Because Moscow is also conducting negotiations with its foreign creditors, a restructured Ukrainian debt could have implications for Russia’s external position. In many respects, the two countries are in very different situations. Until January, the Ukrainian government had not formally missed any payments on its obligations to foreign investors. This contrasts sharply with Russia’s handling of its creditors since the August 1998 financial crisis. Moscow in April 1999 rammed a unilateral restructuring of Russia’s domestic-currency debt down its creditors throats, leaving foreign holders of ruble government paper with only pennies on their dollar. Russia since August 1998 has either missed or restructured nearly all of its payments on obligations inherited from the Soviet Union. However, Moscow has gone out of its way to stay current on its Eurobond obligations, as well as make its payments to the IMF and World Bank. In effect, Russia has been most eager to avoid the situation that Ukraine is now facing: the restructuring of its post-1991 debt to private creditors.
Kyiv’s debt swap, should it go as planned, could cause Moscow to reconsider this prioritization and be more willing to risk a Eurobond default. But a successful Ukrainian swap could also put more pressure on Russia’s creditors to cut a deal with Moscow. Since the new Ukrainian bonds are expected to trade at 60 percent of their face value, holders of the old bonds would in effect be losing 40 percent of their original investment. Perhaps coincidentally, Moscow has pushed its London Club creditors to accept a 40 percent write-off of Russia’s Soviet-era commercial debt. The London Club banks have in return demanded that Russia replace these obligations with new Eurobonds. This too corresponds to the emerging Ukrainian model of “40 percent off in exchange for new Eurobonds.”
A Ukrainian debt swap, if it occurs, would also be a triumph for the so-called “bail in” approach to sovereign restructuring that has been advocated by the IMF and the Organization for Economic Cooperation and Development (OECD) governments since the August 1998 Russian financial crisis. OECD governments have objected to previous sovereign restructurings under which bail-outs for cash-strapped developing countries often meant the transfer of Western tax dollars (via the IMF) to these countries’ private creditors. The IMF made Ukraine into a test case for an alternative “bail in” strategy, under which Kyiv’s private creditors are being forced to take a 40 percent loss before Ukraine’s other creditors are made to feel any pain. This approach does not find much support in the banking community, which argues (not without reason) that “bail ins” will ultimately reduce the amount of lending available to developing countries. If the Ukrainian debt swap were to go awry, it could be because of general lender opposition to the “bail in” strategy, rather than the specifics of the Ukrainian swap itself.