The Russia-Ukraine Bond Dispute: Another Frozen Conflict?

Map of Ukraine, Including Crimea, and Neighbors, Including Russia

Subject: The Russia-Ukraine Bond Dispute: Another Frozen Conflict?
Date: Sun, 6 Mar 2016
From: Peter Clateman <pclateman@yahoo.com>

Transnational Dispute Management
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This article will be published in a future issue of TDM (2016). Check website for final publication date for correct reference.
This article may not be the final version and should be consideredas a draft article.

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The Russia-Ukraine Bond Dispute: Another Frozen Conflict?

By Peter Clateman

Peter Clateman has worked at leading investment institutions active in Russia and the CIS for over 14 years and has been based in Moscow since 2001. Peter has served as General Counsel of Renaissance Capital, Russia’s leading independent investment bank; VR Capital, an award winning hedge fund with over US$ 2 billion AUM focused on distressed assets and special opportunities in emerging markets; and the Sputnik Group, which was the largest private equity fund focused on the Russia and the CIS at the time it was launched. Peter also served as General Counsel and Management Board member of UC Rusal during its merger with SUAL and the aluminum assets of Glencore to form the world’s largest aluminum producer. Prior to 2001, Peter was an associate in the London and Moscow offices of Skadden Arps Slate Meagher and Flom, a leading US law firm. He received his law degree from Columbia University, where he was Chief Editor of the Journal of East European Law, and his BA from Harvard College.
[DJ: Contact Peter Clateman for version of text with footnotes.]

Litigation is usually not the best way to collect from a defaulted sovereign debtor: a creditor is highly likely to obtain a judgment against the defaulted debtor, but it is usually quite hard to enforce the judgment and collect the debt. Yet, Russia has not waited long after Ukraine’s default on $3bn of bonds in December 2015 to announce that it is taking the dispute to court. As discussed below, both the economics and politics of this dispute have pushed it toward litigation and will continue to discourage the parties from settling, barring a much wider agreement on the more substantial conflicts between Russia and Ukraine. No doubt, viewed from a high level, this dispute is likely to follow the standard contours: Russia is highly likely to win a judgment on the bonds against Ukraine, which will be very difficult to enforce. Nevertheless, a litigation in the English court between Russia, cast as a “holdout” lender, and Ukraine, in the role of victimized, indignant borrower, is likely to demonstrate the state of the art in sovereign debt litigation in at least a few areas.

Recap of the Game at First Half

Russia’s purchase of bonds from Ukraine in December 2013 was part of the wider “Ukraine-Russia Action Plan,” a package of arrangements that included a promise of a total of $15bn of financing for Ukraine at a concessional interest rate, discounts on gas prices and an additional set of mutual concessions. This level of lending would have made Russia Ukraine’s largest creditor and largely supplanted its need for further IMF or Western lending. The Plan was clearly intended, and succeeded, in securing the Yanukovich government’s turnabout with respect to Ukraine’s signing an Association Agreement with the European Union, which had been moving toward conclusion in Fall 2013.

Within two months of the initial sale of bonds under the Plan to Russia, the Yanukovich government fell in the pro-European “Maidan” uprising. In March 2016, Russia had annexed Crimea and pro-Russian a separatist revolt had broken out in the Donbass region with Russian support. Ukraine had managed to borrow only $3bn under the Plan before relations with Russia turned around completely.

Nevertheless, this $3bn debt gave Russia outsized leverage in Ukraine’s debt structure and its future ability to borrow. The leverage derived mainly due to the short two-year tenor of the bonds at a time when Ukraine’s economic situation was deteriorating (stalling GDP, increasing debt, declining foreign currency reserves) and it had a heavy debt service calendar in 2014-16. Any default on the Russia-held bond would trigger cross-defaults on other debt exceeding $20 billion. Furthermore, under IMF policy, a default on a bilateral debt to Russia (although Ukraine claimed the bonds were not bilateral debt) would prohibit the IMF from providing Ukraine with further funds without Russia’s consent.

