Fri Sep 26, 2014 5:51am EDT
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By Lidia Kelly and Alexander Winning
MOSCOW, Sept 26 (Reuters) - Ukraine's claims that a $3 billion Russian bailout was illegal are baseless, Russia's VTB bank said on Friday, as Russia warned that it may demand earlier repayment of the bonds in question, raising concerns of a broader Ukraine default.
On Thursday, the Ukrainian security service opened a criminal case over a Eurobond that Moscow purchased in December, alleging abuse of office by Ukraine's former finance minister and violation of the budget law in organising the sale.
Russian Finance Minister Anton Siluanov told Reuters that Kiev was trying to do everything either to invalidate the sale or not to repay its debts. He warned Moscow may ask for the cash soon if official data prove one of the bond's conditions is broken
This could threaten Ukraine's fiscal stability and hurt hopes of an improvement in relations between the two neighbours, now at their lowest point in post-Soviet history.
"This would be a major complication all around, and just underscores that Russia continues to be less than constructive in its approach towards Ukraine," Timothy Ash, head emerging markets strategist at Standard Bank in London, wrote in a note.
The sale took place before Ukraine's former President Viktor Yanukovich was ousted from office in February, spurring a violent conflict in the eastern part of Ukraine.
Kiev alleges as well that the placement of the bond includes an illegal transfer of a $450,000 fee to VTB Capital.
"Claims made by the Ukrainian authorities that the placement of USD 3 billion in bonds was carried out illegally are completely baseless," VTB, the mother company of VTB Capital, said in a statement on Friday.
"The placement was carried out in full accordance with English law and applicable Ukrainian legislation,"
CURIOUS CLAUSE
Investors in Ukraine's dollar debt have been worried for weeks that President Vladimir Putin could use a clause in the bond's conditions to trigger broad defaults across Kiev's sovereign Eurobonds..
The clause stipulates that the "total state debt and state-guaranteed debt should not at any time exceed an amount equal to 60 percent of the annual nominal gross domestic product (GDP) of Ukraine".
Siluanov said that based on unofficial statistics and the hryvnia's devaluation, the threshold has already been crossed, possibly giving Moscow the right to demand early repayment.
The hryvnia, according to calculations by Reuters, has lost almost 36 percent against the dollar since the start of the year.
But Siluanov said the ministry will wait until official data on government debt comes out before making a final decision on the course of action.
"This suggests that Russia might look to trigger the covenant earlier (than previously expected), hence trying to force a broader Ukrainian default due to cross default clauses." Ash said. (Reporting by Alexander Winning; Writing by Lidia Kelly, Editing by Jason Bush and Angus MacSwan)
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UPDATE 1-Russia's VTB calls Ukraine claims on debt illegality "baseless"
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