Dec 18, 2015 1:42 PM

Ukraine won't repay $3 billion Russian debt due this weekend

The Associated Press

MOSCOW (AP) Ukraine won't make a $3 billion debt repayment due to Russia this weekend because Moscow refused to agree to terms already accepted by other international creditors, Ukraine's prime minister said Friday.

The "moratorium" on outstanding debt repayments to Russia announced by Ukrainian Prime Minister Arseniy Yatsenyuk effectively means that Ukraine is defaulting on the debt due Sunday. That move could jeopardize crucial loans that Ukraine has been receiving from a $17.5 billion bailout deal with the International Monetary Fund.

It's the latest spat between the two neighbors following a run of gas supply disputes, Russia's 2014 annexation of the Crimean Peninsula and its support for separatists in eastern Ukraine.

"After Russia refused to accept our offer, despite our attempts to reach a restructuring deal, the government is imposing a moratorium on the repayment of the $3 billion debt to Russia," Yatsenyuk said at a televised government session. "We are ready for court proceedings with Russia."

He did not indicate when Ukraine would be ready to repay the debt. Moscow has previously said it will take Ukraine to court if it fails to pay on time.

Ukrainian Finance Minister Nataliya Yaresko said late Friday she hoped the dispute could still be resolved but Kremlin spokesman Dmitry Peskov discounted that possibility, saying "there is only the court prospect."

Alongside the sovereign debt, the Ukrainian government has decided to put on hold the repayment of a combined debt of $507 million that two Ukrainian state-owned enterprises owe to Russian banks.

It is unclear at this point how Ukraine's imminent default will affect its four-year IMF bailout, as the IMF recently said it can continue to lend to countries behind in debt payments as long as the country is trying "in good faith" to reach a deal.

Still, William Jackson, a senior emerging markets economist at London-based Capital Economists consultancy, said Friday's announcement "does feed into broader concerns that the country's IMF program is now at risk."

He said the IMF's recent concerns about the Ukrainian parliament's decision to reject a proposed budget for the next year and a new tax code could indicate a "growing risk that the country's bailout could be put on hold."

Ukraine's economy has struggled over the past few years and the country has negotiated repayment terms with creditors, but not with Russia.

In November, Russian President Vladimir Putin proposed a debt restructuring, saying Moscow would be willing to agree to payments of $1 billion a year between 2016 and 2018. Ukraine turned down the offer, saying it cannot legally offer Russia a better deal than the one it has negotiated with other debt holders.

That deal has seen countries accept a 20 percent write-down of their Ukrainian bond holdings, a move that has cut Ukraine's sovereign debt from $19 billion to $15.5 billion.

Relations between the two neighbors soured after Russia annexed the Crimean peninsula in March 2014 and threw its backing behind separatist rebels in eastern Ukraine. Ukrainian leaders have accused Moscow of sending troops and weapons to the east, a claim the Kremlin has denied.

The government in Kiev has also sought to give a political dimension to the debt, hinting that Russia bought Ukrainian bonds in December 2013 in a clandestine bribe of then-President Viktor Yanukovych, who was facing massive anti-government protests at the time. Yanukovych fled the country in February 2014.

Kiev-based analyst Vadim Karasyov was confident the default on the Ukrainian bonds will not mean financial ruin for Ukraine.

"Yatsenyuk has clearly run the idea of the moratorium by the main creditors and received their guarantees," Karasyov told The Associated Press.

He said foreign investors in Ukraine are not likely to be affected "because you can count them on one hand as it is."


Yuras Karmanau in Minsk, Belarus, contributed to this report.


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