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Ukraine to Make Good on Russian Debt as $3 Billion Bond Owed

March 20 (Bloomberg) -- As much as Ukraine protests Russia’s military intervention, the country has no plans to renege on a debt with its neighbor.

Ukraine will make good on payments on the $3 billion loan it received from Russia in December, 10 weeks before President Vladimir Putin dispatched soldiers into the Crimea peninsula as part of his push to annex the region, a Finance Ministry official in Kiev said yesterday. The first interest payment on the loan, which was granted in the form of two-year Eurobonds, comes due in June.

“Ukraine will pay its debts as it has been doing before,” Denis Khristoforov, an official in the sovereign debt department at Ukraine’s Finance Ministry, said in a telephone interview. The Russian obligations are “Eurobonds, no matter that there is only one debt holder. If we do not pay it will mean de-facto a default. Ukraine doesn’t want that. We will pay our debts.”

Part of the problem for Ukraine, which is seeking aid from the International Monetary Fund, European Union and U.S. to shore up its economy, is that a halt in payments on the Russian notes could trigger a clause that sinks its other overseas bonds into default as well. Those securities rallied after Khristoforov’s comments, driving down the yield on the benchmark dollar bonds due April 2023 by the most in two weeks. Russia’s Finance Minister Anton Siluanov said today he doesn’t plan to demand early repayment of the securities.

‘Tough Realities’

Ukraine’s government “will have some tough realities and tough medicine to swallow,” Michael Roche, a credit analyst at Seaport Global Holdings LLC, said in a telephone interview yesterday. “It has to make good on contractual obligations. That will include the bilateral debt that was structured as a bond issue due to Russia. You don’t want to start going down the road of discriminating between foreign creditors.”

Russia had bought the $3 billion of bonds in what was supposed to be the first installment of a $15 billion bailout package aimed at luring the country away from closer ties with the EU. Russia halted the aid program after Ukrainian President Viktor Yanukovych, a Putin ally, was ousted last month amid the worst Kiev protests since the country gained independence from the Soviet Union in the 1990s.

Putin said March 18 he will annex Crimea after citizens in the region voted in a disputed referendum to secede from Ukraine, ratcheting up tensions in a stand-off with the West.

‘Immediate Issues’

Andriy Parubiy, head of the National Security Council in Ukraine’s interim government, said yesterday the country ordered the removal of its military from Crimea and plans to seek compensation for assets that Russia has seized in the peninsula. While Putin has vowed not to send in troops beyond Crimea, Parubiy said Ukraine will strengthen deployments along its eastern border with Russia.

He called on the Kremlin to also remove its troops from Crimea, saying Russia was seeking to “politically destabilize” the country and hinder presidential elections.

“Ukraine is dealing with more important and immediate issues than Russian Eurobonds at the moment,” Andrey Popel, director of central, eastern and peripheral Europe at New York- based hedge fund Greylock Capital Management LLC, said in a telephone interview yesterday. “The expectation is that Ukraine will act in a market friendly way.”

‘No Grounds’

Ukraine, facing $10 billion in foreign debt payments this year, doled out 977 million hryvnia ($96 million) to service domestic obligations yesterday, the Finance Ministry said. The price of the country’s dollar bonds due 2023 gained yesterday, cutting yields 0.36 percentage point to 10.42 percent. The rate increased to 10.44 percent today, compared with a low of 8.85 percent reached after Russia pledged the bailout in December.

The hryvnia weakened 1.8 percent to 10.35 per dollar by 2:10 p.m. in Kiev, extending its slump this year to 20 percent, the worst among all currencies tracked by Bloomberg.

While the conditions that would trigger an early redemption clause in the bonds may already exist, Russia doesn’t plan to call in the notes, Deputy Finance Minister Sergey Storchak said yesterday, according to state-run Prime news service. Ukraine is scheduled to make a $73 million interest payment on the bonds in June, data compiled by Bloomberg shows.

“We understand the difficulties,” Siluanov told reporters at a business lobby meeting in Moscow today. “There are no grounds for early repayment yet.”

Debt Covenant

A covenant on the securities allows immediate payment in the event Ukraine’s public debt tops 60 percent of gross domestic product, compared with 40 percent last year, according to the government’s bond prospectus. If Russia absorbs Crimea, it would reduce Ukrainian GDP by about 3.7 percent.

“Ukraine should of course honor its debt no matter who is holding the bonds,” Lutz Roehmeyer, a money manager at Berlin- based LBB Invest overseeing $1.1 billion of emerging-market debt, including notes from Ukraine, said in an e-mailed response to questions. “I hope both countries will recognize they are mutually intertwined and dependent on each other.”

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