Response to $3 billion: as Ukraine justifies the refusal of Russia to return the debt

Ukraine was represented by the English court’s arguments justifying its refusal to repay Russia the $3 billion loan in 2013. Kiev linked the non-payment of debt with the “occupation” of Crimea, “destabilizing” of Eastern Ukraine and the overall strategy of “aggression” by Russia. Moscow, in turn, positioning the dispute as a purely financial and legal: from this point of view Ukraine is simply not repaid the debt on time. Formally, Russia is not even a party to the proceedings: a lawsuit was filed by the British company The Law Debenture Trust Corporation (Trustee for bond issuance), although in the proceedings it took on behalf and in the interests of Russia.

The forced funding

The President of Russia Vladimir Putin in December 2013, explained the decision on financial assistance to Ukraine totaling $15 billion (Russia before the change of power in Kiev have time to buy bonds for $3 billion) that “a brotherly nation and a brotherly country”. But Ukraine in their objections to the Russian claim proves that the loan was in fact imposed on her: since July 2013 Russia has provided strong political, economic and financial pressure” to Ukraine (for example, through trade restrictions), forcing it to abandon the signing of the Association agreement with the EU and to make a choice in favor of Russian funding.

At that time, Kiev has not had the opportunity to borrow on the international market or international financial institutions, so there was only one real choice — to attract money from Russia, agreeing on the “onerous and disadvantageous” conditions, which insisted that Moscow claims Ukraine is in the document for the London court. Among such conditions Ukraine notes the provisions that are not typical for a sovereign Eurobond issues: for example, the condition prohibiting Ukraine to increase the national debt above 60% of GDP (in this case, Russia received the right to demand early redemption of the securities), and the condition that gives Russia the right to declare a default on these securities in case of default of Ukraine on any debt to the Russian state companies (e.g. Gazprom).

The Ukrainian side referred to the talks on 12 December 2013 between the delegation from Kiev and representatives of the Russian Ministry of Finance (including the Minister of Finance Anton Siluanov and his Deputy Sergei Storchak and Alexey Moiseyev), which allegedly determined the final terms of the loan. In particular, as a result of these negotiations, the parties agreed to the loan of $3 billion (instead of $1.6 billion, which initially requested by the Ukrainian negotiators). Of the $3 billion Ukraine had to immediately pay Gazprom $1.6 billion on account of debt “Naftogaz of Ukraine” for deliveries of Russian gas, it follows from the Ukrainian response to the lawsuit. It also says that on these terms through the Minister Siluanov insisted President Vladimir Putin.

The press service of the Ministry of Finance did not respond to a request , Storchak did not answer SMS. Alexei Moiseyev remembers that in December 2013 in Moscow came the then Minister of Finance of Ukraine Yuriy Kolobov, but “no conditions are imposed”, says Moses. From further review, he refused.

Not according to the laws of Ukraine

Ukraine argues that the issue of bonds for $3 billion has violated a number of provisions of the legislation of the country. So, according to Kiev, the emission was violated the law on budget of Ukraine for 2013, according to which at the time of preparation of issue the country could not take more than $1.6 billion This argument at the meeting on 12 December 2013 with Russian officials led by the Minister of Finance in the government of Mykola Azarov Yuriy Kolobov, follows from the document.

The document notes that the final parameters of the bond issue have not been approved by the Cabinet of Ministers of Ukraine. In particular, in the adopted by the Cabinet of Ministers of Ukraine of 18 December 2013 the resolution No. 904 on the terms of issuing Eurobonds was absent three positions that are present in the final version of the prospectus of securities and which, according to Ukraine, are “unusual” for such tools and “bonded” to the country (mentioned above covenants on the debt level and the cross-default and No Set-Off Clause — a provision declaring set-off of mutual debts). If the latter condition was not, Ukraine could theoretically offset $3 billion at the expense of some of the Russian debt to it (for example, arising from the potential claims of Ukraine to compensate for the loss of the Crimea), noted the observers.

In addition, the Cabinet received the draft agreement on the bond issue, as well as expert opinion on this issue a day after its approval on 18 December, that is in violation of the rules of procedure of the Cabinet of Ministers of Ukraine, follows from the document.

Amendments to the law on budget of Ukraine for 2013 were adopted by the Verkhovna Rada on 19 December 2013 and entered into force after the signing by President Viktor Yanukovych on December 29, 2013. Ukraine insists that the decision of the Cabinet is legally insignificant, because the legal system, the principle of “the law is not retroactive”. In addition, the government was not entitled to approve the loan for $3 billion because of amendments to the law on the budget of the borrowing limit has been raised only $0.6 billion, i.e. did not cover the entire amount of issue.

Prevented to service debt

Ukraine notes that a properly performed his part of the agreement of December 2013: in particular, in the first quarter of 2014, Naftogaz paid Gazprom us $2,145 billion (partly from funds borrowed by Russia through the purchase of Eurobonds). But in February 2014, Russia unilaterally refused to issue further loans amounting to $12 billion, although this was “a fundamental part of the agreement,” said Kiev. But after the annexation of Crimea to Russia, Gazprom stopped selling gas to Ukraine at a discount, that is Russia, according to Ukraine, has ceased to perform the agreement, under which there were issued Eurobonds for $3 billion.

Moreover, the further actions of Russia, among whom were trade sanctions and “destabilization” of Eastern Ukraine (in Ukrainian, the document States, for example, “the secret supply of weapons to the militia and regular Russian troops”), has directly affected the possibilities of Ukraine for servicing debt to Russia. The economic purpose of the loan was destroyed, argues the Ukraine. The country has lost access to international borrowing, was forced to seek assistance from the IMF — and this is a direct consequence of the Russian aggression, says Kiev. Thereby, the document says that Russia violated the “implied” condition of Eurobonds: not to interfere with the debtor for debt service.

International law

Finally, Ukraine believes that the Russian loan were meant as a matter of course (though not literally spelled out) that Russia is not entitled to demand from Ukraine’s financial liabilities loan and at the same time violate their own obligations under international law. According to Kiev, Russia violated them — “used force against Ukraine and/or interfered in its internal Affairs”.

In another part of the objection refers to Ukraine “illegal occupation of the Crimean Peninsula”, “illegal expropriation of Ukrainian state and private assets”, “support separatist elements” and “military intervention” in the East of the country. “A well-known part of the Russian Federation in the destabilization of Eastern Ukraine is a clear violation of the usual (customary) international law and article 2 (4) of the UN Charter [principle of refraining from the threat or use of force]”, — the document says.

Alternative version of the same argument to justify the non-payment of $3 billion, Ukraine formulates: she believes she has the right to refuse Russia in repayment of a debt in circumstances where it is “appropriate and proportionate countermeasure in the framework of public international law in order to encourage the Russian Federation to respect its international obligations”. Kiev believes that the court should refuse satisfaction of requirements of Moscow, “while Russia continues to violate international law in its relations with Ukraine.” In particular, the Kyiv implies that he does not need to repay Russia’s debt until it will stop to “invade” Crimea.

Featuring Anna Mogilev