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Putin Bailout Haunts Ukraine With Early Repayment Clause

The risk that Russia will seek early
repayment of a $3 billion bond is adding to pressure on Ukraine
as it races to secure more International Monetary Fund loans.

Russia has the right to call the Eurobond, bought a year
ago to avert a default, if Ukraine’s public debt tops 60 percent
of gross domestic product. The ratio may jump to 70 percent by
Dec. 31, Moody’s Investors Service said Oct. 30.

While Russian President Vladimir Putin said last month he
won’t use the redemption clause on the notes, part of a bailout
package signed with deposed President Viktor Yanukovych, there’s
no guarantee he won’t change his mind, said Paul McNamara at GAM
UK Ltd. That could weigh on Ukrainian finances, strained by a
war against pro-Russian separatists, political wrangling after
October elections and uncertainty about further IMF aid.

“I wouldn’t rely on Russian officials’ statements about
the bail bond,” McNamara said Dec. 3 by phone from London.
“There’s a real prospect of a standoff between Russia and the
IMF, which will find it hard to justify to the western countries
the covering of an early repayment.”

Ukraine’s bonds lost 9.3 percent this quarter through
yesterday, the most after Venezuela among 58 nations in the
Bloomberg USD Emerging Market Sovereign Bond Index. (BEMS) The
benchmark note due July 2017 fell 13 cents on the dollar in the
period, touching a record-low 73.5 cents on Dec. 3. It traded at
74.3 cents by 10:13 a.m. in Kiev, yielding 22.8 percent.

IMF Requirements

The new government of Premier Arseniy Yatsenyuk, approved
by lawmakers this week, needs to adopt a 2015 budget and tax
laws complying with IMF requirements to qualify for the next
$2.8 billion disbursement. Ukraine needs the cash, part of a $17
billion loan program, to repay other debt, buy heating fuel for
winter and stem the hryvnia’s 46 percent slump this year.

Russia, which annexed Ukraine’s Crimea peninsula in March,
has repeatedly denied accusations by NATO and the European Union
that it’s supporting the insurgency across the border, which has
killed more than 4,300 people and displaced 500,000.

The government in Moscow will determine whether Ukraine has
crossed the 60 percent debt threshold based on IMF estimates
expected early next year, Russian Finance Ministry official
Andrey Bokarev said Nov. 27. The ministry didn’t immediately
reply to an e-mail seeking comment yesterday.

‘Whole Amount’

The earliest Russia can try to call the bonds is after the
ministry publishes preliminary 2014 GDP data in March, Halyna
Pakhachuk, head of the Ukrainian Finance Ministry’s debt
department, said yesterday. The government in Kiev has the right
to wait with the payment until December 2015, when final GDP
data is to be released, she said in a phone interview.

“Our 2015 budget will envisage the whole amount needed for
the repayment,” Pakhachuk said.

Russia probably won’t call the bond early, according to
Regis Chatellier, a London-based director of emerging-market
credit strategy at Societe Generale SA, and Lutz Roehmeyer, a
money-manager at LBB Invest in Berlin.

“Putin does not want to be seen as the one who triggered a
default,” Chatellier said Dec. 3 by e-mail. SocGen has an
underweight stance on Ukrainian debt. “The pressure on Ukraine
would come very soon anyway as the bond matures next December.”

Towel ‘Thrown’

While Ukraine will probably avoid default, it will seek to
re-negotiate debt terms in 2016 or 2017 to prolong maturities by
three to five years, LBB’s Roehmeyer said Dec. 1 by phone.
Current bond prices are already reflecting such a scenario,
according to the money manager, who oversees $1.1 billion of
debt from emerging markets including Ukraine.

“Investors are really fed up and most have thrown in the
towel,” he said. “Everyone is realizing how far away from each
other both sides are and that Russia keeps sending troops.”

Without more IMF payouts, Ukraine can’t stop the hryvnia
depreciation that’s stoking bad loans and boosting the future
costs of rescuing ailing banks, according to Marco Ruijer, who
helps oversee $7.5 billion of emerging-market debt at ING
Investment Management in The Hague.

“If the government implements reforms then the IMF will be
willing to give them the benefit of the doubt and save them,”
he said Dec. 1 by phone. “Russia could move forward the
payment. It is a risk, but not one of my main risks.”

Should Russia call the bond, and if Ukraine is unable or
unwilling to repay early, this could trigger a restructuring
affecting other debt, according to Timothy Ash, London-based
chief emerging-markets economist at Standard Bank Group Ltd.
Potential losses for Russia on the $3 billion bond may not be a
concern for Putin, Ash said Dec. 2 by e-mail.

“This is small change for Russia in the bigger scheme of
things, and given its ambitions in Ukraine,” Ash wrote. “You
have to ask why it included the debt-to-GDP trigger in the
documentation anyway.”

To contact the reporters on this story:
Krystof Chamonikolas in Prague at;
Natasha Doff in London at;
Volodymyr Verbyany in Kiev at

To contact the editors responsible for this story:
Wojciech Moskwa at;
Daliah Merzaban at
Chris Kirkham

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Continued here:
Putin Bailout Haunts Ukraine With Early Repayment Clause

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