Clean Slate?

Russia's annexation of Crimea could wipe away billions of dollars of Ukrainian debt.

BY JAMILA TRINDLE , KEITH JOHNSON-

MARCH 18, 2014

Russias appropriation of Ukrainian assets as part of its de facto takeover of Crimea could, perversely, provide some relief to the beleaguered Ukrainian economy. It may be cold comfort when enemy tanks are still on its border, but some observers suggest that Kiev should be able to write off at least ! billion of its debt to Russia because "oscow has effectively stolen Ukrainian territory and energy resources, as well as military hardware and bases. #$n obvious focal point for the Ukrainian government now that Russia has intervened across its border, and actually sei%ed land&assets is debts owed to Russia,# said 'im $sh, head of emerging markets research at (tandard )ank *roup. #+o doubt the

lawyers are sharpening their pencils as we speak.# 'here are already a few ways in which Russian takeover could end up alleviating Ukraines debt, the most pressing of which is probably the ,.- billion .and counting/ that Kiev owes *a%prom for natural0gas shipments over the last year. +ews reports suggest that Russia has already appropriated small Ukrainian energy firms operating in and near the Crimean peninsula. Russian troops in helicopters descended on a natural gas terminal 1ust outside Crimea, the +ew 2ork 'imes reported (aturday. $nd 'uesday, Crimean authorities took over a Ukrainian offshore drilling operation, which is e3pected to be sold to *a%prom, according to the 4all (treet 5ournal. 'he operation, owned by Kievs state0owned energy conglomerate, had 1ust spent -66 million on new e7uipment, which is now lost. 'hen there is the rent from the (evastopol navy base, which under the ,889 and :6,6 bilateral accords was worth 8- million a year in cash to Kiev. It is not clear now, with Crimea formally severed from the rest of Ukraine, if Russia would be under any obligation to continue paying for the base. $nother part of the :6,6 Kharkiv $ccords, which e3tended the naval base lease to :6;:, was to lock0in a long0term discount on Russian gas sold to Ukraine. <owever, that gas0for0basing deal had already broken down by the time of last years protests. =ne of the carrots "oscow had offered Kiev to pry Ukraine away from >urope, in fact, was a ?? percent discount on natural gas @ essentially, what it had already promised to deliver under the terms of the :6,6 accord. 'hat discount is revised 7uarterly and will come to an end this month. Russias military aggression is also calling into 7uestion the validity of the loan "oscow e3tended to the now0deposed Ukrainian Aresident Biktor 2anukovych. Cate last fall, after 2anukovych turned away from a political and trade agreement with the >uropean Union, Russia offered to lend him ,! billion to aid the struggling Ukrainian economy. =nly ? billion of the loan @ in the form of bonds due in :6,! @ came through before 2anukovych was run out of Kiev. 'he 7uestion many observers are asking is whether Ukraine should have to pay back that money given Russias subse7uent anne3ation of Crimea. 'he 7uestion many observers are asking is whether Ukraine should have to pay back that money given Russias subse7uent anne3ation of Crimea. $nna *elpern, a *eorgetown law professor, suggested a creative legal maneuver that might allow )ritain, a close ally of the new Ukrainian central government, to invalidate those bonds as part of a sanctions package against Russia. )ecause the bonds are

>nglish law contracts, *elpern said the U.K. could refuse to honor them in )ritish courts, making them effectively void and worthless to private buyers. #If you close the courts to this debt you make it worthless to the market,# *elpern said. 4hile the plan wouldnt erase the debt, Russia would be effectively left with an unenforceable I.=.U., instead of a tradeable financial contract. *overnments are usually loathe to change the terms of bonds after theyve been issued because it can undermine investor confidence, but *elpern points out it has been done before. $fter the International "onetary Dund .I"D/ spearheaded a global effort to forgive the debt of poor countries like $fghanistan and Rwanda, the U.K. limited private bondholders ability to sue those countries for repayment in the )ritish courts. $fter former Ira7i leader (addam <ussein was ousted in :66?, the United +ations moved to shield the war0torn countrys oil and gas proceeds from creditors and then the worlds big lender countries agreed to reduce the countrys debt, so that its coffers wouldnt be wiped clean by loans taken out by the previous government. #=f all the sanctions the U.K. could impose, this is really targeted and doesnt hurt too many people,# *elpern said. (he first wrote about the idea in a blog post on the Aeterson Institute for International >conomics website. Its unclear whether )ritish leaders would embrace the idea. 4estern officials have been threatening Russia with unspecified EcostsF since troops first moved across the border in Crimea more than two weeks ago, but so far they have proceeded cautiously. 'he United (tates sanctionedseven Russian officials "onday, but it did nothing to stop, or slow, Russias de facto takeover of Crimea. >ven if the U.K successfully scratches ; billion of debt off the ledger, it still wouldnt solve Ukraines financial problems. 'he interim Ukrainian government estimated last month that it would need ?! billion over the ne3t two years. 'he I"D has a team of people on the ground in Kiev now trying to sort out the countrys finances and put together a package of loans and reforms that will help the economy recover. $nd Russia still holds the ultimate trump card. 4hile lawyers can calculate the price tag for Russias Crimean adventure, "oscow still has the power to shut off the natural gas supply that Ukraine depends on. Dilippo "onteforte & $DA & *etty Images