- - Friday, October 2, 2015

After completing a grueling debt renegotiation with its international creditors, Ukraine still has a large mountain to climb solving the problem of the $3 billion bond with Russia, which was executed by the Yanukovych government prior to the Maidan revolution. Although Russia has stated publicly the only deal they will take is to be paid back in full by the new government in Kiev, Ukraine is hopeful that as talks progress later this month, there may be some flexibility in that position.

The current agreement forces creditors to take a 20 percent principal haircut. In return, they will receive a slightly higher coupon and GDP warrants in the out years if certain growth targets are met. The goal of the Ukrainian Finance Ministry was to ensure that Ukraine does not have to come back to the table again with its hand held out. Authorities wanted a permanent fix, according to sources I discussed the issue with in Kiev.

The issue of the single $3 billion bond issued to Russia alone is complicated. Russia, of course, believes the bond should be treated as “official” debt and therefore cannot be restructured, as it was negotiated between then-President Yanukovych and Russian President Putin. Ukraine officials certainly feels otherwise. They see the deal as a bribe from Russia to the former Ukrainian regime to ensure Ukraine did not move closer toward the EU. Currently there is a debate within the International Monetary Fund (IMF) over this exact point.

The final resolution will be critical to the outcome of the Russian bond. “It is being debated,” my Ukrainian source said with a smile. “We will see what the Russians have to say later in October during the scheduled first meeting on this issue.”

To Ukraine, Russia is playing a weak hand and could be risking receiving nothing in return. Per the Ukrainians, they simply don’t have the money to pay the bond back in full. Russian authorities, I am sure, see their position as much stronger. They hold the cards to Ukrainian gas supplies and control the tempo of the now-subsiding war in East Ukraine.

We will see who is the better negotiator.

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