+++ (BBG) Ukraine Defaults on $3 Billion Russia Bond as Court Battle Looms

(BBG – click to see) Ukraine defaulted on a $3 billion bond payment due to Russia, deepening a dispute over the debt as the two sides move closer to legal action.

Prime Minister Arseniy Yatsenyuk said Kiev is imposing a moratorium on the note due Dec. 20, which Russian President Vladimir Putin bought two years ago to bail out Ukraine’s former president just months before he was toppled. Russia said as recently as last week it would take Ukraine to court if the payment was missed.

The default comes after Russia refused to participate in an $18 billion restructuring with commercial creditors earlier this year, arguing it should receive better terms since it’s a sovereign lender. The two sides indicated this month that they’re open to negotiations to restructure the debt and have been using German officials to mediate indirect talks.

Yatsenyuk announced the payment freeze at a government meeting in Kiev on Friday, saying the step was needed after Russia “refused to sign an agreement on restructuring.” Payments are frozen “until our propositions on restructuring are accepted or until a relevant court decision is made,” he said.

The moratorium also applies to about $507 million owed to Russian banks by two state-run companies, according to Yatsenyuk.

Debt Agreement

The government in Kiev is barred from paying Russia back in full under the conditions of the agreement with private creditors and a $17.5 billion International Monetary Fund aid package secured this year to keep the country’s economy afloat. Under that deal, bondholders including Franklin Templeton accepted a 20 percent reduction to their principal holdings.

“A court case is the baseline scenario now,” Vadim Khramov, a strategist at Bank of America in London, said by phone. “An out-of-court restructuring is possible, but the only way to negotiate is to negotiate directly. I don’t see a simple solution coming from bilateral talks.”

Prior to today’s default, Russia had been softening its stance on the debt, with Putin proposing last month that Ukraine pay it back over three years so long as a Western government or bank provide a guarantee. That offer fell through earlier in December, and Russian Finance Minister Anton Siluanov said Dec. 16 an out-of-court settlement may be “impossible.”

Relations between Russia and Ukraine have deteriorated since the bond was sold as Putin annexed Crimea in March 2014 and supported a separatist rebellion in Ukraine’s easternmost regions that’s killed 9,000 people. Germany helped negotiate a fragile truce between the separatists, Russia and the government in Kiev that has held since September. Germany declined to immediately comment on the default.

Ukraine’s restructured dollar-denominated bonds stayed lower, with the yield on the debt due 2025 rising two basis points to 9.65 percent by 12:05 p.m. in Kiev. It’s heading for the fourth week of increases.