Russia is digging in its heels on its $3 billion loan to Ukraine
Failure to agree on a restructuring of the debt could result in the Ukrainian government being unable to meet the conditions of its latest bailout package agreed with the International Monetary Fund. The agreement requires Ukraine to restructure at least $5.2 billion worth of its debt in 2015.
As AFP reported this morning, IMF spokesman William Murray told the press that "if I'm not mistaken, the $3 billion Eurobond comes from the Russian sovereign wealth fund, so it's official debt". Under IMF rules, it is unable to lend to countries that have defaulted on "official debt" meaning any attempt by the authorities in Kiev to force restructuring on Russia could threaten its $17.5 billion rescue package.
Earier today Russian finance minister Anton Siluanov confirmed that the Russian loan would indeed be classified as "official debt" and said that the country was still not ready to restructure the debt "because [Russia] itself is in a difficult situation."
Unfortunately, the Russian loan accounts for a huge chunk of the debt repayments owed by Ukraine this year meaning that its options to find cuts elsewhere are limited:
This leaves the Ukrainian government in an almost impossible situation - either try to change Russian minds, convince the IMF to shift the conditions of its already contentious bailout package (it is highly unusual to provide funds to countries undergoing a civil war), or seek to inflict even deeper losses on private bondholders.
The $3 billion loan was negotiated in 2013 by the previous government under President Viktor Yanukovych, who fled the country following huge anti-government protests on the streets of the Ukrainian capital Kiev. It stipulated that Ukraine had to keep its national debt below 60% of its GDP - a condition that the country has clearly breached as a civil war has hammered state finances and driven the country into a deep recession.
This has given Moscow the ability to recall the loan whenever it sees fit, acting as a sword of Damocles over the head of the authorities in Kiev.
Following Yanukovch's departure, pro-Moscow separatists in the eastern regions of Donestsk and Luhansk took up arms against the new government and declared independent republics. The rebels are widely considered by the international community to be supported by President Vladimir Putin and both the European Union and the US have imposed economic sanctions on Russia in response.
Yet despite their involvement in the conflict, Ukraine has so far been unable to work its way out from under the yoke of its debt obligations.