Russia says Ukraine debt repayment law amounts to default

MOSCOW (Reuters) - Russia on Wednesday demanded the timely repayment of all debts owed to it by Ukraine and accused Kiev of effectively preparing the way for default with a new law.

It threatened to take the issue to international courts if necessary.

The law, approved by Ukraine's parliament on Tuesday, gives the government the right to miss payments to its international creditors as it wrangles over the terms for restructuring $23 billion worth of foreign debt. [ID:nL5N0YA30R]

Russia holds a $3 billion Ukrainian Eurobond whose full repayment is due by the end of the year. Moscow, whose relations with Kiev have been wrecked by a year-long conflict in eastern Ukraine, has declined to join the debt restructuring talks.

President Vladimir Putin, speaking at a meeting with government ministers, said he found the new law "strange".

"To effectively announce an impending default shows a poor level of professional responsibility, all things considered," said Putin, noting that the International Monetary Fund does not lend to countries in default.

Ukraine, its economy battered by recession and rampant graft as well as by the conflict in the east, hopes to secure the next tranche of a $17.5 billion bailout program with the IMF this summer to shore up its foreign currency reserves.

Kiev is also holding talks to restructure sovereign and state-guaranteed debt to plug a $15 billion funding gap, but the negotiations have soured in the past week. Bondholders object to any writedown on the principal owed. Kiev says their stance shows a lack of good faith.

LEGAL REDRESS

Russian Finance Minister Anton Siluanov said Moscow would seek redress in international courts if Ukraine did not respect the terms of its foreign debt repayments.

"For the time being we don't have any grounds (to act). If a payment is missed, we will exercise our right to go to court," he said. Ukraine was due to make its next Eurobond repayment to Russia, worth $75 million, on June 20, Siluanov added.

Putin said the terms of the Eurobond had been particularly generous to Ukraine and that Russia could have demanded an earlier redemption of the bond but had not done so at the request of the IMF.

In addition to the Eurobond, Prime Minister Dmitry Medvedev said Russian banks were also heavily exposed to Ukraine through loans worth around $25 billion.

In the event of a default on either commercial or sovereign debt held by Russia, Medvedev added, "it will be essential to use all possible means of defense, including via the courts".

Relations between Kiev and Moscow soured badly after mass street protests toppled Ukraine's pro-Russian president Viktor Yanukovich in February 2014, in what Russia called a coup.

Moscow then seized Ukraine's Crimea peninsula and has backed pro-Russian separatists battling Kiev's forces in eastern Ukraine, though it denies Western accusations that it has sent troops and military hardware across the border.

More than 6,100 people have been killed in the conflict.

(Additional reporting by Gabriela Baczynska and Alexander Winning; Writing by Gareth Jones; Editing by Jeremy Gaunt)