In October 2015, Ukraine finalized a restructuring with the majority of its private creditors, which rather conspicuously eliminated default by Ukraine on its debt to Russia as a trigger of the cross-default provision in the “New Notes” issued to participants in the restructuring. Shortly thereafter, and just days before the bonds came due, the IMF confirmed that the bonds were a bilateral debt, but almost simultaneously changed its policy to permit further lending to Ukraine even if it defaulted on this debt to Russia. These two developments greatly reduced Russia’s leverage to cutoff Ukraine’s access to capital markets and further IMF funding. Two days before the bonds matured on December 20, 2015, Ukraine declared a moratorium on repayment of the bonds and defaulted.

On February 17, 2016, Russia filed its claims on the bonds against Ukraine in the High Court in London. While IMF policy requires Ukraine to continue to negotiate “in good faith” a consensual restructuring of the bonds with Russia as a condition of future IMF loan disbursements, this requirement does not prevent Ukraine from defending itself in the proceedings. Ukraine’s position in negotiations with Russia is constrained by the “Most Favored Creditor” clause in the New Notes, which only allows Ukraine to grant holdouts a restructuring on terms less favorable than the one granted by the restructuring with the private creditors. This leaves the parties far apart: Russia has repeatedly rejected the restructuring terms offered to private creditors and Ukraine has rejected Russia’s offer to repay the bonds in three annual installments of $1bn per year, but with no reduction of principal or interest.

Second Half Preview

The Bottom Line

Before projecting what might actually happen in the legal dispute, it is worth considering as Ukraine must, the costs of ultimately losing the litigation and being forced, by some means, to pay Russia. Will Ukraine be punished for its obstinacy? Apparently not. Ukraine’s high borrowing costs make the litigation economics relatively attractive. The bonds have a 5% interest rate and, by the bond terms, this rate is applied until the bonds are paid, even if they are in the default. Under English rules, pre-judgment interest on unpaid coupons will likely be charged at 8%, but without compounding. Post-judgment interest on the award would also be 8% without compounding. The result is that, even after adding the cost of generous legal fees, litigation would provide Ukraine a debt and interest holiday with interest accruing at a rate considerably lower than the 7.75% paid on the “New Notes” issued in the restructuring (on which interest must be paid twice annually) and much further below the current yield on its debt, which exceeds 10%. It should also be noted that, under the bond terms, Ukraine did not waive sovereign immunity with respect to prejudgment attachments. Therefore, Russia cannot start the process of chasing and attaching Ukraine’s assets until after receiving a judgment.

Reducing the bottom line to numbers, we can compare the present value of:

Value offered by Russia: $1,000 face value of notes held by Russia with payment made according to Russia’s current offer to repay $1bn of principal per year for three years (assuming coupons continue to be paid as the current rate of 5%): $915

Litigation option: $1,000 face value of notes held by Russia assuming very rapid recovery (judgment in three years and full collection of judgment and interest in three more years) and $15mm / year litigation cost: $835 (decreases the longer litigation/execution continues)

Maximum value permitted by the New Notes (as per the “Most Favored Creditor” clause): $800 face value of 7.75% New Notes, which is the quantity of New Notes issued for each $1,000 face value of old notes in the restructuring: $707

The Defenses

Ukraine’s bonds were issued to Russia on more or less standard terms used for English-law bonds in the current sovereign bond market. Ukraine would normally face a relatively quick summary judgment unless it can find a substantive defense. Speculation about where Ukraine may find arguments has focused on alleged corruption surrounding the issue of the bonds and on Russia’s “aggression” or “illegal” acts in annexing Crimea and supporting separatists in the Donbass. Regardless of Ukraine’s chances, any attempt to make a substantive defense to repayment of a sovereign bond will be a rare enough spectacle. Discussion below will attempt only a brief, practical triage between more and, mainly, less promising directions.

