The saga of Ukraine’s $3 billion debt to Russia may be drawing to a close, with the first indication that Ukraine has grudgingly decided to pay the $3 billion Judgment the British High Court awarded Russia in their recent court case.
Though it has not been widely reported, it seems that Ukraine has today paid Russia the court costs and interests Russia was awarded in the case.
That is a strong sign that Ukraine now expects to lose the appeal it has made against the Judgment to Britain’s Court of Appeal.
In the meantime, though the fact has also received scant attention, Ukraine within the last few days has also just borrowed $3 billion in the international money markets.
This is of course exactly the same amount as the amount Ukraine owes Russia, and though no one is saying it there has to be a high probability that the money Ukraine has just borrowed is intended to be used to pay back Russia.
The point is that the moment the appeal is lost and payment of the Judgment becomes due Ukraine will be in default of a debt it owes to Russia, which is a member of the Paris Club. At that point according to IMF rules all IMF lending to Ukraine should stop unless the amount of the Judgment is paid in full.
Since Ukraine cannot survive financially without IMF assistance, it looks as if the Ukrainian government has decided that it has no option but to borrow the money it owes Russia in order to pay Russia back, even though the interest on the fresh borrowing at 7.375% is very high.
Needless to say that means that all previous speculation that the IMF would set aside its own rules and continue lending to Ukraine even after it had been declared by the High Court in London to be in default of a debt owed to Russia, a member of the Paris Club now looks to be wrong.
Presumably there have been private discussions between the Ukrainian government, the IMF and Ukraine’s Western backers over the last few weeks as it has become increasingly clear that the Court of Appeal would reject Ukraine’s appeal, and a decision was made that for the IMF to go on lending to Ukraine in disregard of its own rules and in defiance of a Judgment of the British High Court was simply not a viable option in view of the momentous consequences such a step would have for the smooth functioning of the international financial system.
That would have left Ukraine with no other option than to pay the debt or see its IMF programme collapse.
Since Western governments are unwilling to give Ukraine the money to pay the debt, that left Ukraine with no other option but to borrow the money at high interest on the international money markets.
Given the reluctance of commercial creditors to lend to Ukraine – a country the success of whose IMF programme is open to doubt – it is likely some quiet pressure was brought by Western governments onto Western financial institutions to ‘persuade’ them to buy Ukraine’s latest debt offering. The price these institutions have demanded in return in the form of the high interest rate is however very high.
This has been a costly episode for Ukraine. It refused to pay the debt when it fell due or negotiate terms for its repayment when they were offered by the Russians, choosing instead to contest the debt in the British High Court. As any lawyer would have advised, this was a dangerous strategy, and in the event Ukraine lost the case and its actions suggest that it now expects to lose the appeal.
It is sometimes said that by contesting the debt Ukraine gained time to pay it back when its finances had stabilised.
That however presupposes that an agreement with Russia to repay the debt on a sustainable basis was impossible, whereas on the contrary the Russians offered to negotiate repayment of the debt on a reasonable basis.
Given Russia’s willingness to negotiate repayment of the debt, and given Western determination to support Ukraine – to the point where the IMF has repeatedly bent its rules to go on lending to Ukraine even in circumstances where it is commercially unwise for it to continue doing so – saying that Ukraine has gained a financial or economic advantage by contesting the debt seems to me a difficult position to sustain.
On the contrary, had Ukraine shown good sense and goodwill, and had it made a genuine attempt to come to a settlement with Russia, I have no doubt an agreement would have been reached which would have resulted in the debt being paid back at much less cost than the price Ukraine will have to pay now.
In reality the true reason why Ukraine refused to pay the debt to Russia was not because it could not do so but because the pathologically anti-Russian Maidan regime in Kiev found paying the debt politically and emotionally impossible.
Now that it looks like the debt will have to be paid, Kiev’s propagandists will have the difficult job of explaining to Ukraine’s people why a debt to Russia which they were told Ukraine would never have to pay has to be paid after all.