U.K. Supreme Court Rules in Favor of Ukraine, Sends $3 Billion Russian Bond Default to Trial

Ukraine won a significant boost in its attempt to set aside a $3 billion defaulted bond after the UK Supreme Court ruled that judges need to consider the backdrop of Russia’s campaign of threatening behavior in the run-up to the annexation of Crimea.

Britain’s top court declared that a judge should pore over Russian attempts to strong-arm Ukraine into issuing the bond, giving the green light to a full-blown London trial. The long-awaited decision allows Ukraine to argue that the bond, sold in 2013 on the eve of the revolution in Kyiv, was part of unlawful political and military aggression from Moscow.

“The success of Ukraine’s defense turns on whether it can establish that Russia threatened the use of force and that those threats were a reason for Ukraine’s decision to enter into the agreement,” Judge Robert Reed said in the ruling. “That question can only be determined after trial.”

The judges gave their decision Wednesday in a ruling that knocks out Russian attempts to win the case and allows Ukraine to stave off any further repayments.

Ukraine’s push to postpone debt repayments has already won support at an international level from key government creditors as well as private bondholders. Ukrainian officials have since been exploring ways to restructure the nation’s debt as funding options dry up, with Russia’s invasion destroying industry and depleting foreign reserves.

“The burden will be on Russia to persuade the court that its threats contributed nothing to Ukraine’s decision to issue these weaponized bonds,” the Finance Ministry said in a statement. “All the evidence will be examined, and the world will be watching.”

The London case has been elevated from a simple commercial dispute to one that has legal implications about the ability of English courts to decide upon sovereign defaults. Judges have traditionally shied away from intervening in foreign state affairs — or what a lower court called “acts of high policy by Russia.”

The judges ruled that while Ukraine couldn’t argue that Moscow applied economic pressure, it could submit that Russia’s threats to use violence against armed forces and civilians amounted to “duress.”

“Duress of the person and duress of goods are clear examples of illegitimate pressure,” the majority of judges said.

The judges did prevent Ukraine from arguing that the agreement was entered into without the authority of the government. Both the president and minister of finance were involved in the lead-up to the borrowing, the court said.

Ukraine stopped interest payments on the $3 billion euro bond at the heart of the dispute at the end of 2015. Lawyers for the Law Debenture Trust that acts on behalf of the Russian state had argued that English courts should decide the case as a straightforward default, without taking politics into consideration.

The case was re-argued just before last year’s invasion of Ukraine and has a long history with appeal judges overturning a lower court ruling. At the time of the appeal ruling, Ukrainian officials called it the first official recognition by an international court of Russia’s “hybrid war.”

“Russia may just throw its hands up and refuse to engage further — having already repeatedly denounced the West its actions in defanging the “blackmail bond,”” Maximilian Hess, Fellow at the foreign policy research institute, said after the ruling.

Alex Gerbi, a lawyer at Quinn Emanuel Urquhart & Sullivan, which acts for the Ukrainian ministry of finance said the ministry looked forward to a “full public and impartial judicial consideration of that case, with the requirement for full disclosure by Russia in respect of its conduct towards Ukraine.”

Lawyers for the Law Debenture Trust, Norton Rose Fulbright, which is giving all fees paid for the work to charity, declined to comment. The trust said separately it takes its “fiduciary obligations seriously and all action taken to date has been in the proper discharge of those duties.”

—With assistance from Daryna Krasnolutska and Irene García Pérez.