Ukraine's Russia debt threatens IMF rescue

WASHINGTON - A default by Ukraine on US$3 billion in debt to Russia this year could threaten the International Monetary Fund's lifeline to the embattled country, an IMF spokesman said Thursday.

The Ukrainian government has begun negotiations with creditors for $15 billion in debt relief, part of a $40 billion, four-year financial rescue envisioned by the IMF.

The Fund has approved a $17.5 billion loan to Ukraine as part of the package in exchange for the government's successful implementation of economic, budget and monetary reforms. It has disbursed an initial $5 billion payment.

But, the IMF has warned, the breakdown of a fragile ceasefire with pro-Russia rebels in the country's east, the failure to reschedule its debt with private lenders, or domestic political issues could all undermine the plan.

Kiev's debt includes $3 billion lent by Russia in 2010 to the previous Moscow-backed government.

An IMF rule could threaten continuation of the Ukraine aid programme. It bars the Fund from lending to a country that has defaulted on a loan in the "official" sector, that is, from a state or public institution.

"We have a non-tolerance policy," IMF spokesman William Murray told reporters at a regularly scheduled news conference.

Ukraine's debt to Russia should be considered state debt, he added.

"If I'm not mistaken, the $3 billion Eurobond comes from the Russian sovereign wealth fund, so it's official debt," he said.

In a sign of the sensitive nature of the topic, however, Murray clarified in a statement several hours later that the IMF had not officially determined its position on the matter.

If Russia refuses to renegotiate Ukraine's debt by the end of the year, Ukraine would be forced into default, putting the IMF in a delicate situation.

Questioned about this possibility, the IMF spokesman said "it's really too early to speculate on that."

There are potential ways to circumvent that scenario. The Russian loan could be renegotiated by the Paris Club of creditor nations or could be sold on the secondary market, making it no longer debt owed to Moscow.