Ukraine announced today it would not make payment on its USD 3 billion debt to Russia due this weekend, deepening a row with Moscow which said it would take Kiev to court.
The announcement essentially confirmed that Kiev will default on the bond come Sunday and unleash a protracted legal battle, though the immediate implications for its much-needed bailout package from the International Monetary Fund were unclear.
Speaking at a government meeting, Prime Minister Arseniy Yatsenyuk said that Ukraine "is imposing a moratorium on repaying the so-called Russian debt."
"From today we are halting payments on this debt," he said. "I stress, once again, that we are ready for a legal process with the Russian side."
Russian President Vladimir Putin last week ordered his government to sue Ukraine if it defaults on the bond, after Moscow said that Kiev has rejected its offers of debt restructuring.
Ukraine's default "could obviously complicate Ukrainian access to international financial markets", although it was difficult to tell to what extent, said Oleg Kuzmin, the economist in charge of Russia at the CIS at Renaissance Capital investment bank.
Moscow and Kiev have been locked in a bitter showdown over Russia's USD 3 billion loan granted to the pro-Moscow regime of ex-president Viktor Yanukovych in December 2013, not long before he was ousted and fled to Russia.
Ukrainian authorities insist that it is not a sovereign loan by one state to another, but rather a transaction made via the financial markets and subject to terms agreed with other creditors.
Kiev had reached a restructuring deal in August with its private creditors - including major banks and investment funds - who agreed to a 20 per cent cut in their claims.
Moscow however maintains that the loan cannot be considered private debt and has refused such conditions, instead offering to spread out the payment over three years and asking the IMF to pitch in.
The IMF this week agreed with Moscow that the bond consists of an official loan.
"Russia has refused, despite our repeated attempts to sign the agreement for restructuring, to accept our proposals," Yatsenyuk said.
Cash-strapped Kiev is in dire need of further international funding and was required by the IMF to restructure a total of USD 15.3 billion of debt to unlock the next installment of the USD 17.5 billion aid package.
