On December 8 the International Monetary Fund essentially allowed Ukraine to default on Russian debt by changing the rules of a game for the first time in 25 years.


Until 2015, Washington was relentless: pay up everyone or don’t come knocking on our door. Kyiv’s negotiating position was significantly bolstered as the IMF is now willing to deal with states that have defaulted on sovereign, but not on private creditors.


Ukraine indeed defaulted on a bond issued by its former President, Viktor Yanukovich, on December 20th, 2013. Ukraine demanded a 20% haircut on Russian debt that is no smaller than what private creditors accepted, but Russia would not badge because indeed its debt was “bilateral.” The Kremlin reacted. Russia’s Finance Ministry announced on December 31st that it is filing a lawsuit against Kyiv for its failure to service its $3 bn bond to Russia. Litigation will be pursued in London, but Russia’s Finance Minister, Anton Siluanov, specified that dialogue with Kyiv is ongoing. In “good will” Russia has not triggered a provision in their bilateral treaty calling for immediate repayment outstanding debt when Ukraine’s passes a 60$ debt/GDP ratio.


So, now sovereigns that owe sovereigns have a better negotiating hand. What is unknown is the spillover of this decision. On that very question, Gary Kleiman of Kleiman International suggested in article article published by the intellinews.com site that both the Eurozone and China could experience a spillover effect.


One of those who stand to lose from the IMF’s decision, besides Russia, is China. Beijing has extended loans to many Central Asian sovereigns and other emerging economies, including Mongolia, Tajikistan, and Uzbekistan. IMF’s policy means there is an available credit line of last resort in case of default, since China is not a member of the Paris Club (nor India and Brazil).


Another spillover effect could be the Eurozone: in Greek bailouts, the bilateral contribution by EU member states is 75% versus 25% by multilateral institutions, like the IMF, the ESM, and the ECB. Like Russia, creditors to Greece and Latvia are Paris Club members, but China maybe already thinking of its own club.


New Europe