Corrupt Use of Funds

Some commentators see a possible defense for Ukraine in similarities between alleged corruption surrounding the bond issue and a famous sovereign debt dispute known as the Tinoco Arbitration. In this case, it was decided that a Canadian bank could not recover under notes it had bought from the government of Costa Rica because the bank was aware, before it acquired the notes, that funds paid for the notes were to be transferred to the personal accounts of associates of the president under circumstances that were “full or irregularities.” In particular, it was shown that the bank was aware that the president was planning to step down and move to Europe and the funds were to be transferred to pay for a long trip to Italy as well as multiple years of advance salaries for the president’s associates.

The Tinoco Arbitration, decided in 1923 by former US President Taft who sat as sole arbiter, is considered to represent the archetype of the “odious debt” concept under international public law. An “odious debt” is one that a sovereign refuses to recognize because it was incurred by a previous government for a purpose at odds with the legitimate interests of the state. If the lender was aware of the illegitimate purpose of the debt in advance, then the debt becomes unenforceable against the successor government. The concept of “odious debt” may be summarized succinctly, but it has understandably generated considerable debate regarding how to determine what actions are at odds with the “legitimate interests of the state” and whether, in fact, this type of defense exists at all as a norm of current international law.

A detour into the long debate about whether there is an odious-debt rule under international law and what it may cover should not be necessary to consider how the Tinoco Arbitration may apply to this dispute in an English court. The Tinoco Arbitration is the only one ever cited as having been decided based on the concept of odious debt and, for those who believe there is such a concept under international law, there is consensus that it is squarely within the concept. If there is no such norm under international law, there are, in any event, other legal grounds under English law that provide a defense if the facts do match the “archetype” of Tinoco. To outline a few: the bonds may be seen as unenforceable agreements because they do not represent real debts, but rather tools of a fraud against the state; they may be seen as unenforceable as a contract in violation of UK anti-money-laundering or anti-corruption laws; the execution of the bond documents may be seen as a type of ultra vires act by the relevant officials in light of the bonds’ illegitimate purpose. Under any theory, there are complications if it turns out that only part of the funds was stolen. However, there seems to be support for the view that, in such a scenario, Ukraine would still have a defense, but Russia would be able to recover a portion of the debt.

So if Ukraine can make out a case along the lines of the Tinoco Arbitration, it has a good chance it would be legally sound. The new government in Kiev has announced it is investigating the circumstances around the bond issues, so it is clearly thinking along these lines, but it has not so far demonstrated any skill at turning allegations against the former government into well-developed cases. General accusations about corruption in the Yanukovich regime or that the bond proceeds were diverted would not be sufficient to state a defense, let alone prove it at trial. Ukraine may show that the funds were diverted to a variety of non-state purposes, not only into the pockets of Yanukovich and his associates (e.g., into political slush funds or private militias). However, Ukraine would need to trace this diversion with specificity and, what is likely to be most challenging, provide evidence of Russia’s advance knowledge of the diversion. While corrupt governments have no doubt stolen more sovereign debt than one cares to think about, the difficulty of proving such a case is no doubt the reason that another decision like the Tinoco Arbitration hasn’t come along since 1923.

Annexation and Support of Separatists

Does Russia’s annexation of Crimea, or its support of separatists in the Donbass, provide any other legal defenses to Ukraine in the bond dispute?

Some comments on the bond dispute have suggested that a portion of Ukraine’s debt should be apportioned to the separated territories. This idea appears to be more for the negotiating table than court. The English court in this case would not have jurisdiction to apportion Ukraine’s debt. Moreover, the treatises on the international law of succession are pretty clear that, in cases of partial succession (i.e., a territory breaks off from a state that continues to exist) there is no norm regarding apportionment of a part of the continuing state’s debt to the succeeded territory. In any event, there does not appear to have been a legal “succession” in either territory at this point (and Ukraine would certainly agree).

