Why Russia and Ukraine have failed to agree?
Ukraine was able to negotiate the restructuring of bond debt with commercial creditors, the restructuring process was completed in November of 2015, when the Ukrainian government approved the terms of issuance of new bonds to replace the old Eurobonds. The restructuring involved the cancellation of 20% of the nominal value of securities, the transfer of the maturity of new securities for the years ahead, while also providing investors with a “bonus” in the form of derivatives tied to the growth of the Ukrainian economy. Not agreed to these conditions only Russia, which insisted on the recognition of the debt of the sovereign and not commercial. Ultimately, the IMF recognized this duty of the sovereign, but it was too late: Ukraine restructured its Eurobonds and new arrangements with lenders stated that regardless of the verdict of the IMF could not offer Russia better terms than were obtained from commercial creditors in the exchange securities.
Russia’s proposal on restructuring announced President Vladimir Putin at the G20 summit in Turkey in November 2015. His proposal was the following: Russia will provide a reprieve on the debt for one year and will provide an opportunity to pay $1 billion a year, starting in 2016. But Ukraine could not agree to this proposal, because it would mean giving Russia more favorable terms than commercial lenders. The net present value (NPV, net present value — evaluation of all future discounted cash flows from the investment) of new Ukrainian bonds to commercial creditors amounted to about 70% of the initial value of the securities, evaluated for the American economist Adam lerrick from the American Enterprise Institute, and Russia’s NPV of restructured loan to Russia was 80% or higher.
“Legally we have no right to offer anyone terms better than those that have been agreed with other creditors”, — noted the Minister of Finance of Ukraine Natalia Jaresko. In addition, Moscow and Kiev could not establish a formal two-way communication, Jaresko and Minister of Finance of Russia Anton Siluanov was not able to meet face to face, in informal negotiations tried to mediate, the Ministry of Finance of Germany, but to no avail.
Why the lawsuit was filed in London’s High court?
Under the terms of the Eurobond issue, Russia could sue Ukraine in the High court of London (English national court) or to initiate arbitration proceedings in the London court of international arbitration (LCIA). While the arbitration proceedings in the LCIA would allow Russia to count on the confidentiality of hearings, materials and even the decision itself, but Russia made a choice in favor of “open and transparent” process in the English court.
February 17, Siluanov told journalists that “the trial in an English court will be open and transparent and protecting the rights of the Russian Federation as the creditor will be independent, credible court that will consider impartially a dispute between two sovereigns concerning default in debt obligations for Eurobonds”.
Russia intends to prove in court the fact of default on the part of Ukraine and expects that the process will not be politicized, says a source in the financial-economic bloc of the government. “The judge is a professional lawyer, the debate is on economic issues. Why would he political-investigative reasons to find out? He doesn’t need it. He establishes the fact of default and shall render the verdict,” says the source. The fact that Ukraine is on the court may attempt to raise questions about the “annexation” of Crimea and the “destabilization” of the Donbas as factors justifying non-payment of $3 billion, not scary. Russia was not going to close the process from the public and therefore did not use the option of arbitration, he says: “We have nothing to hide”.
On the other hand, a positive decision of international arbitration could enforce in 150 countries of the new York Convention. “If the arbitration decision can be executed according to the new York Convention [on the recognition and enforcement of foreign arbitral awards], the English court judgment can be difficult,” says partner and head of international practice Nektorov, Saveliev & Partners Marat Davletbaev.
Whether there were chances for pre-trial settlement?
Despite the lawsuit, the Russian side still does not preclude amicable settlement of the dispute, said on February 17, assistant Finance Minister Svetlana Nikitina. “We are ready for talks, we have never ruled out of court settlement, if Ukraine is ready for constructive good faith negotiations”, — she said.
Ukraine was supposed to repay $3 billion in December 2015, the Finance Ministry said the final occurrence of a default on Eurobonds issued by Ukraine, 1 January — after a ten-day grace period.
However the officials before filing a lawsuit declared that do not exclude pre-trial settlement of the dispute. “And under the old rules [IMF], and new… the first move is made they [a debtor], — Storchak told journalists (quoted by “Interfax”). Storchak was referring to new rules from the IMF for arrears on sovereign debts made by States towards other States. “One of the key principles is that the debtor conducts good faith negotiations — good faith, constructively and so on. The debtor, not the creditor”, he insisted.
In late January, Jaresko said that the parties still have many differences on the issue of debt restructuring, but still hope to settle the dispute without trial, as part of its commitment to the IMF and other creditors.
Who will represent the interests of the Russian and Ukrainian sides in court?
Russia’s interests in the trial with Ukraine is an international law firm Cleary Gottlieb Steen & Hamilton, says Nikitin. Previously, the company was defending Russia’s interests in the arbitration process in the Hague on the “Yukos affair” that lasted nearly ten years and ended in the defeat of Russia and her lawyers. The Hague arbitration in July 2014 was awarded to the former shareholders of Yukos more than $50 billion compensation. For the services of Cleary Gottlieb and her partner — Baker Botts — Russia spent $27 million After losing in this process Russia refused further services Cleary.
In addition, this company represented the interests of “Rosneft” in the judicial proceedings in the “case of Yukos” until a settlement agreement with former group companies YUKOS, which “Rosneft” has signed in March 2015. In General, it is present on the Russian market since 1991.
The advocates of Ukraine are not known yet, representatives of the Ukrainian Finance Ministry on Wednesday evening did not answer the phone , the Ukrainian Embassy in London did not respond to a request by e-mail.
Typically, sovereign bonds are private lenders who consider them a reliable tool for financial investments. Cases of inter-state disputes on the bonds Marat Davletbaev not remember. However, in the history of international borrowings meet the countries defaults on its debt obligations, the most resonant of which are the cases of Argentina, Puerto Rico, and the Congo.
In 2001, U.S. hedge Fund Elliott started buying sovereign obligations of the government are on the brink of default in Argentina, then a division of Elliott Management, NML Capital Limited — refused to accept the proposed Buenos Aires the conditions of loan restructuring. Bonds with a nominal value of $630 million NML acquired for $48 million with multiple discount. With interest accrued to 2012, debt of Argentina before Elliott reached $2.3 billion In total Elliott seeks repayment of the debt of Buenos Aires for 15 years, refusing to participate in two rounds of restructuring.
In the beginning 2000-x years of Elliott-controlled Kensington International bought out the obligations of the Republic of the Congo just for $10 million, and then began to demand to pay a debt. In the end, the British court awarded Kensington $127 million, but in order to achieve payouts on claims company, was arrested on Congolese assets in the amount of $400 million.
In August 2015, the state of Puerto Rico with the status of “unincorporated organized territory” and dependent on the U.S. missed a payment on debts in the amount of $58 million, the country’s Authorities recognized that they do not have money to meet their obligations. Total debt to creditors exceeded $70 billion.