Russia Sues Ukraine in London Court Over $3 Billion Default

  • Cleary Gottlieb Steen & Hamilton hired to represent Russia
  • Russia declined to take part in Ukraine restructuring in 2015

Russia said it filed a lawsuit against Ukraine in the High Court in London after the government in Kiev defaulted on $3 billion in bonds.

Cleary Gottlieb Steen & Hamilton LLP was hired to represent the government in Moscow in a case that will seek to recover the principal in full, $75 million of unpaid interest and legal fees, Russian Finance Minister Anton Siluanov said on Wednesday. The filing comes after Germany tried to mediate talks between the two former-Soviet neighbors to try to reach an out-of-court settlement.

“I expect that the process in the English court will be open and transparent," Siluanov said. "This lawsuit was filed after numerous futile attempts to encourage Ukraine to enter into good faith negotiations to restructure the debt."

The case brings to a head a standoff between the two countries after Russia declined to take part in a $15 billion restructuring that Ukraine negotiated with its other Eurobond holders last year. Siluanov reiterated that Russia was demanding better treatment than private creditors, which include Franklin Templeton, and wants to be treated as a sovereign debtor.

Ukraine’s Finance Ministry, which sought the debt restructuring after a conflict with pro-Russian rebels drained reserves, said in an e-mailed statement on Feb. 11 that the country has demonstrated “an unwavering commitment to reach mutually acceptable outcomes with all its creditors.” The ministry didn’t immediately respond to a request for comment on Wednesday.

Legal Action

Cleary Gottlieb defended Russia in an arbitration case brought against it by the owners of Yukos Oil Co., once Russia’s largest crude producer, over the confiscation of the company’s assets. In that case, the Permanent Court of Arbitration in The Hague found that Russia is liable to pay just less than half of the $114 billion sought.

Russia has to pursue legal action against Ukraine in the U.K. because the bond was structured under English Law. President Vladimir Putin bought the debt in December 2013 to bail out his former Ukrainian counterpart and ally, Viktor Yanukovych, just months before he was toppled and Russia annexed Crimea. The notes were priced to yield 5 percent, less than half the rate on Ukrainian notes at the time.

Another Obstacle

The filing poses another obstacle to Ukraine’s government as it faces political infighting that’s threatening to sink the ruling coalition and further stall a $17.5 billion International Monetary Fund lifeline that the country needs to stay afloat. The IMF warned last week the aid package risked failure if the government doesn’t kick start an overhaul of its economy.

"The move by Russia is a way to increase pressure on Ukraine," said Per Hammarlund, the chief emerging-market strategist at SEB AB in Stockholm. "It is particularly well timed given concerns raised by the IMF recently on the lack of reform and failure to address rampant corruption."

Ukraine’s private bondholders accepted a 20 percent principal writedown and maturity extensions as part of last year’s restructuring. Ukraine is barred from paying Russia back in full under the terms of that restructuring agreement and the terms of its IMF aid, which require it to cut debt payments for the next four years.

Taking the case to the court system means that details will be heard in public. Under the bond documents, Russia also had the option to take the dispute to the London Court of International Arbitration, where proceedings would have been held behind closed doors.

“The fact that they are taking this to the High Court shows that the Russians think they are going to win,” said Peter Griffin, an international arbitration specialist and managing director of Slaney Advisors in London. "It will be a big political statement for Russia if they can get a ruling over Ukraine in an English court.”

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