LONDON (Reuters) - Russia and Ukraine begin the next round in their legal battle over a politically charged $3 billion (2.16 billion pounds) Eurobond on Monday, when a hearing at the court of appeal kicks off in London.
Ukraine is suffering sluggish growth and has come under international pressure for its slow progress in tackling corruption, one of the main obstacles to the disbursement of a long-delayed loan tranche under its International Monetary Fund aid-for-reforms programme.
At the heart of the legal dispute is the debt raised in late December 2013 by then-Ukrainian President Viktor Yanukovich in Russia - less than two months before street protests in the ex-Soviet republic toppled his Moscow-backed government.
Switching to a pro-Western government and teetering on the brink of bankruptcy, Kiev signed up to a loan programme with the International Monetary Fund (IMF) and restructured its sovereign hard currency bonds.
But Moscow declined to take part, insisting its bond which matured in December 2015 should be classed as sovereign, bilateral debt. Kiev refused to pay, saying Russia should have participated in the restructuring.
Following Russia’s request for a summary judgement, the court ruled in March that Ukraine did not provide “justiciable defence” and declined to send the case to full trial.
Kiev appealed the decision. It argues its then-government had lacked the capacity to enter into the agreement with Russia, incurred the debt under duress and on unfair terms.
Ukraine had also argued non-payment was a countermeasure against interference in its economy and territory following Moscow’s military 2014 intervention and annexation of Crimea.
Signs are Ukraine will fight tooth and nail to avoid paying Russia.
“Ukraine reaffirms the strong belief it has in its legal position, as asserted in these proceedings, as well as its commitment to standing firm in the face of this further aspect of Russia’s aggression towards Ukraine and its people through until the full conclusion of the legal process,” Alex Gerbi at Quinn, Emanuel, Urquhart & Sullivan LLP, the law firm representing Ukraine, said in a written statement.
Russia’s government, the sole holder of the notes, is represented by Cleary Gottlieb Steen & Hamilton LLP. The firm declined to comment.
The debt has been structured as a Eurobond under English law, which is unusual because countries do not generally lend to each other under a third country’s legal framework, opting instead for direct bilateral agreements where terms are often kept under wraps.
The London court has suspended judgement until the appeal hearing has been concluded. That could be a while off.
“We are still a long way from a situation where Ukraine will have to write a cheque - if the ruling is in fact against Ukraine,” said BlueBay strategist Tim Ash.
“Even if the ruling was tomorrow...they have the cash to pay. The problem is the politics of it, from a domestic Ukrainian perspective writing a cheque for $3 billion to Russia.”
While Ukraine’s foreign currency reserves have recovered to nearly $19 billion at the start of the year - the equivalent of 3.6 months of import cover - its economy has expanded just 2.1 percent in the third quarter and its debt-to-GDP ratio hit a record high of more than 80 percent.
Investors have been worried over reform progress which stalled last year amid concerns the authorities are backtracking on commitments and unpopular policy changes ahead of presidential and parliamentary elections in 2019.
The hearing is scheduled to last up to five days, according to a court spokesman. The court is expected to deliver a ruling at a later stage.
Reporting by Karin Strohecker in London, additional reporting by Natalia Zinets and Alessandra Prentice in Kiev; Editing by Hugh Lawson