Ukraine Set to Default on $3.5 billion in Russian Debt

On December 18, the Ukrainian government imposed a moratorium on repayment of its $3 billion Eurobond debt to Russia due on December 20.  Ukraine‘s announcement of its intention to default on its Russian debt comes as the International Monetary Fund (IMF) recognized on December 17 that the debt is sovereign, not commercial.  The day before on December 16, the IMF overturned its previous prohibition on lending ‘‘‘to countries that are not making a good-faith effort to eliminate their arrears with [official] creditors.‘  This announcement by the IMF that it will continue to do business with Ukraine post-default was met with criticism from the Russian government.  To further goad Russia, the Ukrainian government is also planning to halt $507 million in debt repayments by state owned companies Yuzhnoe and Ukravtodor to Russian banks.

Ukraine is demanding that Russia agree to a debt restructuring deal with a private sector creditor committee led by Franklin Templeton.  Russia, however, is refusing to participate in the debt restructuring, claiming that its bond purchase was a bilateral state loan instead of a commercial one.  President Putin plans to take Ukraine to court if it fails to pay the $3 billion loan within the ten days after the grace period provided in the terms of the Eurobond.  Russia is expected to be successful if this issue goes to court, despite the fact that the loans were made to a corrupt Ukrainian government that was overthrown and who‘s leader fled the country.

If Ukraine defaults on its Russian debt, Moscow can also be expected to retaliate through various economic and financial measures, likely including restrictions on supplies of coal and natural gas.  Russia has already suspended its trade pact with Ukraine beginning on January 1, excluding it from the free trade zone that includes several former Soviet states.  Unfortunately this episode has highlighted some level of mismanagement on the part of the Ukrainians who continue to insist that the Eurobond is a commercial credit and expanded the controversy to include some $500 million in unrelated Russian debt.  It would have been better served by concentrating on the corrupt origin of the debt in a window of escalating conflict that led to the annexation of a significant portion of its sovereign territory.