In the four years that Russia and Ukraine have been at war, the front line has hardly shifted—and when it has, it has generally been in Russia’s favor, as when the town of Debaltseve was seized in February 2015. Last month, however, Ukraine finally notched a major victory. It wasn’t the result of fighting in Donbas but rather a ruling by the Court of Appeal in London.
The fact that a London courthouse has become one of the key battlefields of the war underscores that there’s far more at stake in the Russia-Ukraine war than territory in eastern Ukraine—the fate of the international financial system, at least in its current shape, also hangs in the balance. The only thing that is certain is that, as a result of the war in Ukraine and the ongoing court case it has produced in London, the global financial system will never be the same, according to Foreign Policy.
The international financial system as it exists today was designed to sever questions of global economic policy from parochial political disputes—or, if necessary, to reconcile them—by establishing and empowering technocratic international institutions. The system was established in the aftermath of World War II, as the Bretton Woods Agreement effectively made the U.S. dollar the world’s reserve currency, and also led to the establishment of the World Bank (the world’s leading development bank) and the International Monetary Fund (IMF), which came to serve as the lender of last resort to sovereign states. A series of other institutions sprang up around these to serve the same technocratic ends, such as the Paris Club, which has come to oversee most restructurings of sovereign-to-sovereign loans.
Russia has supported the global financial order when it serves its own political interests, as demonstrated by a recent effort to use some of its own sovereign bond issuances as a tool to repatriate capital. But the Kremlin has simultaneously always complained that the allegedly nonpolitical system was designed by the United States and Europe to structurally advantage their own interests over those of other countries—complaints that have only grown more vocal in recent years amid the imposition of international sanctions against Moscow.
Russia and Ukraine’s battle over a bond in Britain represents Moscow’s latest challenge to the international financial system, and its ostensible separation of economic disputes from political ones, by brazenly seeking to entangle the two, and tempting Kyiv to respond in kind.
The dispute began when Ukraine’s then-president, Viktor Yanukovych, flew to Moscow in December 2013 to meet his Russian counterpart, Vladimir Putin, as protests against his decision to abandon an association agreement with the European Union raged in central Kyiv. Yanukovych and Putin announced a bilateral action plan that included $15 billion in loans from Russia to Ukraine. One week later, the first loan was issued as Ukraine sold a dollar-denominated bond issued under English law directly to Russia’s National Wealth Fund.
On the face of it, this was not unusual. Emerging markets often issue dollar bonds under English or New York law. Ukraine had used almost the exact same structure to sell debt to private investors many times before.
It is unprecedented in modern history, however, for one country to loan to another directly through such a bond, which is typically an instrument of private-to-sovereign loans. Structuring the loan in this way had several advantages for Russia. First, it allowed Moscow to weaken the international financial system by highlighting its limited reach; the Paris Club has traditionally been the venue for sovereign-to-sovereign debt restructurings, but Russia simply chose not to file its Ukrainian bond there. This approach also allowed Russia to intervene in Ukraine’s private debt market. The latter effort was telegraphed by the fact that the legal wording in the bond was nearly, but not entirely, the same as in Ukraine’s previous bond issuances. These terms granted the bond’s holder, the Kremlin, significant leverage over Kyiv by effectively allowing it to trigger default any time it saw fit—again, not unusual in the case of a private bond holder, but certainly so when borrowing from a sovereign government.
The only reason Ukraine would have considered such a loan was the fact that it was relatively cheap—Yanukovych’s teetering government needed money urgently, and the cost of servicing Russia’s bond was well below the market rate from private investors at the time. Putin nevertheless claimed the bond sale was “commercial” and said $12 billion in further loans, using the same structure, was in the offing.
Those loans never arrived. Although Yanukovych’s government filed plans to sell an additional $1.98 billion in debt on Feb. 17, 2014, Yanukovych fled Kyiv for Russia five days later. The Euromaidan revolution brought his political opponents into government, who vowed they would sign the EU-Ukraine Association Agreement and reject Putin and Yanukovych’s bilateral plans. Moscow then moved to annex Crimea and fomented a separatist insurgency in eastern Ukraine.