Events in Crimea and the Donbass have also been mentioned loosely in connection with a possible “odious debt” defense by Ukraine in the dispute. While some proponents of the “odious debt” concept suggest that debts of an “odious” government should not be recognized, there are few sources that suggest that such a rule is a part of current international law. Any remotely viable “odious debt” argument would require a link between the bond proceeds and these events. However, the annexation of Crimea and separatist uprising in the Donbass occurred under the new government that took over from the one that incurred the debt and there do not appear to be any allegations that the bond proceeds were used specifically to fund these actions.

Does the fact that Russia’s actions are certainly making it harder for Ukraine to fulfill its obligation to repay Russia provide a defense? English contract law excuses performance due to “impossibility” or “prevention” by the other party, but Russia’s actions merely increase the difficulty of repayment. Added economic hardship for Ukraine and its possible default before other creditors do not rise to the level required to excuse performance. While English law does not impose a general duty on the parties to a contract to act in good faith, some suggest that international law should impose an even higher fiduciary duty on lenders in their relations with sovereign borrowers. Although it would be unprecedented, let’s assume that the court does recognize that a fiduciary duty applies-one analogous to the duty English courts have found in exceptional cases involving private parties or based on norms specifically suggested for sovereign lending. Such a duty would relate to the lending relationship-no overreaching in lending terms; disclosure of relevant information and conflicts of interest; no lending beyond borrower’s means; taking measures to verify that loan proceeds are applied legitimately. The duty would not require Russia to avoid harming Ukraine’s solvency generally. For example, it would not be required to continue trading with Ukraine, or to continue supplying it with gas, or not to reroute pipelines around it. Without a clear connection between the bonds and Russia’s actions in Crimea and the Donbass, it is hard to see how these actions violate a fiduciary duty arising out of the lending relationship.

Nevertheless, if we view the situation from Ukraine’s point of view, it still feels odd that it should be forced to repay Russia while it is committing what Ukraine views as acts of “aggression” against it, despite the lack of a connection between the bond and these acts. A victim of aggression should have a right to self-defense, and forcing the debtor to pay its aggressor would seem to run counter to that right. Moreover, in the international context, the victim of aggression has no clear path to protection or compensation and withholding repayment of a debt may be a justified form of self-help. There is no doubt room for the creativity of Ukraine’s legal minions, perhaps aided by access to a richer set of facts, to develop a defense further in this direction. Ukraine faces a thorny path in the English court, however, if it seeks to base its defense on Russia’s acts being “aggression” under international law. A leading contemporary authority on “aggression” in the English courts is R v Jones & Miller, which recognized that aggression is a “crime” under international law and also confirmed that English courts may incorporate norms of international law into English law. Nevertheless, the court also held that it could not incorporate “aggression” as a crime into English law because it would be a new crime and the English constitution requires that new crimes be established by statute. This is not, perhaps, a dead end. Ukraine does not need for the English court to recognize “aggression” as a “crime,” since it is not seeking to justify its own use of force, but merely its use of non-payment as an economic defense and form of self-help. If “aggression” is a crime under international law, then it is also certainly a “tort”, which the court may incorporate into English law without a statute.

Rather than speculate further on the prospects of such an argument, perhaps it is best to move on to other hurdles Ukraine will face if it seeks to base any defense on characterization of Russia’s actions as “aggression”. Ukraine will not only have to convince the court that the annexation of Crimea and Russia’s involvement in the Donbass amount to “aggression” (which is beyond the scope of discussion here), it will also have to convince the court that this question is “justiciable.” An English court may be expected to rule on an issue of international law when it is relevant to deciding a matter of English law (in this case, a defense based on “aggression” in an English-law bond dispute). However, the matter may be “non-justiciable” if the matter was within the authority of another branch of government to decide or there are no clear legal standards for judging the matter. It is fair (and not just convenient for the sake of brevity) to say that English law on “non-justiciability” of international law questions involving war and territorial disputes is still developing and decisions involve fact specific analysis. Broadly speaking, practice indicates that the court is more likely to find the question justiciable when there is wide international consensus that there has been a fundamental violation of international law. In the bond dispute, the path to “justiciability” could be paved by a European Parliament resolution that labeled Russia’s actions “aggression” and a non-binding UN General Assembly resolution (but not a Security Council Resolution) that called for non-recognition of Russia’s annexation of Crimea and for a cessation of “unlawful” actions against Ukraine’s territorial integrity. However, the court may not view either resolution to be sufficient basis for deciding whether aggression occurred and it may decline to make that call on its own.

