Why Ukraine has not repaid the $3bn debt to Russia and what now could expect

Ukraine failed to repay the $3bn bond to Russia and creates the fifth largest default in history. The IMF closes both eyes and generates a dangerous precedent. But there is much more behind. Meanwhile, Moscow took Kiev to court in London. What happens if the court condemns the Ukraine?

It was all expected. The three billion dollars Putin gave Yanukovych – it's appropriate to say it, well, roughly – at the very beginning of Euromaidan not to sign the Association Agreement with the EU will not come back to Moscow. That’s why Russia has sued Ukraine, bringing in a London court, which now has to decide the first case of its kind in the world on the fifth largest default ever. That’s what Moody's says. That the Ukrainian one, with a volume of $71.5bn, is smaller only of Greece, Argentina, Russia (in 1998) and Puerto Rico defaults. Nevertheless, it is a strange one.

Failure to repay the Eurobond had been widely announced. Ukraine demanded a cut of 20%, as agreed with all other private creditors, knowing that Russia would never accept. On the other hand, Putin himself allowed Ukraine to pay the bond in three annual $1bn tranches, knowing that Kiev would not pay anyway. Between the two countries, the IMF was waiting to give the $17.5bn tranche of the $40bn support package. Money that Ukraine, bled from years of kleptocracy and the war in Donbass, strongly needs but that the IMF – according to its rules – could not give if Ukraine had proved an unreliable debtor, not honoring a sovereign debt to another member of the same Fund.

But things turned out differently. Because Kiev did not pay Moscow, going technically in default, but the IMF has transferred the first tranche of money anyway.

What politicians do not say

The IMF's behavior creates an important precedent. It's like saying that today a country can fail to pay its debts to other countries without any serious consequences.

Behind, of course, there's a quibble. And behind the quibble there’s what politicians don’t say.

The quibble is in the nature of the bond itself, which Ukraine claims is a transaction between private parties – subtracted the rules of the IMF and renegotiable just like those of other creditors –, while Russia says it is a sovereign loan, that should be paid off entirely and on time not to lose the chance to get aid from the IMF.

Behind the quibble is the real reason why Kiev government has no intention to repay Russia. Those three billion dollars are the most immediate and achievable, although insufficient, compensation for the far greater damage caused by the occupation and annexation of the Crimea and the war in Donbass. In addition, Ukrainians, already exasperated by the economic crisis and the loss of parts of the territory, would hardly accept such zeal towards Russia.

Moreover, officials in Kiev insist saying that that money was in reality a bribe paid to Yanukovych who put it in his pocket until the last cent, and that the country really never saw even a penny . The money came to the government of then president shortly before he was ousted by the Maidan revolution and fled the country taking refuge in Russia. For some, even, that money has already been returned by Yanukovych in exchange for protection.

What is certain is that the loan is strange indeed. Granted with the money of the Russian National Health Fund, arranged by White & Chase and Clifford Chance western consulting firm, listed on the Irish stock exchange, and drafted under the English law, it contains bizarre clauses. Like the one stating that the sum could not be used to compensate for any damage Russia could ever cause. The Kremlin had already planned to annex Crimea while giving the money?

The English court will tell who is right. It cannot force Ukraine to pay, but only give one more weapon to Moscow to hassle Kiev. On the other hand, if the London court pushes itself examining the damage inflicted by Russia with the annexation of the Crimea and the war in Donbass, the ruling could prove to be a shoot in the foot for Putin.


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