Ukraine gears up for London legal battle: Russia is taking its neighbour to court over an old political loan

Chris Papadopoullos
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General Views Of Kiev - EURO 2012 Venue City
Kiev renegotiated most of its debt last year, but Russia was not part of the deal (Source: Getty)

The tense standoff between Ukraine and Russia over a $3bn loan will enter its next stages in London as we head into 2016.

Russia said at the end of last week that it will be taking Ukraine to an English court after the country failed to repay a $3bn bond due last month.

The countries’ debt standoff goes back to 2013, when Russia offered the Ukrainian President Viktor Yanukovych the loan. It was supposed to be the initial tranche of a $15bn package, designed to keep Ukraine closer to Russia than the EU.

But when Yanukovych was ousted in 2014, the new government began pushing for closer ties with the EU, signing the EU-Ukraine Association Agreement.

After conflict in Crimea and Eastern Ukraine plunged the economy into recession, it became clear Ukraine would have to reorganise its debt. Russia was left out of a debt restructuring last year, in which lenders accepted losses and a longer repayment schedule. Russia claims that Ukraine rejected an offer to split payments over three annual payments of $1bn.

Ukraine maintains that Russia rejected an initial offer, and that due to a “most-favoured creditor” clause, it is unable to repay Russia in full if it has agreed to cut repayments to other lenders.

Russia has also criticised the “most-favoured creditor” clause that Ukraine is citing to justify not repaying Russia.

Another dimension to the standoff is Ukraine’s International Monetary Fund (IMF) bailout. The IMF has agreed to provide $17bn of cheap loans to Ukraine over the next four years provided it undertakes economic reforms to boost growth.

However, it is not clear whether the IMF will continue to lend if Ukraine refuses to pay Russia.

The IMF said last month it would continue to lend to countries that are in arrears with other governments provided they were negotiating “in good faith”.

The two countries this weekend imposed new trade embargoes on each other. Ukraine’s Prime Minister Arseniy Yatsenyuk resents Russia’s behaviour. At a recent government meeting he said the annexation of Crimea and military aggression in the east of the country were just one part of “Russia’s plan aimed at destroying the Ukrainian state”.

“We stopped the military aggression of Russia, and now we are stopping the economic-financial and diplomatic aggression.”

He added: “We are in full gear, ready for battle in court with the Russian Federation.”

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