Given Ukraine’s uphill battle in putting together a defense along the lines explored above, it has been suggested that England should step in and pass a “debt sanctions” law outlawing repayment of these bonds. As English law governs the bonds, such a law would clearly provide a defense to repayment-essentially importing Ukraine’s moratorium on repayment into English law. As proponents of this approach acknowledge, such a move would be an overtly political act that could undermine London’s role as a “neutral” financial center. If Russia implemented retaliatory sanctions covering even a portion of Russia’s external debt of over $500bn, it would be an “asymmetrical” response, which would have further reverberating consequences. In short, Ukraine will need either a legal precedent or political precedent to defend against repayment of the bonds, either of which is sure to be controversial.

The Disclosure Issue

If Ukraine can get a defense to trial, it will be able to seek court ordered disclosure of information from Russia relevant to its arguments. The potential for such an order could be a bit of wild card for the parties in this case. Russia is almost certain to disregard such an order to the extent it touches on any of the Russian government’s internal discussions or information. While the UK State Immunity Act of 1978 (section 13(1)) prohibits the court from punishing a foreign sovereign with fines or jailing its officials for not obeying a disclosure order, it does not prohibit other sanctions, such as drawing “adverse inferences” from the failure of a foreign government to respond (i.e., if Russia refuses to disclose a document, the court may assume that its contents prove facts helpful to Ukraine). English law does not grant any special privileges to the internal information of foreign governments (except diplomatic communications) and UK courts have issued disclosure orders against them. The fact that compliance with a disclosure order may require a party to violate a foreign law does not, in itself, prevent the court from making the order. However, the court will go through a balancing of factors in determining whether to require disclosure. Whether the court’s action will negatively affect relations with the foreign state is one, but not necessarily the primary, factor.

Similar issues were addressed under US law in NML Capital Ltd., et al v The Republic of Argentina, Argentina’s long-running dispute with holdout creditors. In the Argentine bond litigation, the creditors sought, and were granted, disclosure over the foreign assets of Argentina that may be subject to execution. The disclosure requested had the potential to impinge upon state secrets of Argentina. This request came at the execution phase of the dispute and the requested information was not as sensitive as the information Ukraine might seek from Russia to support the potential defenses discussed above. Any disclosure request by Ukraine in this case is certain to be scrutinized as to whether it has provided sufficient grounds to make the request-Ukraine will not be permitted a “fishing expedition”. Of course, disclosure it a double-edged sword and Ukraine may find itself having to respond to orders to disclose its own internal records. It is difficult to gauge the potential impact of disclosure orders on the dispute from the current vantage point. However, if any of Ukraine’s defenses go to trial, we may expect that the limits of what disclosure can be obtained from a sovereign will be tested.

Overtime: Execution

With a judgment in hand, Russia will have to go down the trail more commonly blazed by certain vulture funds of identifying assets of Ukraine outside the country that are not subject to sovereign immunity and seeking to attach and sell them to satisfy the judgment. The bond terms contain a relatively broad waiver of sovereign immunity from execution that covers all of Ukraine’s foreign assets, except for assets in diplomatic and military use, giving Russia the widest search field possible. The waiver of sovereign immunity also covers “commercial” asset inside Ukraine, but Ukrainian courts will not enforce a UK judgment against Ukraine state assets for a host of reasons, including because repayment of the bond violates the moratorium imposed under Ukrainian law.

