Streetwise Professor

December 20, 2015

Russia v. Ukraine: Will the Concept of Odious Debt Have Its Day in Court?

Filed under: Economics,History,Politics,Russia — The Professor @ 4:39 pm

Ukraine has announced that it will default on the $3 billion debt to Russia incurred in the waning days of the Yanukovych government–or is it regime? For that distinction could prove to be important.

It is somewhat surprising to me that as of yet Ukraine has not formally invoked the concept of “odious debt,” even though it seems apposite. Although there were earlier legal precedents (notably, US repudiation of Cuban debts incurred by the Spanish government prior to 1898), the concept was formalized in the 1920s by (ironically) a Russian emigre, Alexander Nahum Sack. Sack wrote:

When a despotic regime contracts a debt, not for the needs or in the interests of the state, but rather to strengthen itself, to suppress a popular insurrection, etc, this debt is odious for the people of the entire state. This debt does not bind the nation; it is a debt of the regime, a personal debt contracted by the ruler, and consequently it falls with the demise of the regime. The reason why these odious debts cannot attach to the territory of the state is that they do not fulfil one of the conditions determining the lawfulness of State debts, namely that State debts must be incurred, and the proceeds used, for the needs and in the interests of the State. Odious debts, contracted and utilised for purposes which, to the lenders’ knowledge, are contrary to the needs and the interests of the nation, are not binding on the nation – when it succeeds in overthrowing the government that contracted them – unless the debt is within the limits of real advantages that these debts might have afforded. The lenders have committed a hostile act against the people, they cannot expect a nation which has freed itself of a despotic regime to assume these odious debts, which are the personal debts of the ruler.

The key criteria established by Sack fit in the Ukraine-Russia case quite well. Yanukovych’s regime quite clearly utilized the debt to “strengthen itself” and “to suppress a popular insurrection.” If anything, the debt was used contrary to the interests of the nation. Putin provided the debt in order to make it financially feasible for Yanukovych to reject an EU association agreement, even though this agreement was widely popular in Ukraine. Furthermore, it is quite clear that the lender–Russia/Putin–were knowledgeable of the purposes for which the debts were “contracted and utilised.” Indeed, Putin offered the loan precisely in order to achieve these purposes, which suited Russia.

Russia, of course, argues that Yanukovych’s government was legitimate, and the current government is an illegitimate regime. Given the history, the facts seem to be on Ukraine’s side.

If the case proceeds, I anticipate that Ukraine will eventually invoke this doctrine. At the very least, it would strengthen its negotiating position.

Putin evidently has given up on a wholesale invasion of Ukraine, or even the eastern Ukrainian regions that he once (but no longer) referred to as Novorossiya. Militarily it was likely to be too difficult, and it would likely lead to further western measures that crush the already weakened Russian economy.

Instead, Putin is resorting to measures to prevent the consolidation of the Ukrainian state. The conflict in Donbas is kept on simmer. There is evidence of Russian active measures in the parts of Ukraine under government control. To these military and paramilitary means, Putin is adding economic conflict. Last week he announced that Russia was suspending a free trade agreement with Ukraine. Russia’s rigid negotiating stance on the $3 billion loan is another way of weakening Ukraine, and also creating strains between the Ukrainian government and the west (in the form of the IMF). Rather than striking a death blow, Putin is inflicting multiple ulcers on its recalcitrant neighbor.

Unfortunately, Ukraine is adding self-inflicted wounds to those dealt them by Putin. In particular, it has failed signally in its attempts to get corruption under control. Oligarchs still control the country. Struggles between oligarchic factions are reflected in bitter conflict in the Rada, culminating in the farcical events of last week, when a legislator lifted up Prime Minister Arseniy Yatsenyuk (grabbing him in a very delicate place in the process) while Yatsenyuk was addressing the parliament. Ukraine keeps copious quantities of inflammables piled up, making Vlad the Arsonist’s job very easy. Old Sovok habits die hard, and Putin is exploiting that.

Realpolitik, geopolitics, and western exhaustion and frustration with Ukrainian dysfunction are leaving Ukraine increasingly isolated. This is why Putin is pushing on many fronts, including on the matter of the $3 billion of debt. Ukraine’s best legal option is to declare the debt odious, and fight it out in court. It will at least buy time, and it has a reasonable chance of success given the, well, rather odious history of this loan.

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5 Comments »

  1. To the above might be added that some, and maybe much, and possibly all of that $ 3 billion is presently in the hands of Yanukovych who resides in Russia, and from whom Putin should more properly be asking for its return.

    Comment by Lubomyr — December 22, 2015 @ 2:03 am

  2. I agree with Lubomyr – Putler Khuylo is looking in the wrong place, Yanusvoloch Yanukonvikt is living in Rasha right under Putler Khuylo’s nose, and Putler Khuylo should get his money from Yanukonvikt.

    Add to that the reparations that Putler Khuylo and the Rashan Federation owe to Ukraine for breach of various treaties and agreements, and for the loss of lives and property that they inflicted on Ukraine in Crimea and parts of Donbas

    Comment by elmer — December 23, 2015 @ 8:33 am

  3. All true, but the current Ukrainian government will do everything it can to lose a winning case, like it has already done with prosecution of the various top thieves of Yanukovych regime.

    Arguably, they are incurring odious debt themselves, by loading up on unsustainable IMF loans with the sole purpose of being able to put off any meaningful reforms even as the economy remains in free fall.

    Comment by Ivan — December 24, 2015 @ 12:05 pm

  4. @Ivan-Yes, the Ukrainians are like the Palestinians. They never miss an opportunity to miss an opportunity.

    The ProfessorComment by The Professor — December 24, 2015 @ 4:27 pm

  5. To prove my point, they have just adopted a budget with spending 12.2 percent above revenue, the deficit being around 3 billion in USD. So we know Putin’s money is being put to good use, destroying Ukraine more effectively than he could ever hope militarily.

    Comment by Ivan — December 25, 2015 @ 12:36 am

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