Ukraine claims USD 3 bln loan from Russia is invalid, unenforceable

The Ukrainian government filed with a U.K. court on May 27 its response to the complaint of a Russian entity demanding the repayment of a USD 3 bln loan provided in December 2013, MinFin reported in a statement the same day. The loan was provided by the Russian side in the form of a purchase of its two-year Eurobonds that matured last December.

“Ukraine’s defense claim the loan agreement is invalid and unenforceable,” the MinFin statement said, explaining that it “violated the borrowing limits then in place” and it “was procured through duress exerted by Russia … to prevent Ukraine from signing the Association Agreement with the EU.” The Ukrainian side “intends to defend this action vigorously as part of a broader legal strategy designed to hold Russia accountable for its aggression,” according to the statement.

Alexander Paraschiy: Before, Ukraine seemed to be building its defense strategy on denying the claim that the USD 3 bln is an official loan (i.e. that it was provided by the Russian government), meaning the holder of this loan should be treated on par with other private holders of Ukrainian Eurobonds. With this statement, Ukraine has radically changed its strategy. First, it has recognized this debt as official. Second, it revealed no intention to repay it. Third, it is now trying to either present it as odious debt, or to attach it to the legal obligations of Russia stemming from its occupation of Ukrainian territory.

This is a bold move by the Ukrainian government that carries with its significant risk, especially in the current circumstances. Namely, we wonder what could be the reaction of the IMF, which – based on its rules – is limited in providing loans to countries that refuse to fulfill their official debt obligations.Hopefully, the IMF will continue closing its eyes on this debt issue in deciding on the third loan tranche to Ukraine (providing Ukraine fulfills all the other demands), though the risk of delays due to Ukraine’s newly adopted tough position on the USD 3 bln debt should not be ignored.