Theoretically, Ukraine has some potential exposure to execution not only because the government retains ownership in numerous enterprises, but also because of the structure of these holdings. The assets of a company in which the state merely has ownership normally cannot be used to satisfy a judgment against the state. However, Ukraine owns 100% of many of the larger state companies, which have never been privatized, and their governance and budgeting remains integrated with the government and its ministries. Russia could claim that the assets of these companies should be identified directly with the state-essentially an alter ego argument-and that they are subject to execution.

Moreover, a good portion of whatever foreign assets Ukraine has is likely to be in Russia (which in Russia’s view includes Crimea). Russia’s own law on foreign sovereign immunity came into force, coincidentally (?), on January 1, 2016. This law incorporates the modern “restricted” view of sovereign immunity that allows the “commercial” assets of foreign states to be used to satisfy judgments and also clarifies the rules for waiver of immunity by foreign governments. Russian courts would be able to apply this newly-minted law and the relatively wide waiver of immunity in the bond terms to determine which Ukrainian assets are available for execution in Russia. Looking even further into hypotheticals, Ukrainian state assets in the Donbass may also be exposed to execution.

As a practical matter, however, it is unclear whether Ukraine has any significant assets abroad, including in Russia. In the breakup of the Soviet Union, assets within each former republic were kept by that republic and the Soviet Union’s foreign assets went to Russia. In Crimea and the Donbass, there may be few state assets left, now or at the time of execution, that have not already been expropriated or destroyed.

If the bond dispute does go to the very endgame, it is possible that, while Russia is still engaged in chasing down Ukraine’s foreign assets, Ukraine could prevail on one or more of the claims that it has brought, or announced that it intends to bring, against Russia in relation to the annexation of Crimea and its support of separatists in the Donbass. (Discussion of those claims is for another day.) If Russia manages to attach any of Ukraine’s foreign assets, Ukraine may be able to intervene in local executions proceedings to ensure that any proceeds from such attachment were used, in effect, to set off Ukraine’s own judgment amount, rather than being remitted to Russia. Some observers have noted that the bond terms contain a “no set-off” clause, but this clause refers to a right to raise off-setting claims as a defense in the proceedings on the bond claims (even without such a clause in the bond terms, set-off would not be permitted for claims unrelated to the bonds). This clause does not prevent the type of effective set-off in the execution phase discussed here. If Ukraine eventually wins significant compensation claims against Russia for events in Crimea or the Donbass, it will likely face its own collection difficulties. The possibility to satisfy such claims by, effectively, setting them off against any amounts Russia manages to collect on its bond claim further decreases Ukraine’s incentive to make any cash settlement now of Russia’s claims.

Pari Passu

Since the (in)famous decisions of the US courts in the case of NML Capital Ltd., et al v The Republic of Argentina regarding the meaning of the pari passu clause in sovereign bonds, this clause has become a potentially more powerful tool for securing payment from dead-beat sovereigns than chasing assets around the world.

In the Argentine bond litigation, language in the bonds’ pari passu clause to the effect that “payment obligations” under the bonds shall “rank at least equally” to other payment obligations to certain other creditors was interpreted to mean that the borrower must pay, to the extent it makes a payment, all such creditors pro rata to the amount each is owed at time of payment. This creates a major conflict between holdout creditors (such as Russia in this situation), whom the borrower refuses to pay until they agree new terms, and creditors who have already agreed to a restructuring and are receiving current payments on their new bonds.

NML and its fellow holdout plaintiffs in the Argentine dispute already had judgments in hand (for many years) that Argentina owed them the full amount on the defaulted debt plus interest, and so a ruling that the Argentina also violated the pari passu clause in the bond terms meant little in itself. However, the US courts went further and issued an order barring third parties (e.g., banks and clearing systems) from participating in any non-pro rata payments to Argentina’s bondholders. Argentina’s banks announced they would comply with the order and, not wanting to pay the holdouts in full, Argentina was also prevented from paying the restructured bondholders, resulting in a default on large portion of its external debt in 2014. At the time of writing, a deal has apparently been reached with most of the remaining holdouts, almost two years after Argentina was forced into the new default and more than 12 years after its original default.

