Ukraine’s bond breakthrough | Financial Times


“Today Ukraine secured another decisive victory against the aggressor,” Ukrainian President Volodymyr Zelenskyy said on Wednesday. He wasn’t talking about a battlefield defeat of Russian forces in Ukraine.

He was, oddly enough, referring to a complex judgment by the UK’s highest court on a $3bn bond that Ukraine defaulted on in 2015.

Why a victory? Because strange as it sounds, given the last year of hostilities and sanctions on Moscow, Russia owns that bond — and on Wednesday the UK Supreme Court blocked the Kremlin from collecting its $3bn (plus interest).

The court said Ukraine deserves a full hearing of its argument that the bond was only issued in the first place because of Russian blackmail going back a decade, and should never have been paid.

This is a big legal victory for Ukraine (however unlikely that it was ever going to actually pay its invader billions of dollars). And beneath all the sovereign debt jargon, it is also important for the origins of Russia’s war on the country.

Viktor Yanukovich © Reuters

This bond was issued in 2013, before Ukraine’s Maidan revolution and Russia’s occupation of Crimea, when the kleptocratic government of Viktor Yanukovich went to Vladimir Putin for a bailout. And weirdly, the bond was a bond.

Unlike many official creditors, Russia didn’t do the usual bespoke loan, but decided to structure its investment as a public bond, with documentation and everything, that in theory anyone could have bought. That included handing jurisdiction to the English courts in the event of default.

It was very strange. And even stranger, Russia used those terms! It even secured summary judgment from an English judge for repayment.

But all along the bond had strict terms that seemed only to give plausible deniability to Russian coercion — what Ukraine said were threats by the Kremlin, including from a hardline adviser to Putin, that it would undermine Ukraine’s statehood if the country moved toward Europe at the time.

An English high court judge should now look at those claims in trial, the justices said on Wednesday.

Beyond Ukraine, this ruling might have interesting consequences for the wider question of how far sovereign debt can become ‘odious’, or legally OK not to pay back because of dodgy origins. Mostly the question was avoided.

Most avenues toward odium were shut down by the court, which threw out Ukraine’s arguments against the legitimacy of the bond except for blackmail based on threats of violence.

Judges appear to have accepted that Ukraine’s government of the time (which was soon overthrown!) technically had formal authority to issue the debt, for instance.

So, this is probably bad news for countries wishing to get out of debts in future because the finance minister who borrowed them was an idiot acting outside parliamentary authority, or the president was getting a kickback, or there was a trade deal on the line, and so on.

It might be better news for countries facing outright invasion if they don’t pay their debts. A high bar perhaps, despite the example of Ukraine.

And really, this case is about the war that is raging right now.

Of course, some might argue that the war has made this case totally irrelevant. If Ukraine wasn’t inclined to acknowledge the bond before, it certainly isn’t now, with so many dead and so much lost. 

In practice, even if an English high court still needs to hear it, the court of world opinion — or at least much of that opinion! — doesn’t need to be told that Russia has been wont to threaten the use of force to coerce the Ukrainian state. It is using force right now. And when it comes to world opinion that believes the contrary, a court case over a bond won’t convince them.

Also, if the UK Supreme Court had agreed to summary judgment, it would not be very hard to imagine that the UK government would have responded with measures to block any payment on this bond permanently, such as specific legislation to make enforcement (like seizing Ukrainian assets) impossible.

Still. Ukraine is fighting for its national survival. It would hardly be adverse to yet another opportunity to showcase Russian aggression when this comes to trial. There are also other reasons to care what happens to this bond.

It is, after all, not just another bizarre relic of the tensions that led up to this war. It is actually fundamental to what the war is being fought over, and, in a way, how Russia has fought it.

The bond was intended as just the first instalment of a Russian financial package to lead Ukraine away from a closer relationship with the European Union, that would have come with alternative EU and IMF loans.

Right on the eve of Ukraine’s revolution and the Russian seizure of Crimea, a $2bn increase in the bond was on the way. Bizarrely, the boilerplate risk factor language even warned that “Ukraine’s ability to refinance or repay this debt will in large measure be dependent on relations with Russia at the time”!

Even the bond’s terms pointed to a Russia that did not really regard Ukraine as a sovereign country. They included an unusual clause that allowed Russia to demand full payment if Ukraine’s debt passed 60 per cent of its GDP. Few official creditors would be so grasping.

Nearly a decade later, Putin still had the same core aim of blocking Ukraine’s orientation westward and the same contempt for its sovereignty. This time, he started Europe’s worst conflict since the Second World War over it. This bond was obscure. But in its own way it already signalled the stakes that would eventually affect us all.

Also, this is a $3bn reminder that Russia’s blending of state and private resources did not start yesterday when it comes to waging hybrid war.

We probably should not go so far as to term this bond the Wagner Group avant la lettre of sovereign lending. It was always clear that the money was coming from the Russian state.

But in its use of private commercial form and the venues of Western finance — Irish exchange listing, English law — in order to advance Russian foreign policy goals, this bond did point to the future of Russian’s irregular ways of war, financial and otherwise. And just how entangled the West would be in the fallout.

And in so far as those ways continue on many global fronts in this second year of the war, from sanctions evasion to energy supplies, we might do well to reflect on what that bond was telling us.