade restrictions on a wide range of Ukrainian products from the first of the year, when a trade deal between Ukraine and the European Union is slated to take effect. Russia has opposed Ukraine’s efforts to build ties with the EU, a key policy goal for the current government in Kiev. The EU, meanwhile, is expected this week to extend sanctions imposed on Russia over the Ukraine crisis for another six months.
The non-payment won’t trigger cross-defaults on Ukraine’s other sovereign debt since it has all been restructured. While investors had expected the default, the yield on new dollar bonds maturing in 2025 climbed nine basis points Friday amid concern that political infighting could scupper changes to tax policy needed to pass next year’s budget and unlock the next tranche of an International Monetary Fund rescue loan.
On Wednesday, David Lipton, first managing director of the IMF, urged Ukraine to approve its new tax code, saying that not doing so will disrupt the aid program.
Out of Court Settlement
Ukraine’s Finance Minister Natalie Jaresko told Bloomberg TV on Friday that she hoped for settling the debt dispute with Russia off court.
“Ukraine is doing everything it can to match the IMF program. I hope we will succeed in reaching an agreement with Russia before trial,” she said.
“Ukraine has officially acknowledged its default. Russia is going to demand the return of $3 billion in court,” Kremlin Spokesman Dmitry Peskov told journalists on Friday in connection with Ukraine’s decision.
