Ukraine has imposed a "moratorium" on the large loan Moscow granted its neighbor before the regime change, the country's prime minister Arseniy Yatsenyuk said. The Kremlin has threatened to sue Ukraine over the issue.
The Kyiv government will not make a payment due this weekend on its debt of $3 billion (2.77 billion euro), Prime Minister Yatsenyuk announced on Friday.
"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," Yatsenyuk said in a government meeting.
Ukraine is also set to cancel payments on $507 million of Ukrainian commercial debt held by Russian banks, according to the prime minister.
"I stress, once again, that we are ready for a legal process with the Russian side," Yatsenyuk said.
Lifeline for Ukraine's ancien regime
Moscow approved the loan to Ukraine in late 2013, shortly before the country's pro-Russian president Viktor Yanukovych was ousted, and before the annexation of Crimea and the armed conflict in the east.
The current Ukrainian government claims that the deal was not a sovereign loan between the two states, but rather a transaction made through the financial markets.
Moscow has refused such conditions and insisted that the bond was an official debt - a viewpoint shared by the International Monetary Fund.
However, the IMF has recently changed its policy on such debts, leaving the door open for Ukraine to keep borrowing even if it falls behind with the repayments.
'Declaration of default'
On Friday, Ukraine's finance ministry said that it expects the new rule to "allow the IMF to continue financing Ukraine," despite Kiev's position. The officials also declared that the country remained committed "to negotiating in good faith" with Russia.
Russia had previously offered to spread out the payment over three years and asked the IMF to provide assistance. The Kremlin has also threatened to take Ukraine to court if it fails to pay.
The decision to halt the payment is "effectively, a declaration of Ukraine's default" the chairman of Foreign Policy committee in the Russian Federation Council, Konstatin Kosachev, said.
The moratorium is set to go into effect on Sunday, according to Prime Minister Yatsenyuk. Ukraine has a 10-day grace period before it is considered to be in default.
The suspension would stay in place "until the acceptance of our restructuring proposals or the adoption of the relevant court decision," Yatsenyuk said.
dj/msh (AFP, AP, Reuters, dpa, Interfax)