Is Putin Going Soft on Ukraine?

At the G20 summit today, Vladimir Putin appeared to make a big concession to Ukraine by announcing that Russia would be willing to restructure Kyiv’s upcoming $3 billion debt repayment on a bond coming due December 20. Putin offered to free Ukraine from all payments this year, and instead have them pay $1 billion in 2016, 2017, and 2018 instead.

Ukraine and Russia were set to face off in a London court over the bond, which was bought by Moscow from Kyiv as a reward for former President Viktor Yanukovych’s rejecting the EU Association Agreement in December 2013. The cravenness of Yanukovych’s maneuver eventually led to his ouster, as street protests by outraged citizens brought his government down.Ukraine has been playing chicken over the bond repayment since the end of August, threatening to default if Russia did not accept the write-down terms Kyiv had negotiated with its other bondholders, led by Franklin Templeton. Russia, for its part, has been refusing, claiming the bond amounts to sovereign debt and is thus qualitatively different from the debt featured in the restructuring deal. This turns out to be a significant distinction, since the IMF has an explicit policy of not lending to countries with outstanding sovereign debts.So what’s going on? Is this evidence, as some journalists seem to think, of Putin easing up in a bid to play nice with the West? Probably not.For one, Putin was on the verge of losing significant leverage over Ukraine, as the IMF was considering rewriting its “lending-into-arrears” policy to allow for Ukraine to safely default. Reports are that the IMF “welcomed” Putin’s offer, and was now kicking the ball into Ukraine’s court. This doesn’t of course mean that the IMF’s rewriting its policy is off the table, but it does keep the pressure up on Kyiv.For another, though Russia is giving way on the payment schedule, it is insisting that there be no write-down on the principal of the loan. This could cause problems for Kyiv with the Franklin Templeton-led consortium, which may well start insisting on a better deal for itself. The existing deal took many months of brinksmanship to negotiate, and it explicitly stipulates that a better deal can not be offered to any holdouts.Finally, Putin appears to be insisting that the EU, the United States, or some other global institution guarantee the repayment of Ukraine’s loan in exchange for the term extension: Put up or shut up, he seems to be saying.In short, it appears to be a shrewd strategic move: Russia’s downsides are minimized and pressure is ratcheted up on Kyiv.And as if to underline this point, after more than two months of relative calm, fighting is starting up again in eastern Ukraine:

A Ukrainian serviceman was killed and eight were wounded in attacks by pro-Russian separatists in the past 24 hours, the Ukrainian military said on Sunday, as both sides reported renewed violence despite a ceasefire deal.

The guns were mostly silent in September and October, but there has been an increase in ceasefire violations in recent weeks, with each side blaming the other.“The most difficult situation is still around Donetsk airport, where illegal groups cynically violated agreements, firing at Ukrainian positions using 120 caliber mortars,” Ukrainian military spokesman Oleksander Motuzyanyk said in a daily televised briefing.

This brings the total Ukrainian dead for the weekend up to six. Both sides are blaming each other for the resumption of hostilities, but if recent history is any guide, this is likely just Putin reminding everyone involved that he still has his fingers on a painful pressure point.

Next up, Ukraine will have to look over the specifics of the proposal and decide what to do. And with Western leaders appearing increasingly fixated on Putin as some kind of savior in Syria, Ukrainians may well end up getting the short end of the stick in these negotiations.