Nikita Aggarwal
This
week, the conflict between Ukraine and Russia enters new territory: the
English high court. In preparation for the hearing
(tentatively scheduled for Tuesday, 17 January), here’s a recap of the
story so far.
What’s this all about?
Russia
is suing Ukraine for non-payment of $3 billion (plus fees and
interest), due under a bond that matured in December 2015. Ukraine,
strapped for cash, borrowed $3 billion from Russia in December 2013 as
part of a wider package of economic support. Rather unusually, it did so
by issuing a 2-year Eurobond which was subscribed entirely by Russia
(acting through its sovereign wealth fund). The Eurobond contract was
governed by English law, and subject to the jurisdiction of the English
courts in the event of a dispute. Russia, acting through the bond
trustee, filed a claim against Ukraine in February 2016. In September, the high court granted Russia’s request for an expedited hearing.
Wasn’t Ukraine’s debt already restructured? Why wasn’t the Eurobond included?
Ukraine
did indeed carry out a restructuring of its external debt, back in
2015, as required to access IMF financing. Ukraine offered to
restructure the Eurobond on the same terms as it offered its other
(private sector) creditors. However, Russia did not accept the offered
terms, arguing that its loan was official bilateral financing and should
not be included in the restructuring of Ukraine’s private sector debt.
Rather than paying Russia back in full, Ukraine issued a moratorium on
repayment of the Eurobond.
What’s Ukraine’s defence for not paying?
Ukraine has filed a lengthy defence that strategically ties this dispute to the broader geopolitical conflict with Russia. In short, it contends:
1. The Eurobond contract that Russia is seeking to enforce was void from the start, as Ukraine did not have the legal capacity to agree to it given that it was unauthorised under the Budget Law, Budget Code and Constitutional procedural rules of Ukraine.
2. If the contract was not void from the start, it is in any event voidable as Ukraine entered into it under duress from
Russia. This includes the imposition of trade restrictive measures,
such as banning imports from Ukraine, and territorial threats that
forced Ukraine to suspend negotiations for an EU Association Agreement
and instead accept Russian financial support. Russia can not enforce
Ukraine’s purported obligations under the Eurobond contract if they were
agreed under duress.
3. It is an implied term of
the bond contract that Ukraine does not have to repay the Eurobond if
Russia deprived Ukraine of the economic benefit of the financing and/or
made it impossible for Ukraine to comply with its obligations under the
contract. Through the imposition of trade restrictive measures, the
annexation of Crimea and military interference in eastern Ukraine, its
economic powerhouse, Russia’s actions crippled Ukraine’s economy. This
led it to seek IMF financing, a condition for which was the
restructuring of $15 billion of debt. In turn, a condition under the
new, restructured bonds was that Ukraine could not offer more favourable
terms to its other creditors, without defaulting on the restructured
creditors and jeopardizing financing under the IMF programme.
Therefore, as a result of Russia’s actions, Ukraine is unable to repay the Eurobond.
4. It is an implied term of
the contract that Ukraine does not have to repay the bond if Russia
breaches its obligations towards Ukraine under public international law
not to interfere in Ukraine’s territorial integrity. It did so, inter alia, by invading and annexing Crimea.
5. Ukraine can refuse to repay the bond where this is an appropriate countermeasure to
induce Russia to comply with its obligations under public international
law. And (if all else fails) the court should exercise its discretion to decline Russia’s request for relief until it ceases to breach its public international law obligations to Ukraine.
That’s pretty comprehensive. Anything they haven’t mentioned?
A
few things stand out. One is the status of the Eurobond as official or
private debt. Russia declined to participate in the 2015 restructuring
on the grounds that the Eurobond was official (i.e. state-to-state)
debt, and therefore more appropriately restructured in the Paris Club.
The IMF agreed with its characterization as official debt.
Another
absentee is the international law doctrine of odious debts. This allows
a state to repudiate debts contracted by a previous regime, if they
were not used in the interest of the people of that state. However, for
this doctrine to apply, there would need to have been a change in
Ukraine’s territory — as despotic as President Yanukovych was, a change
of government is typically not sufficient. See here for a good discussion on this point.
How will the court decide?
The
peculiarities of this case make crystal ball gazing difficult.
Ordinarily, it is not difficult for creditors to obtain judgment against
a sovereign for non-payment of debt (the struggle is usually in finding
assets against which the judgment can be enforced — see Argentina).
However, this is no ordinary case and as such, it is hard to predict how
the court will assess Ukraine’s defence to non-payment. Whilst
presented as a contractual dispute, it is clearly inseparable from the
broader political and military struggle between Russia and Ukraine (and
the West). The nature and terms of the loan are also unprecedented
(intergovernmental, but documented as a Eurobond, with unusual clauses
such as a covenant on Ukraine's debt to GDP ratio not exceeding 60 per
cent). Not to mention, this is just one of many legal battles being
fought between Ukraine and Russia, the outcomes of which could weigh on
the international law arguments in this case.
The case is Law Debenture Trust Corporation PLC vs Ukraine, Case No. FL-2016–000002
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