The latest developments pertaining to Ukraine’s debt to Russia continue to unfold at a breakneck pace. At the Nov. 16 G20 summit in Turkey, President Vladimir Putin dropped a bombshell: Russia is prepared to restructure Ukraine’s debt and forgo the $3 billion payment that would have been due at the end of the year in accordance with the terms of the loan agreement.
Moscow’s new terms can be summarized as follows:
1. Ukraine will repay the debt in installments (of $1 billion each) over the course of three years: in 2016, 2017, and 2018.
2. The United States, European Union, or a trustworthy financial institution will provide a guarantee that the debt will be repaid in accordance with the new schedule of payments.
3. The details of the new plan must be finalized by Dec. 8.
Putin revealed a secret: the International Monetary Fund asked Russia to allow Ukraine to not pay the $3 billion at the end of this year, but to postpone repayment of the debt until next year. The terms proposed by Putin appeared to be more advantageous for Ukraine than those Christine Lagarde, the fund’s managing director, had requested. Putin made a point of emphasizing that he had already discussed this issue, not only with Christine Lagarde, but also with Barack Obama and US Treasury Secretary Jack Lew. «They reacted to our proposal with interest. We agreed with our partners to discuss the details of our proposal very soon», Putin added.
Russian Finance Minister Anton Siluanov commented, «Based on Russia’s proposal, this year Ukraine will only be obligated to pay the interest that that country owes the Russian Federation for 2015, which would be $75 million». Siluanov did not specify whether interest would accrue on the debt over the coming years. «If our proposal finds support by Dec. 8, as we requested, then we are ready for broader talks with the Ukrainians, the IMF, and the others involved with this issue», concluded the minister.
Some experts have claimed that Moscow’s latest overtures to Kiev do not count as «restructuring», since they do not involve a reduction in the principal of the loan. But these are mere nuances in the terminology – what’s most important is that Russia has offered Ukraine a chance to avoid a full-fledged default, while also allowing the International Monetary Fund to save face (otherwise the fund would have to quickly rewrite its own rules about continuing to finance a bankrupt state).
Putin’s statement put the US in an awkward position. They certainly do not want to co-sign on Ukraine’s loan. But at the same time, not offering such a guarantee indicates to the world that Ukraine is not a creditworthy state. Apparently, Barack Obama and Jack Lew, who had been supporting the Russian president from the sidelines of the summit, had not been able to grasp that they had fallen into a trap.
Personally, I was expecting that after Putin’s offer to alter the terms of Ukraine’s debt, some corresponding statements would be made by Christine Lagarde, Jack Lew, and, perhaps, other US officials. But apparently the best Washington could do was to order Arseniy Yatsenyuk to make a statement in response to Moscow’s proposals.
That talking head is habitually used by the Americans to inflame Russian-Ukrainian relations and to neutralize any constructive proposal made by Moscow. Speaking about his country’s debt on Ukrainian television on Nov. 19, Yatsenyuk made the following jab at Russia: «...You can’t have different terms than other creditors. The key conditions are that the debt must be reduced by 20%, with a four-year postponement on all debt payments. If you don’t like it, then the Ukrainian government will decide to introduce a moratorium on paying Russia that three billion dollars». Adding, «I want to explain something very simply to our neighbors and to this aggressor state: we will not pay three billion dollars».
Allow me to comment.
1. This «talking head» personified Washington’s position, which can be described as something like this: «Who cares what we promised President Putin on the sidelines of the G-20 summit? We’ve thought it over and came to the conclusion that ‘Putin’s scheme’ could defuse the tensions over Ukraine, and this does not fit in with our plans».
2. And Christine Lagarde, the IMF’s managing director, was once again placed in an awkward position. At the summit she was forced to take on the humiliating role of petitioning for Ukraine. The IMF evaluates the financial positions of its member states and monitors how those states meet the lending terms of their loans and credits. When the fund acts as a lobbyist for Ukraine, this is in conflict with the fund’s own rules and is known as a «conflict of interest». Yatsenyuk’s statement once again put Christine Lagarde in a tough spot. The string of IMF rule violations and humiliations for its director continues to unfurl.
3. Yatsenyuk again reiterated that Russia is an «aggressor state». Neither the agreement in Minsk, nor Moscow’s proposal to restructure the debt, nor the discounts on the Russian gas sold to Ukraine has had any effect on Kiev’s stance on this matter. And this attitude is not merely a reflection of Yatsenyuk’s personal antipathies. Ukraine’s new military doctrine, adopted in September of this year, labels Russia as its «main enemy».
Russia must rid itself of any illusions that the tangle of knots associated with Ukraine’s debt will be unsnarled quickly or on mutually beneficial terms. Previous mistakes must be kept in mind. For example, it was a mistake to transfer three billion dollars to Ukraine by purchasing Ukrainian debt securities. That transfer should have been formalized as a credit agreement. What’s more, there was no reason to wait until Dec. 20, 2015. Russia had the right to demand early repayment of the debt last March, when Ukraine’s «ratio of debt to GDP» rose sharply along with the collapse of the hryvnia. That proviso was stipulated by the terms (covenants) of the loan. There was a better chance of getting the loan repaid last spring than there is now.
Russia should definitely take a more aggressive stance on the issue of Ukraine’s debt. There should be no illusions that Kiev will transfer three billion dollars to Moscow on Dec. 20. That transfer will not happen. Ukraine will go into a full-fledged default. And there is only one month left. This is why the Russian Federation must file a statement of claim right away with the English court system. That’s the first step.
The second is that Russia must find a way to block any decision by the IMF’s board of directors about the possible continuation of the financing of Ukraine, under the loan agreement signed last March. Winning the support of the other IMF members and getting the needed 15% of the vote on Ukraine’s loan should not be an insurmountable task. Especially given the growing annoyance of most IMF member states about the fact that Washington is blocking the fund’s reform efforts.
And there is still another delicate question. Kiev has repeatedly claimed that it managed to get all the holders of Ukraine’s debt securities to the negotiating table, with the exception of Moscow, and got them to agree to restructure that debt. I would like to point out that it would have been inappropriate for representatives of Russia to have been there, since Russia is an official creditor, while those seated at the negotiating table were private creditors, led by the Franklin Templeton investment fund, a notorious financial vulture.
So, according to my information, Kiev is bluffing. Not all the private creditors were present at the negotiations. And that is a crucial point. There were other financial vultures that also did not attend. They’ve hunkered down, lying in wait for the time being. And Washington knows this perfectly well, trying to avoid surprises by rooting them out and neutralizing them in advance so they don’t foul up America’s game. The media is not really covering the behind-the-scenes aspect of Ukraine’s debt saga.
The US is waging a carefully planned, multiphase war against Russia, which includes the use of Ukraine’s $3 billion debt. And if this is a war, then Russia has an obligation not to forget about the outsiders in those negotiations: Moscow must identify and make use of them in order to ensure its own victory.