Ukraine’s Strange Defence, to Russia’s $3 Billion Debt Claim

In parallel with Ukraine’s extraordinary decision to bar Mikhail Gorbachev from travelling to Ukraine, Ukraine has filed what is legally speaking an equally extraordinary Defence to the Claim Russia has brought against Ukraine in London’s High Court.

Russia brought its claim because Ukraine refuses to repay $3 billion it borrowed from Russia in 2013.  Since the loan took the form of a purchase by Russia of a $3 billion eurobond the court with jurisdiction to decide the case is the High Court in London. 

Russia issued the claim on 17th February 2016.  It has taken a while for Ukraine to file its Defence.  As is usual in court cases Russia granted Ukraine at least one extension of time to enable it to do so.  The reason given for the delay was apparently the change of government in Kiev following the forced resignation of Ukraine’s previous Prime Minister, Arseny Yatsenyuk.

In the event the Defence Ukraine has filed is one that has no precedent in legal proceedings of this sort.  Ukraine claims it should be relieved of paying the debt because Russia’s alleged military aggression against Ukraine means Ukraine should be under no obligation to pay it.

The first thing to say about this Defence is that it essentially admits the debt.  Ukraine is no longer saying the debt itself does not exist because it was a collusive arrangement – a bribe if you will – paid by Russia to Ukraine’s former President Yanukovich.  Nor is Ukraine claiming the debt should not be repaid because it is intrinsically onerous.

These defences, if they were ever considered, essentially collapsed the moment the IMF recognised the debt as valid and said it was public debt – ie. debt owed by Ukraine to Russia as a sovereign state – not debt akin to that which Ukraine also owes to its private (mainly Western) creditors.  Since the debt has been recognised as valid by the IMF Ukraine is no longer able to dispute it.

In light of this the Defence Ukraine has filed – claiming it should not be required to pay the debt because of the aggression Russia has allegedly committed against it – was realistically the only Defence possible if Ukraine was to defend the case at all.

What however are its prospects of success?

A commercial lawyer’s answer would be practically none.  I discussed the prospects of this Defence as long ago as 21st April 2015 when I pointed out the obvious problems:

“The debt is not repayable because Russia has made its repayment impossible by committing military aggression against Ukraine.

Russia categorically denies it is committing aggression against Ukraine. 

The Russians would undoubtedly argue that the question of whether or not Russia is committing aggression against Ukraine has been answered in their favour by Ukraine’s signature to the Minsk Memorandum. This treats the Ukrainian conflict as a civil war and commits Ukraine to a process for its settlement. 

The High Court would anyway almost certainly refuse to look at this question.  It would probably again say this a matter for the International Court of Justice. It is anyway doubtful even if Ukraine could persuade the High Court that Russia had committed aggression against Ukraine that this cancels Ukraine’s whole debt. 

I have tried to highlight the obvious problems with each of the arguments that have been made to justify Ukraine defaulting on its debt to Russia. To someone unfamiliar with the law in this area and with the practice of the British High Court, some of these arguments might appear attractive. This is not in fact so. On the contrary each has so many problems that they all look frankly farfetched.”

A Eurobond, which is the form this loan takes, is a negotiable instrument, in this case one Ukraine itself has itself issued. Defaulting on a Eurobond would be akin to a government bouncing a cheque. If only for that reason the High Court would be almost certain to reject any of the arguments put forward as valid reasons to justify doing it.”

Since I wrote those words – long before Ukraine defaulted on the debt and long before the court case began and the Defence was filed – much has happened.

Ukraine for a time continued to pay Russia interest on the debt until it finally defaulted last December.  It unsuccessfully lobbied the IMF to declare the debt “private” as opposed to “public” debt (for an explanation of what that means see my lengthy discussion here). It purported to negotiate with Russia to restructure the debt

None of these actions is consistent with a Defence which says Ukraine should not pay the debt at all.  On the contrary they suggest Ukraine only refused to pay the debt because it could not get better terms to do so.

If the case is going to be decided on a strictly legal basis then Ukraine’s Defence is hopeless.  This is all but admitted by a law professor sympathetic to Ukraine’s position consulted by The Financial Times. It reports him saying:

“There is nothing typical about the Russia-Ukraine loan or the events that followed.  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.”

This is a straightforward demand that the High Court ignore the law (“a garden-variety contract dispute governed by English law”) and substitute political judgements in place of legal ones (“a resolution…primarily on political, economic and military considerations, rather than legal ones”).

This is something the highly trained Judges who sit in the branch of London’s High Court which deals with commercial cases have up to now consistently refused to do.  They have always said their task is to administer the law, not to enter into the political arena by making political judgements.

Beyond that there must also be concern that taking such a dramatic step would be fraught with consequences for the future, setting an impossibly difficult precedent the High Court – and other commercial courts around the world – might struggle to live with.

It remains to be seen whether this line holds or whether the High Court will cast aside its traditional political neutrality and take sides in a political conflict in ways the Russians would inevitably see as a further example of the “lawfare” the West has been waging against their country.