CI VIEW China threatens to default Ukraine grain company after Russia-Ukraine food shipment deal UPDATE

Reykjavik, Iceland (CI Ukraine) [Update on August 10, 2022 to include the news that creditors accepted the rescheduling of $20bn of Ukraine soveregin bonds after PIMCO voted in support of Ukraine 2022 series] — China’s Export and Import Bank is threatening to force the default of $1.5bn loan to the State Food and Grain Corporation of Ukraine (SFGCU) just days after the Russian and Ukrainian government agreed to re-open grain and food shipments to Africa.

“China Exim Bank is playing hardball and are threatening to send a default note on their loan,” a banker close to the situation said.

[Capitol Intel/CI Ukraine with Federal Reserve Chair Janet Yellen at World Bank IMF Spring Meetings on April 11, 2014]

The banker said the Ukrainian government is seeking a two-year freeze on some $19.5bn in debt payment with the world largest private investors along with $5bn held by the Paris Club and G-7 nations.

China’s Exim Bank threat to derail the debt rescheduling comes after Ukraine’s Naftogaz, the national energy company, was forced into default on Tuesday after creditors refused to a two-year freeze on debt payments.

Myron Wasylyk, the American advisor to Naftogaz CEO Yuri Vitrenko, said the company went into default after the government did not give its consent for Naftogaz to pay-off most recent bond coupon.

“We wanted to pay the coupon. The government wanted us to delay payment and bondholders didn’t approve the delay,” Waslylk said.

However, sources close to Ukraine Finance Minister Serhiy Marchenko said that Ukaine government did not want Naftogaz to repay outstanding bond debt when it was asking for a two-year postponement on the payment of $20bn of government debt.

The approval of a rescheduling of the $20bn Ukraine bond debt is being threatened by the refusal of Germany’s Allianz AG owned US asset manager, PIMCO whose emerging market co-chair, Yacov Arnopolin, is refusing to sign off on the debt agreement supported by the US Treasury Secretary and G-7 leaders, the sources said. The deadline for an agreement is 6pm New York time.

The sources said they have agreement of 67% bondholders, but lack 50% quorum on the 2022 series which PIMCO holds the deciding vote.

PIMCO’s refusal to sign off on the Ukrainian debt surprised Kiev and the government officials are trying to arrange a call between Minister Marchenko and PIMCO CEO Emanuel Roman.

“It is shocking a US investment fund like PIMCO would refuse. It was VR Capital Group of [former Moscow-based Renaissance Capital] Richard Dietz and Bernstein that put Naftogaz in default,” a Kiev source said.

However, at around 5pm New York time [August 9, 2022], PIMCO told Kiev that it will support the debt rescheduling agreement after news reports from Capitol Intelligence/CI Ukraine created a panic within PIMCO.

Today [August 10, 2022] at about 11:30 am EDT Ukraine cancelled the 48 hour extension as it meet the 67% threshold for total bond amount and after PIMCO voted to suport the postponement on the Ukraine 2022 series, the sources said.

China’s threat to scuttle a debt postponement — on a loan originating under the government of Russian-backed kleptocratic president Victor Yanukovych in 2012 – will with a doubt further complicate the food shipment deal between Ukraine and Russia initiated by Italian Prime Minister Mario Draghi and overseen by Turkish president Recep Tayyip Erdogan.

Just hours after Ukraine and Russia signed agreement with Turkey and the United Nations to restart grain shipment to Africa that the Russian military launched missile attacks on Ukraine’s main agriculture transshipment port, Odessa.

The Russian missile attack on Odessa also raised questions whether the Kremlin’s most hawkish advocates of the war are purposely undermining Russian president Vladimir Putin, especially as the grain for Africa deal has been the only sign of détente between Ukraine and Russia since the start of hostilities.

The Russian missile attack on Odessa seriously risked expanding the current conflict by inflicting damage on an important US owned asset, the Neptune deep water grain port operated by America’s largest food conglomerate, the Minneapolis, Minnesota-based Cargill Corporation.

In July 2021, Cargill took over a 51% stake in Neptune at Port Pivdennyi on the northern outskirts of Odessa.

The port, which transported up to 10% of Ukraine;s total grain exports, was part of total investment of circa $150m backed by the World Bank’s International Finance Corporation and the European Bank for Reconstruction and Development (EBRD).

By PK Semler in Reykjavik, Iceland. For more information, please email pks@capitolintelgroup.com

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