Ukraine vows to pay Russia despite default threat

Cash-strapped Ukraine promised on Friday to make the next payment on a disputed Russian loan it had threatened to stop servicing due to Moscow’s rejection of more lenient terms.

The decision should help ease some of the tensions building between the two neighbours throughout Ukraine’s 14-month separatist revolt that Kiev accuses Moscow of staging — a charge Russia denies.

But the Western-backed Kiev leadership also warned its various lenders that it may stop making interest payments should they fail to accept painful debt restructuring terms within a matter of weeks.

“Two days ago, we paid $39 million (34 million euros) for (US-held) Eurobonds, and we will also pay $75 million to cover the so-called Russian bonds,” Finance Minister Natalie Jaresko told reporters.

Her office quickly stressed in a separate statement that a faster-than-feared economic implosion left Kiev with no alternative but to freeze its payments “unless a negotiated solution is found in the weeks to come.”

Ukraine is scrambling for a way to plug a $15.3-billion budget hole over the coming four years.

The potential savings form part of a $40-billion global rescue that also includes IMF lending and is meant to keep the strategic former Soviet country from slipping into default.

But Moscow has refused to negotiate and still expects the bond’s principal returned when it matures by year-end.

Russia had warned it would ask the International Court of Justice in The Hague to declare Ukraine in default if it failed to make a scheduled $75-million interest payment on Saturday.

Jaresko said the money would be delivered on Monday because banks remained closed over the weekend.

The coupon covers a $3-billion Eurobond that Moscow purchased from Ukrainian president Viktor Yanukovych’s government in the wake of his December 2013 decision to ditch a landmark EU alliance and preserve closer ties with Russia.

The pro-European leadership that emerged after three months of subsequent street protests has denounced Moscow’s three-year loan as little more than a Kremlin bribe.

– Sweeteners for creditors –

Jaresko said separate negotiations with Ukraine’s private Western lenders would continue in Washington next week.

But she stressed that Ukraine still expected those creditors — comprised of four US financial titans who include the likes of Franklin Templeton — to take a so-called “haircut” that will see them get back only 60 cents on the dollar.

The so-called Ad-hoc Committee of Bondholders owns most of the debt Ukraine is trying to restructure and has firmly rejected the deal.

Yet Jaresko argued that Ukraine — its already-dire 2015 economic outlook recently slashed by the Fund to a contraction of nine percent — faced no alternative but to insist on the tough debt restructuring terms.

“Considering that recently Ukraine’s economic growth forecast turned worse, today Ukraine is sending the (private) creditors’ committee a revised debt restructuring offer,” Jaresko said.

“The updated proposal includes a considerable reduction of the principal, an extension of the debt servicing terms, and changes to the interest payment,” the US-born Ukrainian finance minister said.

Sources close to the talks told AFP that the new proposal intends to soften up the US debt holders by offering them a new Eurobond by 2020 meant to cover some their loss.

Jaresko’a office said only that Kiev “proposes a value recovery instrument for bondholders should the situation significantly and durably improve beyond the projections of the (IMF) programme.”

The big bondholders said in a letter published in the Financial Times on Wednesday that “a haircut sends the wrong signal to global capital markets when Ukraine can least afford to be shunned.”

Yet they also offered to wait until Ukraine’s economy improves before asking for the coupon payments.

The IMF has backed Ukraine’s position strongly and encourage the lenders on Friday to relent.

“I strongly believe that the authorities’ programme and the determination and boldness with which it is being implemented, despite considerable headwinds, warrant the support of the international community,” IMF chief Christine Lagarde said.


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