Bridges Burned? Ukraine Has to Negotiate with Russia on Debt or Face Default

Russia invested three billion dollars in Ukrainian government bonds. After a year-long civil war with ethnic Russians and constant demonisation of Russia and its leaders, Ukraine is crawling back to Moscow asking for help.

The article originally appeared at German Economic News. Translated for RI by Anita Zalaldinova

Ukraine is negotiating with its creditors on a debt cut which among others EU citizens have to finance. The US asset manager Franklin Templeton is the largest creditor. But Russia also invested three billion dollars in Ukrainian government bonds and rejects a cut.

On Friday the Ukrainian government will hold talks with their bond creditors about possible debt restructuring. Investors are thought to be willing to accept a debt cut of 40 to 50 percent if an insolvency of Ukraine can be thus averted, the Financial Times reports.

However, alleviating the debt burden of the country can only be possible if the Kremlin cooperates. Russia is one of the largest bond creditors of Ukraine. But Kiev will not grant special priority to Moscow in negotiations on the debt-restructuring. The largest creditor of Ukraine is the US asset manager Franklin Templeton. Since 2010 the US company has invested over seven billion dollars in Ukrainian government bonds.

Though some financial analysts have an opinion that there will be no cut. Instead the debt-repayment dates can be temporarily stretched, former ING banker Robert Grant says. Finally, during the past debt-restructurings no debt cut was allowed. In the current year Ukraine must pay foreign debts of about eight billion dollars. Three billion thereof were provided by Russia. Last month the Russian Finance Minister Anton Siluanov said that Russia had already included these three billion dollars in the current household budget. Apparently, Russia will insist on payment of the sum.

Meanwhile, the IMF agreed to grant Ukraine 17.5 billion dollars of loans. The first tranche of five billion dollars has already been provided to the debt-ridden country. The IMF loans are part of a larger international loan package totalling $40 billion. Specifically, the IMF has converted its previous program designed more for short-term cash problems aids (Stand-By Arrangement) into a long-term scale program (Extended Fund Facility). This also gives Ukraine access to European taxpayers’ money.

Under the Extended Fund Facility program Kiev will obtain loans from the EU, the US, the World Bank and the IMF, the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB). The Ukrainian Finance Ministers Natalia Jaresko announced arms purchases worth $3.8 billion on Tuesday. The armour deal will be financed through the new loans.

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