On Wednesday, the British Supreme Court ruled in Ukraine’s favor in one of the longest-running legal disputes between Moscow and Kiev, ordering a full trial in London over Ukraine’s claim that it should not have to repay a $3 billion loan. The pro-Russian administration of then-President Viktor Yanukovych, says the pro-Russian administration, fell apart under pressure from Russia.
Against the background of Russia’s war in the Ukraine and all the horrors resulting from it, a distant legal victory in Britain may seem minor. After all, the disputed funds are not even a fraction of the hundreds of billions in damage Russia has caused in Ukraine in the past year.
However, Ukrainian President Volodymyr Zelenskyy acclaimed the ruling as a “decisive victory,” and many Ukrainians celebrated it as much as their country’s successes on the battlefield.
This ruling is indeed decisive and important not only for Ukraine but also for the West. It matters 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 to in December 2013. Back then, protests in kyiv against corruption and Yanukovych’s decision to abandon plans to strengthen ties with the European Union. In previous months, Moscow had put considerable pressure on the Ukrainian economy to persuade Yanukovych to stop signing an association agreement with Brussels and instead join the Russian-led Eurasian Economic Union. According to the current Ukrainian government, the Russian pressure on Ukraine at that time was not solely economic. kyiv alleges that, in addition to a trade blockade, Moscow threatened the Yanukovych administration with military action if it did not comply.
On December 17 of that year, as protests in Ukraine continued, Yanukovych flew to Moscow to meet with President Vladimir Putin. Details of the discussions between the two presidents were never disclosed publicly, 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 quell the protests in kyiv, but the Yanukovych government went 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 protesters and state forces in kyiv culminated in the Maiden Revolution. Yanukovych fled to Russia, and the remaining $12 billion Putin had offered to loan Ukraine was never delivered. But as Russian forces began to take control of Crimea and Ukraine was hurtling toward defaulting on its debts, sovereign debt experts began going through Ukraine’s books and noted some anomalies in the $3 billion down payment. from Moscow to the Yanukovych administration.
First, the loan was structured in a rather unusual way: in the form of Eurobonds. 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 often concessional; these loans are known as “official debt.” Private debts, such as Eurobonds, can be traded on open markets. Official loans cannot. When governments face debt pressure, their private and official debts are also restructured in separate, though usually simultaneous, processes. Therefore, Russia’s use of a private market instrument for its loan to the Yanukovych administration was highly unusual.
As experts reviewed the language of the bond offer, they discovered unique conditions that gave the eurobond holder substantial influence over the Ukrainian economy by effectively allowing it to force Ukraine into default. The Russian National Wealth Fund owned the Eurobonds, which meant the Kremlin could blackmail the Ukrainian government. The fact that the loan was structured as a private market debt despite being issued by an official creditor also meant that Russia could thwart Ukraine’s ability to restructure its private debts and receive support from other official creditors under duress. .
Putin has been complaining about the dominance of the dollar over the global economy for a long time. He first declared his intention to create a “sphere of influence” for the Russian ruble during his annual address to the Federal Assembly in 2006. The pro-Putin youth group Nashi, the brainchild of Putin aide Vladislav Surkov, subsequently embarked on an extensive public campaign. campaign to end the role of the dollar in the Russian economy. But at the time of Yanukovych’s ouster, Russia had not made any significant progress on its de-dollarization agenda. Even Putin’s “blackmail bond” was denominated in US currency. Yet the Eurobond issued to the Yanukovych administration was still an attack on the dollar-dominated economic order. It was Putin’s attempt to try to break the Western-led system from within.
The fact that the Eurobond blurred the lines between Ukraine’s private and official creditors meant that, in theory, Russia could thwart Ukraine’s ability to restructure its public and private debts.
The formal restructuring process is arcane and technical. In simple terms, the size and terms of the Eurobond held by Russia meant that Russia could have 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 Eurobonds, and holders of its other Eurobonds also refused to participate in Russia’s debt war, possibly because most of Ukraine’s remaining Eurobonds were in debt. hands of the US-based investment firm, 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 one. Ukraine’s private creditors subsequently agreed to restructure Ukraine’s private debts in August of that year, four months before the Eurobond held by Russia was due to mature. However, because the Eurobond was also an intergovernmental loan, theoretically the Eurobond still gave Russia leverage over Ukraine’s ability to secure relief and support from official creditors.
Since its establishment, the IMF had maintained a policy that meant it could not lend to countries in arrears with other official creditors. This meant that Ukraine faced a possible crisis when it was due to repay the Eurobond held by Russia on December 20, 2015. However, 10 days earlier, the IMF Announced that it was changing its rules saying that it would now allow loans to countries in arrears with official creditors. Although he denied that the move was political or in any way related to Eurobonds held by Russia, the announcement was published only in two languages, English and Russian.
The Kremlin was outraged. Russian Prime Minister Dmitry Medvedev said the IMF move would “open Pandora’s box, cause enormous damage to world finances and generally undermine confidence in international financial institutions.” The Eurobond plot had turned out to be too clever by half. Russia had tried to use the instruments and institutions of the international economic order to its advantage, but failed to inflict any real damage.
Russia subsequently sued over the refund. Because the Eurobond was issued under English law, the matter was heard by the English High Court. The first round went in their favor when Judge William Blair, brother of former British Prime Minister Tony Blair, ruled in March 2017 that Ukraine offered no “justiciable” or court-ready defense for defaulting on the loan and refused to send the case to a full trial. However, kyiv 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 Supreme Court ruling effectively upheld that ruling.
kyiv will now have its day in court to argue that the debt is invalid because the Eurobond was sold under the pressure of martial threats. The fact that Russia invaded and annexed the Ukrainian region of Crimea shortly after Yanukovych was ousted and subsequently fomented conflict in eastern Ukraine certainly makes the arguments credible. If Ukraine’s argument is upheld at trial, it could invalidate the loan.
Russia’s loss in the UK Supreme Court may not move the needle on Putin’s war in Ukraine, but it is yet another step in dismantling his threats to the international order, and as the genesis of the Eurobond demonstrates, for Putin, the two are one and the same. .
The opinions expressed in this article are those of the author and do not necessarily reflect the editorial position of Al Jazeera.
