Ukraine’s New Law Allows Delay Of Foreign Debt Payments

Ukrainian President Petro Poroshenko has signed into law a bill that allows Ukraine to impose a moratorium on the repayment of its foreign debt until at least July 2016. The bill could impact the repayment of Ukraine’s $3 billion debt to Russia.

Ukraine's New Law Allows Delay Of Foreign Debt Payments

Ukraine’s $30 billion external debt

A press release on Poroshenko’s official website Thursday disclosed that the president had signed a law on the government’s powers to suspend payments on foreign loans. The release added that the law authorized the Cabinet of Ministers and relevant city councils to make decisions regarding the suspension of payments on all or several state foreign loans guaranteed by the state and local foreign loans. The Ukrainian parliament adopted the draft law on May 19.

According to Ukrainian Prime Minister Arseniy Yatsenyuk, Ukraine’s total debt is estimated at about $50 billion, of which $30 billion is external and $17 billion is internal. The prime minister indicated that the suspension of payments could only relate to private loans, but Ukraine considered its $3 billion debt to Russia also as a private one, a stand which Moscow disagreed with.

Earlier, Russian President Vladimir Putin said the bill de facto was an announcement of a default, casting a negative light on the professionalism of Ukraine’s leadership. Anton Siluanov, Russian Finance Minister, said Ukraine is due to pay off $75 million in eurobonds to Russia by June 20 and that Moscow would turn to an international court if the Ukrainian president signed a moratorium on the repayment of foreign debt.

Moratorium to address Ukraine’s complicated financial situation

Kiev has received several aid packages from international financial institutions, including the IMF, which has pledged to transfer $17.5 billion to the country over the next four years with the first $5 billion installment being received.

The press release from the president’s office highlighted that the adoption of the law will prevent the negative consequence of potential cases of non-fulfillment of obligations, which will release significant funds to support the domestic economy and enhance Ukraine’s defense capacity.

Earlier, the government explained that the moratorium was needed due to the complicated financial situation in Ukraine. The country has to pay $30 billion in foreign exchange obligations in the next four years alone.

The moratorium does not mention Ukraine’s bilateral, multilateral or domestic commitments or the debts to the IMF, the EBRD and other institutional lenders. However, the bill says the $3 billion in Ukrainian eurobonds purchased by Russia at the end of 2013 are on the list of liabilities subject to a possible payment moratorium.

ValueWalk detailed how Hasenstab, Franklin Templeton’s international bond manager, bought several billion dollars’ worth of Ukrainian government bonds.  Some analysts felt Hasenstab was following his usual pattern as a “vulture” investor, buying distressed assets and hoping to sell them for a big profit at a later date.

Earlier this month, former Treasury Secretary and White House economic adviser Larry Summers took a swipe at what he called “selfish and unconstructive” investors in Ukrainian bonds. Summers was indicating that Ukraine bondholders like Franklin Templeton should take a haircut. He said Ukraine’s creditors, which include Franklin Templeton and other major U.S. funds, are remaining anonymous and are refusing any debt write-offs so far.

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Mani is a Senior Financial Consultant. He has worked in Senior Management role in large banking, financial and information technology organizations. He has provided solutions for major banking and securities firms across the globe in the area of retail, corporate and investment banking. He holds MBA (Finance) and Professional Management Accounting Qualifications. His hobbies are tracking global financial developments and watching sports