On Wednesday, Britain’s Supreme Court ruled in favor of Ukraine in one of the longest-running legal disputes between Moscow and Kiev. pro-Russian government of then-President Viktor Yanukovych withdrew under pressure from Russia.
In the context of Russia’s war in Ukraine and all the horrors that ensue, a legal victory far away in Britain may seem small. After all, the disputed funds are not even a fraction of the hundreds of billions in damage Russia has caused in Ukraine over the past year.
Nevertheless, Ukrainian President Volodymyr Zelenskyy greeted the ruling as a “decisive victory”, and many Ukrainians celebrated it as much as their country’s successes on the battlefield.
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This ruling is indeed decisive and important not only for Ukraine but also for the West. It is significant 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. At the time, protests were raging in Kiev against corruption and Yanukovych’s decision to abandon plans for closer ties with the European Union. In the previous months, Moscow had been pressuring the Ukrainian economy to convince Yanukovych not to sign an association agreement with Brussels and to join the Russian-led Eurasian Economic Union instead. According to the current Ukrainian government, Russian pressure on Ukraine at the time was not only economic. Kiev claims that, in addition to a trade blockade, Moscow has threatened Yanukovych’s government with military action if it disobeys.
On December 17 of that year, as protests continued in Ukraine, Yanukovych flew to Moscow to meet with President Vladimir Putin. Details of the talks between the two presidents have never been made public, but after the meeting Yanukovych announced that Ukraine would seek observer status in the Eurasian Economic Union and receive $15 billion in loans from Russia.
The announcement did nothing to dampen protests in Kiev, but Yanukovych’s government pushed ahead with the agreed plan anyway. The first $3 billion tranche of the $15 billion loan was issued just three days after Yanukovych’s visit to Moscow.
In late February 2014, deadly clashes between demonstrators and state troops in Kiev led to the Maiden Revolution. Yanukovych fled to Russia and the remaining $12 billion Putin had offered to lend Ukraine was never delivered. But as Russian troops began to take control of Crimea and Ukraine moved toward defaulting on its debts, state debt experts began scrutinizing Ukraine’s books and noticed some anomalies in Moscow’s first $3 billion payment. to the Yanukovych government.
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First and foremost, the loan was structured in a rather unusual way – in the form of a Eurobond. Such bonds are a common way for sovereign governments to borrow, but they are used to borrow from private creditors, not other states. When governments borrow from each other or from international institutions such as the International Monetary Fund (IMF), the terms are usually favorable – such loans are known as “official debts”. Private debt, such as Eurobonds, can be traded on open markets. Official loans may not. When governments face debt burdens, their private and official debts are also restructured in separate, though usually simultaneous, processes. So Russia’s use of a private market instrument for its loan to the Yanukovych government was highly unusual.
As experts sifted through the language of the bond’s offer, they discovered unique terms that gave the Eurobond holder significant leverage over the Ukrainian economy by essentially enabling Ukraine to default. Russia’s National Wealth Fund owned the Eurobond, which meant the Kremlin could blackmail the Ukrainian government. The fact that the loan was structured as private market debt, despite being issued by an official creditor, also meant that Russia may have compromised Ukraine’s ability to restructure its private debt and to receive support from other official creditors in case of coercion. , could be frustrating.
Putin has long complained about the dominance of the dollar over the global economy. During his annual speech to the Federal Assembly in 2006, he first declared his intention to create a “sphere of influence” for the Russian ruble. campaign to end the role of the dollar in the Russian economy. But at the time of Yanukovych’s impeachment, Russia had made no significant progress on its de-dollarization agenda. Even Putin’s “blackmail bond” was denominated in US currency. However, the Eurobond issued to Yanukovych’s government was still an attack on the dollar-dominated economic order. It was Putin’s attempt to break the Western-led system from within.
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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 mysterious and technical. Simply put, the size and terms of the Eurobond held by Russia meant that Russia could have potentially prevented Ukraine from getting relief from its private creditors if it defaulted on this particular loan. However, Ukraine continued to pay interest rather than default on the Eurobonds, and holders of its other Eurobonds also hesitated to join Russia’s debt war – probably because most of the remaining Eurobonds of Ukraine was owned by the US-based investment company Franklin Templeton. who 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 debt. Ukraine’s private creditors subsequently agreed in August of that year to restructure Ukraine’s private debt, four months before the Eurobond held by Russia was to be paid. Nevertheless, because the Eurobond was also an intergovernmental loan, the Eurobond theoretically still gave Russia leverage over Ukraine’s ability to get help and support from official creditors.
Since its inception, the IMF had followed a policy of not lending to countries in arrears with other official creditors. This meant that Ukraine faced a potential crisis when it had to repay the Eurobond held by Russia on December 20, 2015. Ten days earlier, however, the IMF had announced that it was changing its rules by saying it would now allow loans to defaulting countries to official creditors. While it denied that the move was political or related in any way to the Russian-owned Eurobond, the announcement was only published in two languages, English and English. Russian.
The Kremlin was outraged. Russian Prime Minister Dmitry Medvedev said the IMF’s move would “open Pandora’s box, cause massive damage to world finances and generally undermine confidence in international financial institutions”. The Eurobond plot had proved half too clever. Russia had tried to use the instruments and institutions of the international economic order to its advantage, but failed to do any real damage.
Russia then sued for reimbursement. Since the Eurobond was issued under English law, the case was heard by the English High Court. The first round went in her favor when judge William Blair, brother of former British Prime Minister Tony Blair, ruled in March 2017 that Ukraine failed to present a “justifiable” or legal defense for the failure to repay the loan and refused the loan to pay back. the case to a full trial. However, Kiev won the next round when England’s Court of Appeal ruled in September 2018 that a full trial should be held to hear Ukraine’s arguments. The ruling of the Supreme Court factually confirmed that ruling.
Kiev 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 the Crimea region of Ukraine shortly after Yanukovych was ousted and subsequently fueled the conflict in eastern Ukraine certainly lends credence to the arguments. If Ukraine’s argument is upheld at trial, it could invalidate the loan.
Russia’s loss to the UK Supreme Court may not change Putin’s war in Ukraine, but it is yet another step towards defusing his threats to the international order – and as the genesis of the eurobond demonstrates, for Putin the two are one and the same .
The views expressed in this article are those of the author and do not necessarily reflect the editorial view of Al Jazeera.