Fifteen Eighty Four

Academic perspectives from Cambridge University Press


Sovereign defaults during and after the Russian invasion of Ukraine

Kei Nakajima

Sovereign states usually go into default when they are unable to repay their debts owed to creditors as a result of a balance-of-payment crisis. Both Argentina, amidst the historical financial crisis in 2001, and Sri Lanka, which declared itself ‘bankrupt’ during its recent economic turmoil, fall into this category. A sovereign state may even deliberately default on its debts, irrespective of its financial capacity to make repayment. The repudiation of the Tsarist bonds by the then-newly installed Soviet government a hundred years ago may still find itself as a prime example of this category. In contrast to these unwilling or unable debtors, the recent failure by the Russian Federation to make interest payments on its international bonds is seen as unique and unprecedented enough to establish a third category of sovereign debt default. With its sufficient financial capacity, Russia tried to remit its interest payments to bondholders via international settlement agencies. Notwithstanding, this attempt was eventually prevented by the series of sanctions imposed by the United States and the European Union on Russia and Russian entities.

Given that bondholder litigation and arbitration often follow sovereign defaults in both the unwilling and unable scenarios, the question arises as to whether the same could apply to the new third category. In theory, neither litigation nor arbitration should be necessary to obtain repayment from a willing and able debtor. Furthermore, the existing sanctions may practically constrain the tactics of the bondholders’ side – which would otherwise be available – insofar as the web of sanctions also prohibit Western bondholders from engaging in transactions with Russia and Russian entities in many respects. Recall that bondholders’ litigious holdout actions are primarily aimed at gaining leverage over the sovereign debtor in out-of-court settlements, rather than to become judgment-creditors. In the present circumstances, creditors need to be aware of the three-year prescription period within which claims on principal and interests shall be made against Russia, but that short period might arguably afford bondholders the time to wait and see if sanctions will be lifted or modified.

In markets, hedge funds have reportedly been purchasing distressed Russian and Ukrainian bonds since the invasion, signaling that some sort of legal actions against the war-torn countries could be triggered. Still, Ukraine has successfully solicited the consent of its creditors for around 75 per cent of the aggregated principal amount of its 13 outstanding series of bonds, which has enabled it to defer coupon and principal payments until 2024. While no equivalent sovereign debt restructuring can feasibly be anticipated as to Russian debt, the web of sanctions mentioned above appears to have had an effect of discouraging bondholders from pursuing legal action against Russia.

As a result of the above, there remains a moratorium before bondholders’ litigation against Russia (and Ukraine) could possibly be triggered, during which the legal framework applicable to sovereign debt dispute settlement should be recalled. While no multilateral mechanism for dealing with sovereign defaults exists at the international level, my recently published book attempts to provide a slightly better account of the current state of affairs by way of interpretation of the applicable contractual, statutory and treaty provisions before courts and tribunals.

About The Author

Kei Nakajima

Kei Nakajima is Associate Professor of International Law at the University of Tokyo. Previously he worked at the International Court of Justice in The Hague as an Associate Legal O...

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