Russia is threatening to call in its $3 billion loan to Ukraine early in a move that could push the war-torn country into default.
Last week Russian Finance Minister Anton Siluanov announced that Ukraine had breached the terms on the loan that was agreed between Moscow and then Ukrainian President Viktor Yanukovych, who fled the country following mass protests in the capital Kiev last year.
Under the terms of the deal, Yanukovych had agreed to cap Ukraine's national debt at 60% of GDP. However, the ongoing civil war in the east of the country and a stand-off between its two major trading blocs in Russia and the EU its debt ballooned to around 72% of GDP in 2014 and could reach over 80% this year.
Moscow is now threatening to force Kiev to repay the loan early in a move that one analyst says would make some form of debt restructuring or default a "foregone conclusion", according to Bloomberg.
The timing couldn't be worse. Ukraine is set to hand over $19 billion over the next three years ($7.5 billion in 2015, $4.7 billion in 2016, and $6.6 billion in 2017) in debt payments that its ailing economy can ill afford.
Bank of America Merrill LynchUkraine debt repayment schedule.
Indeed its economic crisis has become so deep that at the end of last year the International Monetary Fund (IMF) identified a $15 billion shortfall in government funding that will need to be plugged "within weeks," according to the Financial Times. That figure comes on top of the $17 billion programme that has already been arranged by the IMF.
The initial deal was deemed sufficient to ensure that the immediate funding needs of Ukraine would be met and, once the country had stabilized government debt would be left on a sustainable footing.
These forecasts now look wildly optimistic. The government in Kiev has effectively lost control of regions accounting for some 16% of Ukraine GDP to rebels, while the costs of fighting continue to mount.
And the country is running out of money.
The US has agreed to up to $2 billion in additional loan guarantees to Ukraine — conditional on it meeting the conditions of the IMF programme — but whether it will be enough to prevent a major debt restructuring (whereby creditor countries agree to extend their loans over a longer time period or waive some of the interest owed on the debt) or a default remains to be seen.
The sword of Damocles currently being held over the government's head by Moscow will not be helping to encourage other countries to help.
Russian Prime Minister Dmitry Medvedev says a decision on whether Moscow will recall the loan early will be taken "soon". That will be scant comfort to those trying to prevent the crisis in Ukraine from getting even worse.
Read more: http://www.businessinsider.com/russia-could-drive-ukraine-bankrupt-by-calling-in-3-billion-loan-2015-1#ixzz3P03SYogv
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