Vladimir PutinREUTERS/Grigory DukorRussia's President Vladimir Putin (R) greets veterans after the Victory Day parade at Red Square in Moscow, Russia, May 9, 2015.
President Vladimir Putin is warning that he could call in Russia's $3 billion loan to Ukraine at any time, a move that would spark a stand-off with the International Monetary Fund (IMF).
Under the terms of the original 2013 deal, negotiated with then President Viktor Yanukoych who fled the country last year following massive anti-government protests, Ukraine had to keep its national debt below 60% of GDP. That condition has now been clearly breached allowing Moscow to recall the loan at any time.
On Wednesday Putin explained the reasons why his government is yet to do so: "However, by the request of our Ukrainian partners and the IMF, we do not use this right. We do not want to aggravate further the difficult economic situation of our partners and neighbours."
Yet the recent passing of a bill by the Ukrainian government that would allow the country to impose a moratorium on foreign debt payments may force the Kremlin to rethink this position.
That puts the IMF into something of a bind. It is both asking Russia not to call in its loan while also pushing Kiev to renegotiate it.
In March, the IMF released details of its $17.5 billion rescue package, including an economic reform programme. It included what they are calling "debt operations", but what most of the outside world would call debt restructuring whereby the country either imposes losses on bondholders or extends the repayment deadline.
Except here's the problem — one of the biggest payments due in 2015 is a $3 billion loan from Moscow:
Anna Gelpern, a law professor at Georgetown University and expert in the subject, calculates that Russia's debt will have to be included if the Ukrainian government is going to hit the IMF's target of $5.2 billion worth of restructuring in 2015, according to the Financial Times.
And that, in turn, could become a huge problem for the IMF. Under IMF rules, it is unable to lend to countries that have defaulted on "official debt" meaning any attempt by the authorities in Kiev to force restructuring on Russia could threaten its $17.5 billion rescue package.
Kiev is claiming that the Russian deal is a private loan that would be subject to its moratorium bill. Moreover, the wording of the moratorium bill leaves little doubt over how it views debts taken on by the previous administration: "The government has the right… not to return loans borrowed by the Yanukovich kleptocratic regime."
That, however, does not appear to be the view of its partners.
IMF spokesman William Murray told the press in March that "if I'm not mistaken, the $3 billion Eurobond comes from the Russian sovereign wealth fund, so it's official debt". However, the Fund later clarified those comments to state that "no determination has been made by the Fund as to the status of this claim."
So that's as clear as mud then.
Unsurprisingly, Russian finance minister Anton Siluanov believes that the Russian loan should indeed be classified as "official debt" and said that the country was still not ready to restructure the debt "because [Russia] itself is in a difficult situation."
As Putin made clear today, that is still the case as far as Russia is concerned.
So what can Kiev do?
FT Alphaville's Joseph Cotterill points to one possible loop-hole. In the small print of the loan agreement, the wording surrounding which "fiscal or other laws and regulations" the contract falls under leaves out a crucial line regarding "the place of payment".
Russia’s claims are two-year bonds issued in December 2013 and governed under English law, but that's not clearly stated in the document itself. This means that the Ukrainian government could attempt to claim that the loan falls under the country's own "laws and regulations" and adjust those accordingly in order to allow for a restructuring of the debt (or at least, it provides sufficient ambiguity for them to make the case).
There is even a question as to whether the loan itself broke guidelines governing what Russia's sovereign wealth funds can invest in.
But that avenue is only credible insofar as the IMF views the Russian loan as private, not official debt. And that's not been a clear message coming from them to date.
Any reversal of its position could seriously jeopardise its relationship with Moscow, which has held off calling in the loan to date at the Fund's request.
In other words, the IMF has dug itself a hole and it's not at all clear how it gets itself out of it from here unless Moscow unilaterally decides to back down on its demand for repayment in full and on time. Putin's intervention today suggests they are nowhere near that point just yet.

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