IMF changes its lending into arrears policy in Ukraine’s favor

The IMF executive board approved on Dec. 8 changes to its lending policy that will enable it continue to lend to those countries that failed to pay on time their official debt, Bloomberg reported that day. It cited IMF spokesman Gerry Rice, who promised more details “in the next day or so.” Russian Finance Minister Anton Siluanov, who was the first to foresee such an IMF move, responded the same day that the decision was adopted “exclusively to harm Russia and with the aim to legalize the possibility of Kyiv not paying its debts,” as cited by Interfax news agency. He also repeated that Russia is going to defend its interests in court.

Recall, a Russian state fund that holds USD 3 bln in Ukrainian Eurobond declined to join the other holders of Eurobonds worth USD 15 bln in a combined debt operation, demanding a preferential treatment. Russian top officials claimed the USD 3 bln Eurobond should be treated as official debt, a default on which should have prohibited the IMF to lend to Ukraine, according to the IMF’s previous policy. The updated policy, approved on Dec. 8, seems to allow Ukraine to default on this debt, regardless of its status. The Ukrainian side continues to treat this debt as commercial.

In other news, Siluanov told journalists on Dec. 8 that Russia will initiate an IMF board meeting to consider the status of Ukraine’s USD 3 bln Eurobond. “We had confirmation of the official status of this debt at the level of the IMF’s top management,” he said. “Now we intend to initiate a board meeting for the formal approval of the status of this debt”.

Alexander Paraschiy: While we have yet to see the official IMF documents on its “lending into arrears” policy change, we admit that such an IMF decision will indeed add much more bargaining power to Ukraine’s MinFin in its talks with its Russian counterparts on the USD 3 bln debt restructuring. The good news for Ukraine is that a default on the loan to Russian fund, possible by Dec. 20, is unlikely to affect not only its program with the IMF, but also Ukraine’s credit ratings and its financial stability.

Regarding Russia’s appeal to the IMF to recognize the Ukraine’s Eurobond as official debt, we continue to believe that the IMF board won’t approve such status, even though the IMF’s managing director and lawyers support the Russian view, according to Russian media. By recognizing this debt as official, the IMF board will have to recognize that it mistakenly allowed it to be included in Ukraine’s debt operation in March 2015. As this debt has signs of being both commercial and official, we expect the IMF will adopt some intermediary status for it. For the Ukrainian side, it’s not critical now what will be status of this debt. If it’s recognized as commercial, Ukraine will be legally restricted to offer Russian side the conditions better than what the holders of the other USD 15 bln in Eurobonds approved. If it’s recognized as non-commercial, Ukraine will be free to offer better restructuring conditions to Russia, if it wants to.

Источник: Конкорд Капитал