By 9 September, 2016 0 Comments Read More →

Russia fights Ukraine over “Yanukovych debt”


The slowly developing Russia-Ukraine $3 billion sovereign debt dispute got a sudden new development when, at the end of July 2016, Russia requested the London High Court make an expedited ruling on the dispute. Following that, on 8 September 2016, the High Court scheduled the hearings for the dispute for 17-20 January 2017.

The debt

The history of this dispute started in December 2013 when the then-Ukrainian President Viktor Yanukovych’s visit to Russia resulted in the so-called 17 December 2013 Ukrainian–Russian action plan, which included agreement on future natural gas prices and Russia’s promises to give Ukraine some financial aid. Under this plan, Russia agreed to buy a $15bn issue of Ukrainian Eurobonds, with a $3bn bond purchased in the same month with money from the Russian National Wellbeing Fund. The parties decided to issue the bonds under English law.

However, because of significant deterioration of relations between the two countries, the issue of Eurobonds did not go beyond the first $3bn tranche – Russia halted the further purchase of Ukrainian Eurobonds after the 2014 Ukrainian revolution which ousted President Yanukovich in February 2014.

The dispute

The Eurobonds were repayable by December 2015. While initially Ukraine did acknowledge the existence of the debt and paid interest on it, in December 2015 it refused to pay the principal amount of the debt.

Initially, Ukraine tried to argue that the bond should be subject to the terms of the debt restructuring deal it had reached with its commercial creditors with the help of the International Monetary Fund (the “IMF“) and included it in its plan to restructure $18bn of its foreign debt. The terms of the deal prohibited Ukraine from treating other private creditors more favourably than its participants.

Ukraine tried to claim that the bond was an ordinary commercial debt and as such could not be offered better terms than its deal with the other private creditors. In response, Russia claimed that as a state it is an official lender and should receive preferential terms for its debt. This issue was later finally resolved by the IMF, which made a statement saying that the $3bn bond is part of Ukraine’s official debt and urged the countries to reach a settlement on this issue. However, the subsequent IMF-backed negotiations did not lead to any result.

After the failed negotiations, on 17 February 2016 Russia filed a lawsuit against Ukraine in the London High Court for recovery of the debt and $75 million interest on it. Three months after that – on 27 May 2016 – Ukraine issued its defence to Russia’s claim.

Ukraine’s defences

Initially the Ukrainian government’s main rationale for non-payment of the debt was the fact that it “has the right … not to return loans borrowed by [a] kleptocratic regime”, which effectively meant that Ukraine viewed it as a bribe to President Yanukovych and considered itself not bound by it.

While many states (such as Iraq and South Africa) have attempted to use this argument for refusal to pay debts of a previous regime, they have rarely ever been successful. One of the few rare examples is Ecuador which declared that its foreign debt was “illegal” and “immoral” and refused to make interest payments on $3.2 billion of foreign-denominated bonds in 2008, causing the country’s default. However, even this resulted in a series of lawsuits in the US courts, some of which led to settlements with the creditors.

While some of Ukraine’s officials (most recently Chief Military Prosecutor Anatolii Matios) still allege that Ukraine is ready to present some overwhelming evidence about the actions of Mr Yanukovych’s government, Ukraine is also adding a variety of new arguments to its defence.

The focus of the defence shifts to what the Ukrainian side calls “massive, unlawful and illegitimate economic and political pressure on Ukraine in 2013” which initially forced the country to accept Russian financial aid in exchange for some political concessions and “illegitimate threats and pressure” applied after that. This, in the opinion of Ukraine, justifies non-payment of the debt as it made it impossible for the state to pay it.

To prove its position Ukraine uses a wide variety of arguments including Russia’s use of force against Ukraine and interference in its neighbour’s internal affairs; then-President Viktor Yanukovych’s breaking Ukraine’s internal rules on debt; and Russia breaching contract by hindering Ukraine’s ability to repay. Additionally Ukraine’s lawyers argue that it is implied in the bond document that Russia cannot insist on repayment if it has breached obligations towards Ukraine under international law.

Overall Ukraine’s defence is mainly focuses on political, economic and military considerations rather than on legal ones in what on its face looks like a commercial debt dispute based on English law. However, in the opinion of some experts, it may be successful in court.

Further developments

As the case was developing rather slowly, on 29 July 2016 Russia requested the High Court to make an expedited ruling on the dispute. After that the Russian Ministry of Finance made a statement saying that it hopes that once the court satisfies Russia’s motion, full-scale legal proceedings will not be necessary, and the court will be able to pass the final ruling at the beginning of 2017.

Most recently, on 8 September 2016 the High Court scheduled the hearings for the dispute for 17-20 January 2017.


Due to the uniqueness of its nature and the arguments of the parties, this dispute will have a significant impact on English and international financial law and disputes relating to the non-payment of sovereign debt.

Most noticeably, the English High Court’s decision will present an interesting opportunity to review the possible successfulness of various arguments – from the corruption of the previous regime to the use of illegitimate threats and pressure and the hindering of the debtor’s ability to pay by the creditors as the grounds for non-payment of the foreign debt.

About the Author:

Ivan Philippov is an English qualified lawyer. He specialises in international commercial and investment arbitration and has experience of working or doing internships in Russia, United Kingdom and Sweden.

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