Ukraine’s default on debt to Russia will cost the IMF


Translated by Ollie Richardson for Fort Russ

10th December, 2015


The International monetary Fund (IMF) has decided to change its own rules on lending before Ukraine entertains the possibility of further participation in programs of the Fund. However, this effectively means that by 2016 Ukraine will begin and will be marked as ‘default’, and Russia would enter into a series of lengthy proceedings in international arbitration, the results of which will set a precedent.

The IMF Board on Wednesday approved a reform that allows the Fund to lend to debtors, even in case of default on sovereign debt. The Minister of Finance of the Russian Federation Anton Siluanov called the decision hasty, biased, taken exclusively at the expense of Russia and the legalization  of Kiev to not pay its debt. He also said that Russia will go to  the international court if Ukraine doesn’t pay its debt of 3 billion dollars within 10 days after December 20.

“The rules of financing programs of the Fund have existed for decades and remained unchanged.  Sovereign creditor have always had priority over commercial ones. The rules emphasized the special role of official creditors, which is especially important in times of crisis, when commercial lenders are turning their backs on countries and depriving her of access to resources,  said Siluanov to reporters.

The decision, according to Siluanov, has already caused serious damage to the reputation of the IMF, as it breaks the rules that have evolved over the years.

The only true way

Official communication by the IMF on the decision has not yet been published. The reform was approved by the Board of Directors of the Fund, RIA Novosti was told by the Director of the IMF , from Russia, Alexei Mozhin. According to him, the decision is effective immediately and will apply to previously agreed contracts.

Official explanations via the press service of the Fund, were promised to be provided in the next day or two. Previously, the IMF did not officially link the reform with the situation around the Ukrainian debt, because the rule changes were discussed for years. For Russian authorities, the relationship between these changes and the commitment to Kiev is obvious, and therefore legal proceedings are inevitable.

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The Russian President Vladimir Putin on Wednesday instructed the Cabinet to sue Ukraine, if they will not repay the debt to the Russian Federation.

Russia has previously expressed a willingness to restructure the debt of Ukraine, allowing it to repay one billion in 2016-2018, subject to the provision of guarantees for it from the authorities of the United States or the EU, or one of the international financial institutions. The United States refused to provide such guarantees. The Finance Ministry has received the same answer – although not official yet –  from the Europeans.

“I think this is the only correct way (to appeal to the court — ed.) if you, Ukraine, and our partners Fund (IMF — ed.) will not accept the decision on our proposals, which, in my opinion, are very important for regulating the entire system”, — Siluanov said.

The Prime Minister of Ukraine Arseniy Yatsenyuk has said that the country is ready to sue Russia for debt.

A dangerous precedent

The Kremlin will analyze the decision by the IMF, but it is already clear that it is a dangerous precedent for international practices, said the President’s press Secretary, Dmitry Peskov, on Wednesday .

“We’re talking about sovereign debt, and, of course, we have yet to carefully analyze the similar decisions of the IMF. The case, of course, is absolutely undesirable for us, and most importantly, from our point of view, as an international practice, it is quite dangerous — it creates a very dangerous precedent by allowing the non-payment of sovereign debts. The question is – what is next?” — Peskov said.

The Minister of Finance of the Russian Federation has informed Russia that it intends to initiate a new session of the IMF Board of Directors to confirm the status of the sovereign debt of Ukraine to Russia. The government of the Russian Federation is surprised that the debt status is questioned – this  is the first time this has happened in the world arena.

“If the two governments agree, it’s obviously a sovereign loan, but never in the history of the IMF, in the history of international economic relations, has this been questioned” — said the head of the government of the Russian Federation Dmitry Medvedev in interview to the Russian TV channels.

“It is surprising that international financial institutions have begun to say that it seems that it is not quite a sovereign loan. It’s bullshit. This is obviously a blatant, cynical lie. This is a sovereign loan,” added the Prime Minister.

“The International Monetary Fund, despite the fact that it should reflect the position of the vast majority of States, and not only borrowing States, the creditors, again for the first time in its practice, has taken a decision that aims to support the economy in spite of the real circumstances of the case, in spite of existing legal agreements, only for political reasons,” Medvedev said.

Erosion of trust

For such a hasty decision, the IMF will have to pay dearly, says the head of the government of the Russian Federation. To avoid this, according to him, the international economic system, in particular the IMF, needs to be reformed.

“This seriously undermines the credibility of the decisions that are made by the IMF. I think that now the IMF’s flow of requests from various borrowing States will be greeted with a request to grant them the same conditions as Ukraine. Who would the IMF be in this case to refuse them?” — said Medvedev.

“The IMF, despite the fact that it should represent the interests of creditor States and of the States of the borrowers, for the first time in its history, is doing everything to contribute to the economic development of the state of the borrower (Ukraine) only for political reasons. Thus, the IMF undermines its own credibility. All this is due to the fact that the international financial system is unfair. The Bretton Woods agreement is no longer working — quotas are not reallocated. If this system is not reformed  in the near future it will undermine confidence,” he said.

The decision by the IMF looks particularly odd because it is contrary to the usual norms that apply to previously issued loans, according to the Minister of economic development of Russia Alexei Ulyukayev.

“It’s actually a problem not only for Russia and Ukraine, but a problem in general for the global sovereign debt market. Now the lender will be very wary of providing a loan to a sovereign borrower knowing where he may have to do what we are trying to do regarding this $3bn Ukrainian debt”, — said the head of the Ministry of economic development.

Who will believe Ukraine

By changing the rules of the IMF and refusing to guarantee the obligations of Ukraine, the West has demonstrated that, in principle, it does not believe in the solvency of Kiev, said Medvedev. The Prime Minister himself admitted that the prospects for the return of Ukrainian debt to Russia are full of pessimism.

“They say that hope dies last, but if you want my opinion, I have a feeling that it will not return, because of the crooks. They refused to return the money, and our Western partners do not only refuse to help, they hinder it”, — Medvedev said in an interview with Russian TV channels.

“They (Ukraine — ed.) must pay this loan, it is our strict attitude and we don’t support the IMF. And, by the way, regarding our partners, the President spoke about this; I signed the letter to the European Union, we appealed to the Americans to help ensure payment of the debt by Ukraine, to be ready to give instalments to be paid, and they told us they will not help, which means only one thing — they do not believe in the solvency of Ukraine,” — said the head of the government.

The Prime Minister said that Western countries have not given themselves as guarantees for Ukraine and have not allowed the use of “first-rate banks, which could make Ukraine, if they adopted a system of installments, have to return us the loan across three years, in other words, they washed their hands and said let Ukraine itself come up with the money”.

Meanwhile Ukraine is preparing a new agreement on credit support with the EBRD, the EIB, Poland, Switzerland and Turkey, said Natalie Jaresko, the head of the Ministry of Finance of Ukraine .

According to her, Ukraine in 2015 had already received 6.7 billion from the IMF and more than $3 billion from the U.S., EU, World Bank, Canada, Germany, Japan and Norway.

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