Russia Wins Early Verdict in $3 Billion Ukrainian Bond Case

(Bloomberg) -- Russia won an early verdict in a London lawsuit that may force Ukraine to repay part of a defaulted $3 billion bond, in a dispute that extended the battle over Russia’s annexation of Crimea into a U.K courtroom.

Judge William Blair threw out all of Ukraine’s arguments Wednesday, saying he was at pains to distinguish between the law and the "troubling" political background. He ruled the case shouldn’t go to a full trial but gave Ukraine the right to appeal.

The loss of the fertile Crimean region and the Russian-backed revolt in the east had pushed Ukraine to the brink of bankruptcy, forcing it to seek an international bailout. Russia refused to take part in a $15 billion debt restructuring that Ukraine reached with foreign bondholders including Franklin Templeton in 2015. It filed the London lawsuit to force Ukraine to repay the defaulted $3 billion bond, plus nearly $700,000 in interest for every additional day of default.

"It would not be right to order the case to go to full trial in such circumstances," Blair said in a summary of his ruling Wednesday. 

The decision is a win for Russia in the politically charged case and a setback for Ukraine, which has been chronically short of cash since the conflict began in 2014. Prices for Ukrainian bonds dipped on news of the decision.

Judge Blair, who called the background to the suit "deeply troubling," said that the economic and political pressure arguments fell under international law and couldn’t be dealt with by English courts.

Putin Purchase

Russian President Vladimir Putin bought the debt in December 2013 to bail out his ally, Ukrainian leader Viktor Yanukovych, who was ousted months later. Russia annexed Crimea in 2014 and has faced international criticism for supporting rebels in two eastern regions of Ukraine. The stand-off shows little sign of abating amid continued violence and failed peace talks.

Russia sees the ruling as final, the finance ministry said in a statement on its website on Wednesday, adding that Ukraine is now obliged to repay its debts.

Ukraine won’t have to repay any of the defaulted bond until at least after the next court hearing, which is scheduled to occur within two months, according to lawyers for both sides during the hearing.

‘Surprising’

The High Court’s decision is "surprising in my mind," said Timothy Ash, a senior emerging markets sovereign strategist at Bluebay Asset Management. "I assumed the annexation of Crimea had a material impact on ability to pay."

I’m "not sure how Ukraine is going to find the $3 billion, and what this means for the 2015 restructuring as the terms then implied no better terms offered to other creditors," Ash said in an email.

Ukraine’s restructured dollar bonds dropped after the ruling, with the yield on notes maturing in Sept. 2019 jumping 17 basis points to 7.19 percent, the biggest advance in more than two weeks. 

Russia argued at a January hearing that English courts should treat the default as a simple debt issue while lawyers for Ukraine said the country’s been subject to unlawful political, economic and military aggression from Russia, and the terms of the 2013 notes should never have been agreed to by lawmakers.

“We take the decision with respect but we have grounds to consider that it doesn’t take into consideration economic and military aggression against Ukraine and its people that Russia has constantly done since 2014,” Finance Minister Oleksandr Danylyuk told reporters in Kiev, saying that Ukraine will appeal the decision. “Today’s court decision is just a first stage. We will continue to defend our position.”

The case is: The Law Debenture Trust Corporation Plc v. Ukraine, High Court of Justice, Queen’s Bench Division, Commercial Court: FL-2016-000002

--With assistance from Natasha Doff Daryna Krasnolutska and Olga Tanas

To contact the reporter on this story: Jeremy Hodges in London at jhodges17@bloomberg.net.

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Christopher Elser