U.K. court rules against Ukraine in USD 3 bln debt case

30 March 2017

The High Court of London ruled on March 29 to reject all the defense arguments of Ukraine in a dispute with Russia on USD 3 bln Eurobonds. In that way, the court recognized the right of Russia to demand repayment of a USD 3 bln debt that was due in December 2015, as well as interest (5% p.a.) unpaid since June 2015.


The same day, the Russian Finance Ministry offered its interpretation that the court “made a final decision obliging Ukraine to pay Russia its debt on Eurobonds in full, with no additional hearings on this issue.” In its turn, the Ukrainian Finance Ministry emphasized that the court allowed Ukraine to appeal and also suspended the execution of the ruling. “This decision was the first stage. Ukraine will continue defending its case and protecting state interests consistently, using all avenues available to it under English law,” its press release said.


Recall, the holder of a USD 3 bln Eurobond (a Russian state-owned fund) was Ukraine's only major creditor that refused to take part in a 2015 restructuring that provided desperately needed relief to the Ukrainian economy. The government's debt operation resulted in the exchange of then-existing sovereign Eurobonds (the old notes) worth USD 15 bln into a series of 7.75% Eurobonds maturing in September 2019-September 2027 (the new notes) and GDP warrants. The debt operation was a part of the IMF’s Extended Funds Facility program initiated in March 2015.


Alexander Paraschiy: This is a negative surprise, but it changes little for Ukraine.  On the positive side, we see the latest ruling will have no direct implications for Ukrainian financial accounts. Neither it will have any implications for UKRAIN Eurobonds.


First of all, non-payment of the USD 3 bln bonds (the “old notes”) will not trigger a cross-default under any other existing Ukrainian sovereign bonds (the new notes), according to their prospectus. Moreover, the new notes contain a Most Favored Creditor clause, which prohibits Ukraine from repaying the USD 3 bln debt to Russia in the near term. Namely, the Russian holders of the “old notes” cannot get a repayment schedule implying better NPV (at a 10% discount rate) than any other holder that agreed to restructure their notes in 2015. In other words, Ukraine would be breaching its obligations under all the other sovereign Eurobonds if it repays its debt to Russia in full earlier than in 2022.


Secondly, the Ukrainian side can claim that the soon repayment of Russian debt will violate the IMF’s Extended Fund Facility program, which assumes no principal payments on Eurobonds till the end of 2018.


Thirdly, a law on the moratorium on debt repayment, approved by the Ukrainian parliament in May 2015 and amended in April 2016, prohibits any payments on Russian debt until it is restructured. That means no one in Ukraine will dare to decide on repaying this debt, lest they be prosecuted for abuse of authority.


Ukraine will appeal the ruling to buy some more time for the government (about a year) and freeze the situation, but we do not expect it will succeed. Even when the Russian side finalizes its legal victory, the commitments that the Ukrainian government took to the IMF and the holders of the new Eurobonds - as well a local law - will still prohibit such payment. The only way that Russia can get the ruling enforced will be to claim some of the Ukrainian government's foreign assets (the above-mentioned law protects the government’s assets in Ukraine's jurisdiction).


This entire process will take years, in our view, and will result in few payments to the Russian government. Meanwhile, Ukraine will be preparing its claims against Russia for economic damages incurred by the occupation of Crimea and military aggression in Donbas – such damages should exceed the value of the contested Eurobond.