January 20, 2016 / 1:12 PM / 2 years ago

Ukraine finance minister says Russia bond restructuring can differ from private sector swap

DAVOS, Switzerland (Reuters) - Any out-of-court deal to restructure Ukraine’s $3 billion debt to Russia must deliver the same economic effect for Kiev, though its format would likely differ from last year’s private sector debt swap, Ukraine’s finance minister said on Wednesday.

Speaking to Reuters on the sidelines of the World Economic Forum in Davos, Yaresko said she remained optimistic about the possibility of reaching an agreement with Moscow, even though the Kremlin has pledged to file suit against Kiev for non-payment of the bond which matured last month.

“Unfortunately the Russian delegation wasn’t able to meet us in Davos but I am always an optimist. We have a good track record of finding consensual agreements ... it’s the preferable way for all of us,” Yaresko said.

She said however that an agreement with Russia had to be consistent with the International Monetary Fund’s loan program to Kiev which envisaged saving $15.2 billion over four years via restructuring debt, and also must fit with the terms of the Eurobond restructuring that Ukraine conducted last year.

“That means no better arrangement can be done, it doesn’t mean it has to be identical (to the Eurobond restructuring). It has to have the same net economic effect,” Yaresko said. “By definition it will be different technically but we must end up with the same net present value.”

Ukraine last August reached a deal with a group of funds, including Franklin Templeton, to allow them to swap existing bonds for higher-yielding, longer-maturity debt as well as receiving future payments linked to Ukraine’s economic growth.

But, with bilateral relations still in crisis over Moscow’s annexation of Crimea in March 2014 and its backing for separatist rebels in eastern Ukraine, Russia has refused to participate in the restructuring, arguing its debt should be classed as bilateral rather than commercial.

Ukraine’s loan deal with the IMF has not been endangered as the lender has changed its rules to allow funding to governments that are in arrears on bilateral debt.

Yaresko said she expected to receive the third loan tranche in February, after the passage of the 2016 budget in December, though she ruled out the possibility, suggested recently by the central bank, that the third and fourth tranches could be disbursed at the same time.

There was no possibility of quitting the IMF program as many Ukrainian politicians have suggested, she said.

Some lawmakers say the reforms promised to the IMF are too painful, arguing the Ukrainian economy does not urgently need more cash from the Fund and would fare better without the austerity mandated by the IMF program.

Their opposition almost derailed the draft budget and many reforms are still pending.

“Over 23 years we had a tradition of beginning and not completing programs,” Yaresko said, noting Ukraine’s near-bankrupt state when the current government took over.

Yaresko said Ukraine would stay the course with reforms recommended by the IMF and was optimistic about the outcome.

“Ukraine has shown and continues to show that when push come to shove on every major reform effort we are able to build a large enough coalition whether on the budget, debt restructuring, the legislation that went through in the fall.. We have a fragmented political system but it’s democracy at work,” she added.

Tough reforms are already helping turn the economy around, Yaresko said, adding she was sticking to forecasts that Ukraine’s economy would grow this year after two years of recession.

But she admitted the global economic slowdown could affect the original prediction of 2 percent growth in 2016.

“The expectation is to see positive growth this year. Of course slowdown globally will affect us, however we still believe we will see positive growth this year if we continue the reform process,” she said.

Asked if 2 percent growth looked plausible she said:

“That was last year’s estimate. We are constantly reviewing our estimates, I’d say somewhere in that region.”

However, she said reduced trade links with Russia following a trade embargo, mean Ukraine is now less exposed to the fall in Russia’s rouble which sank on Wednesday to new record lows against the dollar

Reporting by Sujata Rao; Editing by Richard Balmforth

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