Will Ukraine accept Russia's debt restructuring offer ?
Putin has agreed to restructure Ukrainian debt but Kiev may reject his offer. After a long period of negotiations, Russia has agreed to restructure the Ukrainian debt, which the previous government, headed by Viktor Yanukovich and Nikolay Azarov, loaned from Moscow at the end of 2013. Russian President, Vladimir Putin has proposed the restructuring scheme and called it “the best conditions”.
Experts believe that Ukraine, which refused to pay the debt earlier, will reject Putin’s offer. However, Moscow’s agreement on restructuring was considered a positive step towards negotiations. By December Ukraine has to pay back $3 billion to Russia, which the previous Ukrainian authority borrowed from it. The new Ukrainian government agreed with lenders on the restructuring of its external debt and planned to include the Russian debt in this deal.
Russia was against such a turn of events and called this debt sovereign, not commercial like others Kiev has already restructured. In response to it, the Ukrainian authorities stated that Moscow would not get special conditions and if it would not agree, Kiev will impose moratorium on payment of this debt. Ukraine wasn’t threatened by default because the International Monetary Fund was ready to change its rules and continue funding of Kiev even in case of an announcement of default on Yanukovich's debt by Russia.
In just a few days, Moscow changed its position. On Monday, after negotiations with the Managing Director of the International Monetary Fund, Christine Lagarde, the US President, Barack Obama and US Secretary of the Treasury,Jack Lew, Vladimir Putin offered Ukraine the chance to restructure its debt for three years at the G20 Summit in Antalya (Turkey). Putin stated that conditions which he offered were even better than those which were planned before.
“We were asked to transfer payment for the next year. I said that we are ready for even deeper restructuring and agree not to receive money this year but to receive $1 billion in the following year, $1 billion in 2017 and one more in 2018” – stated the Russian president. Meanwhile, Putin stated that he wanted International Financial Organizations to provide a guarantees on the payment of Ukrainian debt to Russia. Experts believe that Putin’s initiative is an attempt to maintain his international reputation.
According to an expert of the debt securities at Dragon Capital, Sergey Fursa, Russia wanted to hedge its bets on Ukraine and the International Community until the last moment. After the IMF statement in support of Ukraine, Moscow has had no option but to agree on restructuring. Fursa believes that Russia thought that IMF would not bend its own rules and grant credit to the country which has debt owed to its official creditors.
“But the IMF said that they will change its policy and won’t let Russia to disrupt Ukrainian funding. The IMF is changing the rules under which it can continue funding of Ukraine. When Lagarde explained to Putin this situation he understood that it won’t work” – believes the expert. According to him, the Russian Federation has two options – go to the trial or restructure. Russians don’t want to go to the trial because Putin needs to go there personally as he agreed on that. “This won’t do” – stated Fursa.
Forex Club leading expert, Andrei Shevchishin, also believes that the agreement on restructuring is a real way out from the existing situation because a litigation on debt can be protracted and has a negative result considering counterclaims. Kiev can’t accept Putin’s conditions because they contradict Ukrain’s agreements with other creditors. The reservation in acceptance of conditions of the new Ukrainian bonds of $15 billion which were issued for restructuring of debt is a stumbling stone.
This document states that Ukraine won’t be able to provide better conditions to creditors, who will not agree with restructuring. In October Russia didn’t accept Ukrainian conditions on restructuring which entailed 20% write off of a nominal value of “old” Eurobonds under receiving new dollar bonds. NVP of Ukrainian bonds received by investors, as a result of exchange, was about 70% of initial bonds’ cost.
If Russia restructures Ukrainian debt of $3 billion according to Putin’s conditions, NVP will be 80% or more which is 10% higher than for the other creditors who agreed on Octobers restructuring. Putin’s offer is more profitable for Russia than the Ukraine’s offer based on the restructuring of sovereign Eurobonds.
However, it doesn't meet one of the main criteria of the IMF program concerning restructuring of Ukraine’s obligations; absence of primary debt repayments until 2019. Thus, the Russian offer isn’t satisfactory for Ukraine and IMF – stated Dragon Capital Chief Economist, Elena Belan.
Anton Tabah, the Chief Economist of the Institute of the energy and finance, agreed with this statement. “It’s a normal position, conditions are really better than offered by private creditors. In principle, all parameters of the deal are fair” – he believes. Tabah predicts that the external debt repayment period will be longer.
“If the term is 4 or 5 years than it will be an attractive offer and all will save their reputation. There will be no write offs from the Russian side and the Ukrainian side will get the instalments. So, everything is ok” – stated Tabah. Dmitriy Lekuh,an Odnako observer, believes that the Russian offer is a provocation of a very high level.
“First of all, it’s a Public Relations event. I don’t think that the Russian offer will be accepted. Our Western partners aren’t idiots and they understand that Ukraine is insolvent. So, they won’t impose such responsibility on its taxpayers” – he noted.
The IMF called the Russian offer a good step but there are many steps to be made before taking a final decision. Alexander Parashiy, the head of analytical department of Concord Capital, doesn't exclude that an agreement can be reached on Ukraine’s debt operation. If the debt is defaulted, there is a special agreement in place between the USA, EU and IMF on its repayment without Ukraine’s participation.