Ukraine’s ‘you invaded us’ debt non-payment defence

Elaine Moore and Neil Buckley

Ukraine has come up with a stinging rebuttal to Russia’s insistence that it repay a $3bn loan that was due last year: if you wanted your money back you should not have invaded our country.

That is the essence of what could become lengthy arbitration in London’s High Court this year as the neighbouring countries condense years of conflict into a financial dispute.

Law professors say Ukraine’s defence — detailed in a court filing on Friday — is plausible but if it succeeds in its claim it will be one of the few countries to successfully justify non-payment of debt.

In recent years, campaigners have put forward numerous proposals for countries to be forgiven debts incurred by previous regimes, including reducing South Africa’s apartheid-era debt and writing off the money borrowed by Iraq under Saddam Hussein, but none has prevailed.

In 2008, Ecuador managed to slash the debt it owed by claiming that the offences of the previous regime invalidated legal protection for the creditors — but it remains a rare exception.

Ukraine has focused its defence against repaying a $3bn, three-year bond to Russia on the country’s annexation of the Crimean Peninsula and involvement in a two-year separatist conflict in eastern Ukraine.

This, the government argues, is proof of the economic, political and military strategy that Russia has employed to destabilise Ukraine, effectively rendering it unable to repay the debt.

Mark Weidemaier, associate professor of law at the University of North Carolina, calls the dispute unique in the annals of debt litigation.

“There is nothing typical about the Russia-Ukraine loan or the events that followed,” he said. “The Russia-Ukraine dispute involves a politically and militarily fraught conflict wrapped in a garden-variety contract dispute governed by English law ... the resolution will depend primarily on political, economic and military considerations, rather than legal ones.”

Ukraine’s contentious “Russia bond” was provided to Viktor Yanukovich, the country’s former pro-Russian president, in late 2013, just a few months before the government was ousted in a pro-western revolution.

Ukraine included the debt in a plan to restructure $18bn of debt in the hopes of averting bankruptcy last year. But while private creditors accepted the deal, Russia refused to take part, saying the debt was a bilateral loan between two governments and not comparable to privately-held bonds.

Following Ukraine’s non-repayment of the maturing bond in December, Russia, represented by Cleary Gottlieb Steen & Hamilton, initiated proceedings to recover the debt. The case is being heard in London’s High Court as the bond was issued under English law.

The dispute threatens to further complicate efforts to resolve the conflict between Ukraine and Russia, and comes just two days after the release of Nadia Savchenko, a Ukrainian helicopter pilot held in Russia, in a prisoner swap. The prisoner deal was seen as a first step in reviving the stalled process of implementing last year’s Minsk peace agreement for the region.

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