It is generally unprofitable for foreign creditors to upset the fragile financial balance built in Ukraine due to favor of the IMF.
The Cabinet of Ministers declared the successful restructuring of all Eurobond issues, except for the “debt of Yanukovych”. While this is $3 bln, which maturity date falls on December 20 of the current year. The experts suggest that the Russian party may refuse restructuring of this debt. Such refusal of the Russian Federation will most likely case no serious consequences.
By agreeing to haircut and restructuring, other creditors announced to the world and their shareholders that the proposal of Ukraine in the current situation is the most profitable. How will they be able now to support the position of the Russian Federation that the proposal is inadequate? It would mean to recognize that they just out of the blue permitted to “shave” their investors.
Accordingly, everybody will agree that the Russian Federation simply uses default as a means of political pressure, and nobody will want to participate in such games (especially on the side of Vladimir Putin).
Therefore, in the author’s opinion, the risk of cross-default is minimal.
Firstly, the conditions of issue of “new” restructured bonds expressly provide that the Russian “old” bonds can not trigger cross-default. Accordingly, if the Russian Federation launches the whole procedure of cross-default, it must be done it in the next couple of weeks before the restructuring deal is closed and creditors receive new bonds.
Secondly, to announce a cross-default is the right, but not the obligation of creditors. It means that it is not enough for the Russian Federation to declare default on its bonds – it is necessary for other creditors to abandon the agreed restructuring plan and voluntarily take advantage of the provisions on cross default.
However, why should they?
Today, Ukraine is not in default on payments – only the provision on the ratio of correlation of external debt and GDP may be the basis for default. However, the ratio was not exceeded yesterday, and so far all the creditors, including the Russian Federation, put up with it. If the Russian Federation now, a few days before completion of the restructuring, declares default on the basis of technical, in fact, provision, it will be difficult to understand otherwise than another attempt to put political pressure on Ukraine.
As a result, if the Russian Federation declares default now, the creditors can either join Putin and begin unpromising in terms of collection litigations with Ukraine (remember YUKOS), or stay on the side of financial common sense and receive money on restructured bonds peacefully.
It is clear that the Russian government can donate $3 bln for the sake of policy. However, it is hard to imagine what is the point for the ordinary corporate investors who are primarily interested in the money.
Sovereign or private?
The practical value of division of bonds into sovereign/private is, above all, for the purposes of the IMF. If Ukraine defaults on sovereign bonds, according to its internal rules the IMF would have to close the funding programs in Ukraine. If Ukraine defaults on private bonds, it does not natter for the IMF. Accordingly, at first sight, this qualification defines whether we will get more money from the IMF under the already approved programs.
As in the case of cross-default, there is another question: why should the IMF defund Ukraine now, moreover, at the instigation of Putin?
The IMF has been working in Ukraine almost since the revolution, its experts have full access to all financial information, and for them default on Russian bonds can not be a surprise. In turn, Ukraine – with certain tolerances – fulfills all the requirements of the IMF, including in relation to the IMF’s budget figures prescribed. It is no secret that our fragile financial stability today to a large extent is the result of work and resources of the IMF.
Thereto, the Fund is not completely in a forced position. The decision to recognize the debt as sovereign is taken by the IMF’s Executive Board according to rather vague criteria. Moreover, the IMF can (as already suggested once before) waive its own internal rule on the prohibition of financing of offenders of sovereign obligations.
In such a situation it is difficult to imagine that the IMF would break the financial equilibrium, which it built in Ukraine, with own hands. To make such a gift to Putin, the Fund must have very, very solid grounds, perhaps, some high strategy considerations, which can not be known to me.
Therefore, there is no need for the IMF to refinance Ukraine’s debt to the Russian Federation. If default of Ukraine on Russian bonds bears no special risk, it is unclear why the Fund would give a lot of money in the pocket of the Russian Federation.