Russia’s Supreme (Court) loss

Maximilian Hess

On Wednesday, the British Supreme Court ruled in Ukraine’s favour in one of the longest-running legal disputes between Moscow and Kyiv, ordering a full London trial on Ukraine’s claim that it should not have to repay a decade-old $3bn loan it says the pro-Russian administration of then-President Viktor Yanukovych took out under pressure from Russia. In the context of Russia’s war in Ukraine and all the horrors resulting from it, a legal victory far away in Britain may appear minor. After all, the funds in dispute are not even a fraction of the hundreds of billions in damages Russia has caused in Ukraine in the past year.
Nonetheless, Ukrainian President Volodymyr Zelenskyy hailed the ruling as a “decisive victory”, and many Ukrainians celebrated it as much as their country’s successes on the battlefield. This ruling is indeed decisive and important not only for Ukraine but for the West as well. It is important because the loan in question was Russia’s first attempt to challenge the Western-led economic order through its actions towards Ukraine.
The disputed loan was agreed in December 2013. Back then, protests were raging in Kyiv against corruption and Yanukovych’s decision to abandon plans for closer ties with the European Union. In the months prior, Moscow had put the Ukrainian economy under substantial duress to persuade Yanukovych to move away from signing an association agreement with Brussels and instead join the Russia-led Eurasian Economic Union. According to the current Ukrainian government, Russian pressure on Ukraine at the time was not solely economic. Kyiv alleges that in addition to a trade blockade, Moscow threatened the Yanukovych administration with military action if it did not comply. On December 17 that year as protests continued in Ukraine, Yanukovych flew to Moscow for a meeting with President Vladimir Putin. Details of the discussions between the two presidents were never publicly disclosed, but after the meeting, Yanukovych announced that Ukraine would seek observer status in the Eurasian Economic Union and receive $15bn in loans from Russia.
The announcement did nothing to assuage the protests in Kyiv, but the Yanukovych government moved forward with the agreed plan anyway. The first $3bn tranche of the $15bn loan was issued just three days after Yanukovych’s Moscow visit. At the end of February 2014, deadly clashes between protesters and state forces in Kyiv culminated in the Maiden Revolution. Yanukovich absconded to Russia, and the remaining $12bn Putin had offered to loan Ukraine was never delivered. But as Russian forces began to seize control of Crimea, and Ukraine hurtled towards defaulting on its debts, sovereign debt experts started looking into Ukraine’s books and noticed some anomalies in Moscow’s initial $3bn payment to the Yanukovich administration.
First and foremost, the loan was structured in a rather unusual way – in the form of a eurobond. Such debentures are a common way for sovereign governments to borrow, but they are used for borrowing from private creditors, not from other states. When governments borrow from each other or from international institutions such as the International Monetary Fund (IMF), the terms are typically concessional – such loans are known as “official debt”. Private debts, such as eurobonds, may be traded on open markets. Official loans may not. When governments face debt duress, their private and official debts are also restructured in separate, if typically concurrent, processes. So Russia’s use of a private market instrument for its loan to the Yanukovych administration was highly unusual. As experts picked through the language of the bond’s offering, they discovered unique terms that gave the eurobond’s holder substantial leverage over the Ukrainian economy by effectively allowing it to force Ukraine into default. Russia’s National Wealth Fund owned the eurobond, which meant that the Kremlin could blackmail the Ukrainian government. That the loan was structured as a private market debt despite being issued by an official creditor also meant that Russia could potentially frustrate Ukraine’s ability to restructure its private debts and to receive support from other official creditors in the event of duress.
Putin has been complaining about the dollar’s dominance over the global economy for a long time. He first declared his intent to create a “sphere of influence” for the Russian rouble during his annual address to the Federal Assembly in 2006. The pro-Putin youth group Nashi, the brainchild of Putin aide Vladislav Surkov, subsequently embarked on an extensive public campaign to end the dollar’s role in the Russian economy. But at the time of Yanukovych’s ousting, Russia had made no meaningful progress on its de-dollarisation agenda. Even Putin’s “blackmail bond” was denominated in the US currency. The eurobond issued to the Yanukovich administration, however, was still an attack on the dollar-dominated economic order. It was Putin’s attempt to try and break the Western-led system from within. The fact that the eurobond blurred the lines between Ukraine’s private and official creditors meant that Russia could, in theory, frustrate Ukraine’s ability to restructure its private and public debts.
The formal restructuring process is arcane and technical. In simple terms, the size and conditions of the Russian-held eurobond meant Russia could have potentially prevented Ukraine from securing relief from its private creditors if it defaulted on this particular loan. However, Ukraine continued to pay interest rather than default on the eurobond, and holders of its other eurobonds also baulked at participating in Russia’s debt warfare – arguably because the largest share of Ukraine’s remaining eurobonds were held by the US-based investment firm, Franklin Templeton, which led the negotiations. The IMF also ruled in March 2015 that the eurobond should not be treated as a private debt but as an official one. Ukraine’s private creditors subsequently agreed to restructure Ukraine’s private debts in August of that year, four months before the Russian-held eurobond was due. Nevertheless, because the eurobond was also an intergovernmental loan, the eurobond still theoretically gave Russia leverage over Ukraine’s ability to secure relief and support from official creditors. Since its establishment, the IMF had maintained a policy that meant it could not loan to countries in arrears to other official creditors. This meant that Ukraine faced a potential crisis when it was due to repay the Russian-held eurobond on December 20, 2015. However, 10 days earlier, the IMF announced that it was changing its rules saying it would now allow loans to countries in arrears to official creditors. Although it denied that the move was political or in any way connected to the Russian-held eurobond, the announcement was published in only two languages, English and Russian.
The Kremlin was outraged. Russian Prime Minister Dmitry Medvedev said the IMF’s move would “open Pandora’s box, cause huge damage to world finances and generally undermine confidence in international financial institutions”. The eurobond plot had proved too clever by half. Russia had sought to use the instruments and institutions of the international economic order to its advantage but failed to inflict any real damage. Russia subsequently sued for repayment. Because the eurobond was issued under English law, the matter was heard by the English High Court. The first round went in its favour as Judge William Blair, brother of former British Prime Minister Tony Blair, ruled in March 2017 that Ukraine has failed to offer a “justiciable” or court-ready defence for not paying back the loan and refused to send the case to a full trial. Kyiv, however, won the next round when the English Court of Appeal ruled in September 2018 that a full trial should be held to hear Ukraine’s arguments. The Supreme Court’s ruling effectively upheld that judgement.
Kyiv will now have its day in court to argue that the debt is invalid because the eurobond was sold under duress from martial threats. The fact that Russia invaded and annexed Ukraine’s Crimea region shortly after Yanukovych was ousted and subsequently fomented the conflict in eastern Ukraine certainly makes the arguments credible. If Ukraine’s argument is upheld at trial, it could invalidate the loan. Russia’s loss at the UK Supreme Court may not move the needle on Putin’s war in Ukraine, but it is yet another step towards defanging his threats to the international order – and as the eurobond’s genesis demonstrates, for Putin, the two are one and the same.