The English Court of Appeal has overturned a previous ruling and said that Ukraine’s “duress” defence of its non-payment of a $3 billion debt to Russia can go to a full trial. Justice William Blair had previously ruled that a full trial was not needed because Ukraine did not have a “justiciable defence”.
The case dates back to 2013 when Russia lent $3 billion through the issuance of a Eurobond to the then Ukrainian government led by Viktor Yanukovich. After the revolution in Russia which removed Yanukovich from power, Russia annexed Crimea in 2014 and Ukraine defaulted on debt payments in 2015.
The $3 billion debt is owed under English law. Russia has brought a legal case in the UK for payment of the debt. In 2017 William Blair ruled that Ukraine had no proper defence, which Ukraine appealed. That appeal has been successful, so if Russia wants to continue pursuing the claim it will go to full trial in 2019.
Ukraine claims the debt was taken on under ‘duress’ from the Russian government, which invalidates the claim. The defence is therefore related to the broader concept of odious debt that loans to an unaccountable regime, which do not benefit the people of the country concerned, cannot then be enforced against those people. It may be that Russia will decide not to keep pursuing Ukraine in British courts because of the evidence it would now be required to disclose.
Ukraine’s default on the debt in 2015 also came after private holders of Eurobonds collectively agreed to a 20% reduction in the size of the debt. Those bondholders are the only creditors who have reduced the value of any of the debt. For example, the World Bank has not restructured any of the $5.3 billion it is owed.
Despite the restructuring and default on the Russian debt, Ukraine’s government external debt payments are expected to be $6 billion in 2018 – 13% of government revenue. Between 2014 and 2017, the IMF lent Ukraine $12.6 billion to help Ukraine make debt payments. These loans were suspended in 2017 over a failure to implement IMF conditions on privatisation, land sales and anti-corruption measures. If and when the IMF agrees to resume lending, it has in principle agreed a further $8.6 billion of loans.
In 2019, Ukraine’s debt payments are expected to shoot up even further, with $8.5 billion in principal and interest being owed across external creditors.