KIEV/MOSCOW (Reuters) - Ukraine and Russia appear all but certain to take their dispute over a $3 billion Eurobond to court after Ukraine said it would not repay the bond when it matures next week, prompting Russia to cry default and say a legal battle was now on the cards.
Ukraine has included the two-year bond which matures on Dec. 20 in external commercial debt it is restructuring to shore up its war-torn economy.
But Russia, whose political relations with Ukraine are at rock bottom, has refused to accept these terms, insisting the bond is an official country-to-country loan, not commercial debt.
Prime Minister Arseny Yatseniuk said on Friday that Ukraine would not repay the Eurobond when it matures and that Kiev was geared to fight the issue in court.
A moratorium on repayments would be in place “until the acceptance of our restructuring proposals or the adoption of the relevant court decision ... We are prepared for court action from the Russian side,” he said.
The finance ministry in Kiev said it was still committed to negotiating a restructuring agreement in good faith with Russia, but the Kremlin said the moratorium sent a clear message.
“This is the recognition of their default,” Dmitry Peskov, spokesman for Russian President Vladimir Putin, told reporters on a conference call. “Effectively, there are only legal prospects now.”
The Eurobond in question was issued by the government of former President Viktor Yanukovich just two months before he fled in the face of bloody street protests triggered by him seeking to halt Ukraine’s swing toward European integration in favor of closer economic ties with Russia.
After he fled, Russia annexed Ukraine’s Crimea in March 2014 and threw its backing behind a rebellion by separatists in eastern Ukraine.
Russian Deputy Finance Minister Sergei Storchak said Ukraine’s decision on the moratorium was not a surprise.
“We have expected these actions - looking at the line of conduct that the Ukrainian authorities have exercised in the last six months,” Storchak told journalists.
He said Ukraine’s move would not influence Russia’s intention of taking Ukraine to court once the 10-day grace period on the debt payment expired.
Storchak said Ukraine had no chance of winning in court. But he added that he saw no point in Russia demanding that the International Monetary Fund halt its aid program to Ukraine even if Moscow lost the legal battle.
“Ultimately, the problem of any lender is that he is interested in the economic growth of its borrower,” he said. “Without growth - credits are not returned.”
Ukraine’s finance ministry sounded a more conciliatory note than Yatseniuk, saying in a statement: “Ukraine remains committed ... to negotiating in good faith a consensual restructuring of the December 2015 Eurobonds.”
Ukraine must show it is open to negotiate with Russia on restructuring in order to qualify for more lending from the International Monetary Fund.
Russia’s position was bolstered on Thursday after the IMF said it also classified the bond as official debt. But the Fund has balanced this by changing its policy to allow it to keep lending to countries in arrears on repayments of such debt, effectively throwing Ukraine a borrowing lifeline.
Kiev must also show that it is “pursuing appropriate policies” to continue receiving support under its $17.5 billion IMF bailout program. On Friday the IMF warned that the program was under threat from apparent rejection by parliament of critical tax amendments and the draft 2016 budget.
Ukraine’s messy politics and the threat of a court battle with Russia are prompting many fund managers to sell out of Ukraine’s bond market.
Reporting by Natalia Zinets in Kiev; Darya Korsunskaya and Alexander Winning in Moscow; Writing by Alessandra Prentice and Lidia Kelly; Editing by Richard Balmforth