Success for Russia in US$3 billion debt claim against Ukraine

Against a backdrop of political tensions between Russia and Ukraine, the English High Court has ruled on a claim brought by the Law Debenture Trust Corporation plc on behalf of Russia, as trustee under a trust deed dated 24 December 2013. The claim concerned non-payment of notes in the form of debt instruments called Eurobonds to the value of some US$3 billion. 

24 April 2017

The Law Debenture Trust Corporation plc made a claim on behalf of Russia as trustee (the Trustee) under a trust deed dated 24 December 2013 in respect of non-payment of notes in the form of debt instruments called Eurobonds to the value of US$3 billion. Russia is the sole holder of the notes at issue. The defendant was the State of Ukraine as issuer of the notes. The notes were constituted by a trust deed governed by English law and which gave exclusive jurisdiction over disputes to the English courts. The dispute was recently brought before the English High Court, when the Trustee applied for summary judgment against Ukraine.

Summary judgment is the procedure by which the court may decide a claim without a full trial, where the claimant can show that the defendant has no real prospect of successfully defending the claim.

Ukraine argued that Russia applied unlawful political pressure to deter it from signing an association agreement with the European Union and to encourage financial support to be taken from Russia instead, and that for this reason non-payment was justified. The US$3 billion in notes was due to be repaid on 21 December 2015 and carried interest at 5%, which equates to nearly US$700,000 in additional interest every day.

The Trustee emphasised the standard structure of the transaction and described Ukraine’s defence as a clear attempt to avoid its responsibilities to repay a debt despite the fact it had received funds in full.

Ukraine raised four defences, each of which was dismissed by the Court

  1. Ukraine submitted that the transaction was void because, as a matter of Ukrainian law, Ukraine did not have capacity to enter into it, not least because the transaction breached limits in Ukraine’s Budget Law. The Court held that as a sovereign state recognised by international law Ukraine had unlimited capacity to borrow, which cannot be limited by the state’s internal laws on borrowing. In addition, the Minister of Finance was the signatory of all 31 debt issuances by Ukraine in which the Trustee had acted between 2000 and 2013. In the Court’s view the Minister of Finance had usual authority to enter into the transaction on behalf of Ukraine. 
  2. Ukraine submitted that wrongful and illegitimate acts alleged to have been carried out by Russia constituted duress under English law, intended to coerce Ukraine into withdrawing from its planned association agreement with the European Union, and that as a result the bond issuance was void and should not be subject to summary judgment. The Court found that the kinds of acts described could not give rise to a defence of duress under English law. Furthermore, the Court decided that the alleged threats of force from Russia fell under the foreign act of state doctrine and as such were issues upon which it could not adjudicate. 
  3. Ukraine argued there was an implied term in the trust deed that prohibited Russia from interfering with Ukraine’s ability to repay or to demand repayment if Russia is in breach of its obligations to Ukraine under public international law. Ukraine contended that military action by Russia in Crimea and eastern Ukraine has the economic effect of severely impeding the State’s ability to meet its obligations. However, the legal test for the implication of terms was not satisfied as it would render the notes untradeable and contradict their express terms.
  4. Ukraine argued non-payment was a proportionate countermeasure, given the severity of the effect of Russian interference on its territorial integrity and economy and that if it was otherwise obliged to make payment, it should be entitled, on the facts of the case, not to meet that obligation. Based on recent case law this argument was rejected by the Court.

Finally, Ukraine argued that the case was not suitable for summary judgment and that there were other compelling reasons for a full public trial, given the circumstances of the case, which it contends is itself a tool of oppression by Russia. The trustee disputed this, contending that Ukraine’s defence was an attempt to shoehorn irrelevant issues of international law into a claim regarding a debt. The judge ruled that ultimately the claim was for the repayment of a debt to which there was no justifiable defence and as a result granted summary judgment in Russia’s favour. Nonetheless, the Court acknowledged the “deeply troubling circumstances” that had been presented to it in Ukraine’s defence.

The Finance Ministry of Ukraine has commented that while it respects the decision it has been granted the right to appeal which it is going to use in the coming months.

This case is merely one front in the legal war that is ongoing between Russia and Ukraine. The Court noted that Ukraine itself was seeking redress at an international level, having filed proceedings against Russia in the International Court of Justice in January 2017 relating to Russia’s actions in relation to Crimea and Eastern Ukraine.  Moreover, a number of investors in Crimea are bringing international arbitrations against Russia for expropriation of assets located in Crimea.