Report: Russia wants fair rules on sovereign debt

MOSCOW, Dec 10 (PRIME) -- Imagine the Greek government had insisted that E.U. institutions accept the same haircut as the country’s private creditors. The reaction in European capitals would have been frosty. Yet this is the position now taken by Kiev with respect to Ukraine’s U.S. $3 billion Eurobond held by Russia, Finance Minister Anton Siluanov said in an article contributed to the Financial Times late on Wednesday.

In late 2013, Ukraine had been in recession for more than a year, its current account deficit was becoming unsustainable, its international reserves were barely enough to cover three months’ imports, and no other creditor was prepared to lend on terms acceptable to Kiev. Yet Russia provided $3 billion of much-needed funding at a 5% interest rate, when Ukraine’s bonds were yielding nearly 12%.

Russia’s financing was not made for commercial gain. Just as America and Britain regularly do, it provided assistance to a country whose policies it supported. The U.S. is now supporting the current Ukrainian government through its USAID guarantee program.

Because the loan came from our National Wealth Fund, which can only invest in securities, it was structured as a Eurobond. It is nonetheless an official credit, as the management and staff of the International Monetary Fund are widely reported to have acknowledged.

Longstanding international practice dictates that Russia’s official credit should have been afforded preferential treatment compared with private credits, and the same treatment as other official credits. Yet when Ukraine recently restructured its debt it treated Russia’s claim as a private credit, while excluding all other official credits (including USAID-guaranteed credits) from the 20% haircut and four-year maturity extension agreed with private creditors.

Russia has experience of accepted international practice. Following the August 1998 financial crisis, our private creditors wrote off more than one-third of their claims, while official creditors refused to accept any haircut. More recently, European authorities insisted that Greece’s private creditors accept an even larger haircut, but rejected Greece’s requests that its official creditors write-off a portion of their claims.

The IMF, which has long refused to lend to countries that are in arrears on payments to official creditors, earlier this week accelerated a change to this policy in advance of the December 2015 maturity date on our Eurobond. Russia has no desire to see the IMF curtail its funding program for Ukraine, but we are concerned that changing this policy in the context of Ukraine’s politically charged restructuring may raise questions as to the impartiality of an institution that plays a critical role in addressing international financial instability.

Official bilateral lending is an indispensable supplement to the IMF’s own funding efforts. If the IMF were to lend into arrears on Russia’s Eurobond, official bilateral creditors are likely to be reluctant to lend to sovereign borrowers that cannot access private markets, for fear that their public policy-motivated financing may be restructured with the claims of the debtor’s private, profit-seeking lenders. This is why the IMF has long refused to lend into official arrears.

It must be a core principle of IMF lending that a borrower may receive funding only if it negotiates in good faith with official creditors. Ukraine has not. In addition to refusing to treat Russia’s claim as an official credit, Ukraine has contractually committed in its new private-sector bonds not to repay Russia’s claim in accordance with its terms, and not to offer Russia an alternative having a value even equal to the package offered to private sector creditors.

In contrast, Russia has exercised considerable restraint in not accelerating its Eurobond – which could have seriously complicated Ukraine’s restructuring – even though Ukraine long ago breached its undertaking not to allow its debt to exceed 60% of its GDP. Russia has also proposed to defer our Eurobond, so that it would be repaid in three annual instalments of $1 billion in 2016, 2017 and 2018, with interest and a suitable western guarantee. The IMF has publicly called our proposal a “positive step”.

The international framework that has guided debtors, creditors and others in dealing with sovereign financial distress over the past 50 years has been successful in large part due to the work of the IMF. Its well-founded principles should be changed only after due consideration, and not in response to the politics of the moment.

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