Ukraine Imposes Moratorium On Repayment Of $3B Loan To Russia

Ukrainian Prime Minister Arseniy Yatsenyuk said Friday that his government is imposing a moratorium on the repayment of a $3 billion loan due to Russia this weekend. On Thursday, Ukraine announced that it cannot make the bond payment without violating a debt-restructuring deal with other international creditors.

“Considering that Russia has refused, despite of our efforts, to sign an agreement in the restructuring and to accept our proposals, the cabinet is imposing moratorium on payment of the Russian debt worth $3 billion,” Yatsenyuk reportedly said during a cabinet meeting Friday.

Kiev also announced a moratorium on debt owed to Russian banks by two Ukrainian companies. “The government is imposing a moratorium on the payment of $507 million by two Ukrainian companies — Yuzhnoye and Ukravtodor — to Russian banks. From today, all payments shall be suspended until the adoption of our proposals or a court decision,” Yatsenyuk said.

The announcement has the potential to escalate tensions between the two nations that have remained engaged in hostilities ever since Russia annexed the Crimean peninsula in March 2014 and began supporting separatist rebels in eastern Ukraine.

Russia loaned Ukraine $3 billion in December 2013 through the purchase of government bonds. Ukraine has insisted that the loan should be considered private and should, therefore, be exempt from the International Monetary Fund’s rules that require Kiev to make good on its sovereign debt as part of its IMF bailout package, which the country desperately needs to overhaul its struggling economy.

Last month, Russian President Vladimir Putin proposed a debt restructuring, and said that his government would be willing to agree to payments of $1 billion a year between 2016 and 2018 -- an offer Ukraine turned down, claiming that it cannot offer Russia a better deal than the one it negotiated with other debt holders. That deal involves a 20 percent write-down of bond holdings, which cut Ukraine's sovereign debt from $19 billion to $15.5 billion.

“The Ukrainian Government has indeed negotiated in good faith all along and in line with the IMF-supported Program’s debt operation targets, without prejudice to its position on the underlying debt obligations themselves,” the Ukrainian ministry of finance said, in a statement released Thursday. “The December 2015 Eurobonds constitute debt obligations which Ukraine cannot pay in accordance with their initial terms.”

Meanwhile, the IMF criticized the Ukrainian government Friday, expressing concerns that the country’s parliament might reject a tax overhaul plan that would unlock the latest tranche of much-needed funds from the lender’s $17.5 billion bailout program.

“It is with concern that we have observed the discussions yesterday in Parliament that effectively rejected the government’s proposals for a new tax code and the government budget for 2016,” David Lipton, the first deputy managing director of the IMF, said, in a statement. “Approval of a budget that deviates from program objectives for 2016 and the medium-term will interrupt the program and inevitably disrupt the associated international financing.”