You're reading: Does Ukraine owe anything to an aggressor?

Russia’s annexation of Crimea, including the energy resources and military hardware and bases there, give the Ukrainian government the right of writing off at least $5 billion of its debt to Russia, analysts say.

“An obvious focal point for the Ukrainian government now that
Russia has intervened across its border, and actually seized land and assets is
debts owed to Russia,” mentioned Tim Ash, head of emerging markets research
at Standard Bank Group.

Ukraine owes Russia some $2 billion for natural gas delivered in 2013,
and an additional $3 billion once bonds mature in 2015 that Russia purchased
from it.

Late last year, then-President Viktor Yanukovych
shunned a political and trade agreement with the European Union, and instead
sealed a $15 billion loan program with Russia in the form of eurobonds. Russia
had imposed economic sanctions on a wide range of Ukrainian goods leading up to
the November 2013 EU summit causing local producers millions of dollars in
losses. Designed to infuse cash into Ukraine’s ailing economy, only $3 billion
came in before Yanukovych abandoned his post and fled to Russia.

The question many observers are asking is whether Ukraine should have to
pay back that money given Russia’s subsequent annexation of Crimea.

Anna Gelpern, Georgetown University law professor, suggested a creative
legal maneuver that might allow Britain, a close ally of the new Ukrainian
central government, to invalidate those bonds as part of a sanctions package
against Russia. Because the bonds are English law contracts, Gelpern said the UK
could refuse to honor them in British courts, making them effectively void and
worthless to private buyers.

“If you close the courts to this debt you make it worthless to the
market,” Gelpern said.

While the plan wouldn’t erase the debt, Russia would be effectively left
with an unenforceable debt document instead of a tradable financial contract.

Anders
Aslund, senior fellow at the Peterson Institute in Washington, D.C., says that Ukrainian the government needs to adopt a rigorous policy toward Russian financial claims and the international community should offer ful llegal, political, and financial support.

“First,
Ukraine should refuse to serve any of its debts to Russia and its state entities, including Russian state banks. A country does not owe anything to an aggressor who has violated every international law,” emphasizes Aslund.

But Russia is also getting ready to act on the debt issues involving
Ukraine. On March 21, Russian Prime Minister Dmitry Medvedev said that Ukraine
owes $11 billion related to the so-called 2010 Kharkiv Accords. In the deal
that Yanukovych brokered, Ukraine received a $100 discount on each cubic meter
of gas in exchange for extending Russia’s lease of a naval base in Sevastopol
until 2042. Medvedev implied the agreement is no longer valid since Crimea has
been annexed.

Meanwhile, the terms of the December 2013 eurobonds that Russia
purchased imply that should Ukraine’s debt-to-gross domestic product ratio
reach 60 percent, Russian can automatically call on receiving the $3 billion in
debt. Thus, it appears that Russia’s wants to include the $11 billion into the
nation’s debt portfolio to push it beyond the 60 percent threshold.

Any debt settlements by Ukraine would be very complicated given its dire
financial state.

However, Investment Capital Ukraine analyst
Taras Kotovych says that even if the new Ukrainian authorities will recognize
these debts, it will not lead to a default. “The state foreign debt as for end
of January is $73.23 billion, even if it would be increased by $11 billion – the
debt to GDP ratio would not exceed 50 percent. There are not any threats of
Ukraine’s default,” Kotovych said.

Kyiv Post staff writer
Vladyslav Golovin can be reached at [email protected].