Ukrainian Debt and the British Legal System

The Supreme Court of Great Britain has concluded the hearings concerning the case of Ukraine’s debt to Russia of $3.75 billion (together with interest it goes up to $4.5 billion). Judges will now meet and must make a final decision on the outcome of the discussion.

I want to believe that this will really be the final decision, as the Supreme Court is considering an appeal against the decision of the London High Court, which in 2017 has already decided in favour of Russia, obliging Ukraine to repay debt and interest.

Judges are not time-limited and can hold consultations for a long time. It is possible that they will seize this opportunity, as any Supreme Court decision would bring substantial costs to the Western political and economic system.

The easiest option is to confirm the decision of the London High Court. The case is more than transparent. Ukraine indeed received that money. Moreover, it was not a simple loan allocated to one state by another. Since at the time of the decision to grant Ukraine a loan of $15 billion (3 billion of which Kiev had managed to obtain) the situation in the country had already been destabilised, President Yanukovych’s future was in question, and the habit of Kiev’s authorities to refuse loans made by their predecessors was well known, and Russia played it safe.

As was already said, the money was not allocated in the form of a state loan: Ukraine issued so-called eurobonds (bonds in foreign currency freely placed among foreign investors), which Russia bought. Ukraine’s position is that Russia forced Yanukovych’s government to make the loan. However, Moscow could not force Kiev to release eurobonds. Moreover, any other investor could buy them if they so desired. Yanukovych, before appealing to Russia, applied for a loan of the same $15 billion (or euros) to the European Union, to the IMF, and was in principle willing to take money from any creditor. Another thing is that no one but Russia wanted to lend it. Today no one wants to lend to Ukraine either, but the IMF periodically increases the poverty, and Eurobonds are still placed both by the Ukrainian government and individual companies (for example, Naftogaz). And they are bought out by risk-prone investors, too.

In general, the Supreme Court of Great Britain must confirm the decision of the London High Court and order Ukraine to pay the debt with interest. But in this case, Western political interests will be severely undermined. The fact is that if such a decision is taken, Ukraine will be threatened with an official declaration of default. Ukraine has long been insolvent (since 2016), but so far avoids the official declaration of state bankruptcy.

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The West will have to either give Kiev the opportunity to re-lend, or silently watch its glitzy system of post-Maiden Ukrainian statehood fall apart. Kiev has few options: to pay without receiving financial support from the West is to collapse its financial system and immediately intensify all (political, economic, social) crisis processes. To refuse to pay is to close for itself the last loophole (build-up of public debt at the expense of eurobonds issues). In case of a refusal to comply with the court’s decision, even the most risky investors will no longer buy any Ukrainian securities. The IMF, of course, can once again spit on its own rules and continue to allocate tranches, but they have long not being saving Kiev. For four years the Fund has given 1.5-2 times less than it receives from Ukraine in the form of payments on repayment of past debts and interest. Ukraine receives the funds necessary for budget consolidation on the free financial market due to the placement of state and corporate obligations. A refusal to pay will lead to immediate presentation for the payment of if not the rest of the debt, then a significant part of it, and there will be nowhere to borrow from.

The last option is to enter into negotiations with Russia on debt restructuring. You don’t have to be a genius to understand that as a precondition, Moscow will require the rejection of all Kiev’s claims against Gazprom, other Russian companies, and the Russian state. And the amount of other concessions that Ukraine will be offered will be determined during the negotiations.

However, it is not necessary to have the gift of foresight to claim surely that the Ukrainian leadership will never opt for negotiations with Russia on restructuring this debt, which in Kiev is called “Yanukovych’s debt”. This will collapse the entire ideological justification of Maidan and will be perceived by the Maidan public and, above all, by armed and angry radicals, as the betrayal of the motherland in a particularly perverse form. It is not known whether the government that made such a decision will at least be able to start negotiations with Moscow, or whether it will be demolished sooner.

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In general, if the debt has to be paid, Ukraine finds itself at an impasse from which there is no way out. The West will have to admit that its project to create a Russophobic Ukrainian state has shamefully failed and enter into negotiations with Russia over the forms and methods of resolving the Ukrainian crisis without taking into account Kiev’s opinion and at the expense of Ukraine’s interests. This is a failure on a scale equal to the Syrian catastrophe of the West, only not stretched in time over several years.

It would seem that it is possible to follow the path of Stockholm arbitration and declare that since Ukraine needs money, and Russia has a lot of it, there seems to be no debt. Western courts have made political decisions in recent years. No one would be surprised if something like this happened this time. But it’s not for nothing that Russia played it safe and issued a loan in the form of a purchase of Eurobonds.

The fact is that a lot of states, as well as public and private companies, around the world are credited in this way. And British justice is based on precedent. Roughly speaking, if Ukraine cannot pay the debt nominated in Eurobonds, other borrowers have the same right. It is easy to assume that a lot of companies and states around the world will try to take advantage of such a good opportunity to write off multi-billion-dollar debts. The British judicial system will be littered with well-motivated claims, and the trials will be conducted by highly qualified lawyers. It can’t be all figured out in a year or two. And even if finally it will be succeeded to refuse it under some plausible excuse, for several years the international lending system will be paralysed. And it will not be managed to refuse to everyone.

Even with stunning stability and permanent growth, it would be the strongest blow to the world economy and trade (and to the Western one to a much greater extent than to the Russian one). Now the world is in a systemic crisis that is only deepening and the end of which is not visible. Moreover, this is a crisis of the Western system that reigned supreme on the planet after the collapse of the USSR. Thus, having made decisions in favour of Ukraine, the West will shoot itself not even in the foot, but immediately in the head.

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The Supreme Court of Great Britain found itself in a situation of a difficult choice between two evils. The most logical thing would be to make a just decision in favour of Russia. After all, Ukraine is as good as dead, and its untimely demise for the West is a tragedy, but not a catastrophe. Well it’s not even a tragedy – more a nuisance that everyone will forget the day after tomorrow.

But a specific decision will be made by specific judges. And they will certainly have trouble they would like to avoid. They’ll probably try to buy time.

As already said, Ukraine is as good as dead. In the past one and a half to two years, this has been talked more and more openly in Kiev. The leading politicians of the West have already realised this. You see, while the judges will “consult”, Ukraine will finally fall apart and the problem of debt will dissolve in time and space itself. Similarly, the Swedish Svea County Court of Appeal is dragging its feet concerning Gazprom’s appeal, having postponed the decision on its most important part (regarding $2.6 billion in favor of Naftogaz) until 2020.

In itself, the postponement of decisions does not cause damage to Ukraine. On the contrary, at this stage it formally reinforces its negotiating position. It’s just that in the world in general, and in the West in particular, there are more and more individuals and structures interested in making this state formation disappear like a bad dream and stops to prevent decent people from living. And this is already serious, because sooner or later quantity becomes quality, and then the principle of “push the one who falls” comes into force.

Rostislav Ishchenko

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