Powered by Guardian.co.ukThis article titled “Ukraine refuses to repay $3bn loan owed to Russia after bitter row” was written by Phillip Inman Economics correspondent, for The Guardian on Friday 18th December 2015 18.22 UTC

Ukraine has refused to repay Russia a $3bn (£2.01bn) loan after a bitter row that could put on hold Kiev’s plans to restructure its growing debt with international creditors.

The Ukrainian government rejected a Kremlin proposal for repayments in three tranches of $1bn, putting the entire amount on the path to default.

Moscow reacted angrily to the move and threatened to sue for the return of its funds, lent to the former president president, Viktor Yanukovych, who was ousted in February last year.

The loan repayment is due on Sunday but Ukraine has another 10 days from then to sign a deal before an official default is triggered, but after an eleventh hour attempt by Germany to broker a deal failed, the two sides appeared on a collision course.

“Since Russia has refused, despite our repeated efforts to sign a restructuring agreement … to accept our proposals, the cabinet is imposing a moratorium on repayment of the so-called Russian bond,” Arseniy Yatsenyuk, Ukraine’s prime minister, said in a government meeting.

He also said Ukraine would cancel payments on $507m of Ukrainian commercial debt held by Russian banks.

The moratorium would be in place “until the acceptance of our restructuring proposals or the adoption of the relevant court decision … We are prepared for court action from the Russian side,” he said.

Ukraine blamed the Kremlin for scuppering a deal after Moscow’s negotiators refused to join a creditors club organised by the International Monetary Fund (IMF), which has lent Kiev $17.5bn.

Ukraine has been at loggerheads with Vladimir Putin for almost two years over accusations he is financing rebel soldiers in the east of the country.

This week, Nato’s top civilian official renewed calls for Russia to remove troops from eastern Ukraine, citing Putin’s recent admission that it had military advisers in the region.

Vladimir Putin: there is Russian military presence in Ukraine.

Jens Stoltenberg, the Nato secretary general, said it was clear Russia had soldiers in the region and they should be withdrawn under the terms of the peace deal it helped broker in February.

Ukraine’s parliament, which has descended into fistfighting during several heated debates this year, has repeatedly called on Moscow to relinquish Crimea, which voted to join the Russian federation in an election Kiev says was rigged.

The dispute is further complicated by fears that Ukraine is heading for a wider default after the parliament rejected a new tax code and the draft 2016 budget, both considered essential elements of the restructuring demanded by the IMF as the price of its loan.

The Ukrainian leadership has also watched warily as developments in Syria and the refugee crisis have forced Europe to consider Putin as an ally, downgrading concerns over Crimea and the simmering tensions in Donetsk and other eastern regions.

A proposed gas pipeline from Russia to Germany that would bypass Ukraine and which European commission officials have said appears to break EU rules, has also raised tensions.

Ukraine included the two-year bond in its external commercial debt, but Russia has refused to accept the terms it has offered, arguing that the bond was an official bilateral loan.

Kiev’s finance ministry said it was still committed to negotiating a restructuring agreement in good faith with Russia.

Russia is an official creditor under international agreements, which means that to qualify for more lending from the IMF, Ukraine must show it is open to negotiating in good faith.

William Jackson, an emerging markets analyst at Capital Economics, said the implications of the moratorium were unclear.

“According to a recent decision, the IMF can continue to lend to countries in arrears to official creditors ‘subject to the debtor’s good faith efforts’ to reach a deal. The Ukrainian authorities have claimed that they have already done so, and are prepared to continue in a similar vein. But it’s not difficult to envisage any debt talks breaking down,” he said.

“Given this, as well as the IMF’s concerns voiced today about parliament’s rejection of the new tax code and 2016 budget, there seems to be a growing risk that the country’s bailout could be put on hold.”

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