Russia’s standoff with Ukraine over a $3 billion bond took a U-turn as
President Vladimir Putin said he’s ready to lift a December deadline and spread
payments over the next three years.
Putin unveiled the proposal at a press conference during a Group of 20
meeting in Antalya, Turkey on Monday focused on rebuilding ties to fight
terrorism in the wake of the deadly attacks in Paris last week. This is the
first time Russia said it was ready to soften its stance on the debt it bought
from former Ukrainian leader Viktor Yanukovych in December 2013, months before
he was overthrown and Russia annexed Crimea.
“There will be many amongst the Western official community who will push
Ukraine to accept this deal,” said Timothy Ash, the head of Europe, Middle East
and Africa credit strategy at Nomura International, pointing to the
"new-found focus" on Islamic State, which claimed responsibility for
the violence in Paris that killed at least 129 people. There is a "desire
to ‘normalize’ relations with Moscow," he said.
Russia proposed letting Ukraine pay back $1 billion annually from 2016
to 2018 and is waiting for guarantees from the U.S., European Union or other
global financial organizations on the repayment, Putin said. Until now, Russian
officials had insisted that Ukraine must pay the bond in full on Dec. 20, and
threatened legal action if its neighbor missed the deadline.
Restructured Bonds
The about face comes after Putin met with Barack Obama at the G20 summit
for the first time since the Russian president surprised his American
counterpart in September by sending in his warplanes to prop up Bashar
al-Assad, the Syrian leader the U.S. wants deposed. Since then, Islamist
terrorism has taken over the global agenda and provided common purpose.
The proposal calls into question the implications for Ukraine’s other
bondholders, including Franklin Templeton, which reached a $15 billion
restructuring agreement with the government in August that involved writing
down 20 percent of the face value of their holdings. Ukraine said it would not
give Russia better terms than its other creditors.
Ukraine changed terms on its Eurobonds in order to qualify for a $17.5
billion International Monetary Fund loan granted to help lift its economy out
of a recession worsened by separatist unrest in its easternmost regions. The
restructured notes, which started trading last week, rallied after Putin’s
comments, with the yield on the 2027 security falling 12 basis points to 8.89
percent.
“We agreed with our partners that we’ll discuss details of our proposals
comprehensively in the nearest future," Putin said on Monday. “We were
asked to delay this payment to next year. I said that we’re ready to go for a
more profound restructuring."
Better Terms
The proposal is a positive step and the details now need to be discussed
between Russia and Ukraine, an IMF spokesperson said on Monday.
Ukraine’s Finance Ministry said "it hasn’t received any direct
information and has no comment at this time."
Under the conditions of its debt restructuring, Ukraine is prevented
from giving holdouts better terms than those agreed to by other bondholders.
This means Putin’s proposal would need to get the consent of Franklin Templeton
and other creditors, according to Vadim Khramov, an analyst at Bank of America
Merrill Lynch in London.
“It’s not clear how that would be done legally, as Russia officially did
not participate in the restructuring,” Khramov said.
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