The pari passu clause in the Ukrainian bonds contains similar language to the Argentine bonds regarding the equal “rank” of “payment obligation” with an exception for “such obligations as may be preferred by mandatory provisions of applicable law.” Some commentary on the bond dispute suggests that this exception completely guts any strength the clause may have because Ukraine can simply pass a law creating a payment preference (in fact, it has already passed the moratorium which does just that). However, the moratorium or any similar law passed by Ukraine is not likely to be viewed as a mandatory provision of “applicable law” by the English court since Ukrainian law is neither the “law of the contract” (which is English law) nor the law of the place of payment under the bond terms.. This still leaves a couple of questions about how the English court will deal with the pari passu issue.

Firstly, various English practitioners have, essentially, ganged up to present the view that the English courts interpreting the clause under English law would not read a pari passu clause with language about equal “rank” of payments to require “ratable payments.” It should be noted that many US practitioners and academics also opposed the interpretation of the pari passu clause applied in the in the NML Case decisions before they were issued. At a minimum, it is early to say that the English courts will come out differently from the US court on pari passu. As recently as 2003, the English court in Kensington International v Republic of Congo specifically noted, in declining to decide whether a pari passu clause in a sovereign debt required ratable payments, that the issue was undecided by English courts. Ironically, the US courts may address the meaning of the pari passu clause under English law bonds before the English courts do. Some hedge funds are currently seeking an order in the New York court blocking violation of the pari passu clause in English law bonds issued by Argentina. Each side has enlisted an actual lord as its expert on English law and they are likely to battle it out this year in New York.

Secondly, even if the English court rules that the pari passu clause requires ratable payments among the same class of creditors, the ruling would be without teeth unless the court issues an order to comply that extends to third parties. In the NML Case, the judge apparently believed that Argentina had acted in various and extreme ways to avoid payment under the defaulted bonds and was prepared to grant extraordinary measures to assist the plaintiffs. In the Kensington case mentioned above, the English court declined to issue such an order, but the court was clear that its decision was based on “the particular circumstances of the case,” which are not relevant to the current bond dispute. Therefore, even if the English court applies the “ratable payment” interpretation of the pari passu clause, it is an open question as to whether it will issue such an injunction under the circumstances.
The court order issued in the Argentina bond dispute on the back of the pari passu clause has proved a very strong, if not fast-acting, tool in pressuring Argentina to pay holdout creditors on terms vastly superior to those who earlier participated in the voluntary restructurings. If the proceedings in the bond dispute get to this point, Russia may test the pari passu waters and Ukraine’s other creditors will certainly be paying nervous attention.

Recap and Punditry

Russia is no doubt aware of the long litigation path ahead and that turning to court will not increase pressure on Ukraine, but rather grant it a rather favorable debt holiday. So, what’s in it for Russia? While the economics are against Russia, it may see the London trial as a no-lose proposition politically. If it wins a judgment, then the current Ukrainian government’s allegations about the corruption and other evils of it predecessor will be undermined, even if it never gets to present the speculative defense outlined above. If Russia loses, well, then it is the court that will have been on trial. In announcing Russia’s filing of claims against Ukraine in the High Court, Russia’s Finance Minister stated that the very hearing of a dispute between two sovereigns in the English court would be a “historical precedent.” He expects that the “court will be open and transparent” and that it is “independent” and “competent,” and that it will review the case “impartially.” Pre-trial statements of faith in the court are usually contingent on the outcome. A win by Ukraine would be unprecedented, whether based upon an “odious debt” or equivalent defense; based on Russian “aggression”; due to court sanctions against Russia for failure to comply with disclosure orders that impinge upon its sovereignty; or due to overtly political English “debt sanctions” law targeting these bonds. A Russian loss would fit into its perennial narrative that it is treated in the West with double standards. Given that Russia has been spending considerable economic, political and even military capital on actions whose connecting thread seems to be highlighting such double standards, risking a few more billon to underline the issue won’t add much to the investment. And it will certainly give sport fans some action to look forward to.