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The Conundrum of Public and Private Interests in Sovereign Debt: the Who, What, When, Where, and How of the Sovereign Loan from Russia to Ukraine

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The Conundrum of Public and Private Interests in Sovereign Debt: the Who, What, When, Where, and How of the Sovereign Loan from Russia to Ukraine IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM THE CONUNDRUM OF PUBLIC AND PRIVATE INTERESTS IN SOVEREIGN DEBT: THE WHO, WHAT, WHEN, WHERE, AND HOW OF THE SOVEREIGN LOAN FROM RUSSIA TO UKRAINE Iryna Zaverukha “Neither a borrower nor a lender be; for loan doth oft lose both itself and friend.” - William Shakespeare I. THE INVISIBLE PARTY IN SOVEREIGN LOAN AGREEMENTS ..................... 86 II. THE PARTIES, THE DECISION-MAKERS, AND INTERESTED SUBJECTS ..... 87 III. THE SOVEREIGN BORROWER ................................................................. 87 IV. CREDITORS OF SOVEREIGN BORROWERS .............................................. 91 V. THE CONUNDRUM OF PUBLIC AND PRIVATE INTERESTS ........................ 94 VI. THE FIDUCIARY SOVEREIGN, JUS COGENS, AND WHAT WENT WRONG IN UKRAINE .......................................................................................... 96 Professor of Law, Ukrainian Catholic University, L’viv, Ukraine, and Professor of Law, Kujawy and Pomorze University in Bydgoszcz, Poland; B.S., L’viv Banking College; J.D., Ivan Franko L’viv National University; LL.M., University of Southern California School of Law; Ph.D. Taras Shevchenko Kyiv National University; S.J.D., The Institute of Legislation of the Verkhovna Rada of Ukraine. The author thanks Professor Mitu Gulati, who introduced her to the concept of a fiduciary theory of jus cogens, as developed by Evan J. Criddle and Evan Fox- Decent, while she was an LL.M. student at the University of Southern California. 85 IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM 86 Gonzaga Journal of International Law Vol. 22:2 I. THE INVISIBLE PARTY IN SOVEREIGN LOAN AGREEMENTS While a government loan is considered to be on behalf of the people and for their welfare, sovereign debt, the ultimate result of it, has tremendous potential to compromise the constitutional and international rights of the people. Austerity measures for debt-troubled countries, inter alia, entail cuts in government expenditures, rises in unemployment, limited access to private bank accounts by their owners, and many other limitations. For example, between 2008 and 2013, unemployment rates in Greece increased from 7.3% to 27.9%.1 Public sector employment decreased from 942,625 to 675,530 between 2009–2013, with pay shrinking by over 25%.2 Private sector wages fell at least 15% during these years.3 Youth unemployment reached 64.9% in May 2013.4 Unfortunately, empirical evidence shows that, in many of the poorest countries, the fulfillment of debt service obligations is often undertaken at the expense of social investment. For example: [I]n 2004, Ecuador’s external debt was US $ 16.9 billion, and its debt service payments amounted to US $ 3.7 billion (more than six times its expenditure on health care); in 2006, Kenya spent more on debt servicing than on health; in 2006, the Philippines spent over 32 percent of its annual budget on servicing interest payments, compared with around 14 percent on education and 1.3 percent on health.5 Moreover, excessive debt service burden and harmful conditions linked to loans and debt relief often limit investments and undermine the provision of accessible public services. Despite repeated rescheduling of debt, developing countries continue to pay out more each year than the actual amount they receive in official development assistance.6 When a sovereign debtor is on the brink of default, the political and ideological focus shifts to the people of the state. Ultimately, the paradigm, “creditors v. sovereign/government,” transforms into the “creditor v. people of the state” paradigm. Contextualizing such transmogrification of 1. Preliminary Report, THE TRUTH COMMITTEE ON PUBLIC DEBT (June 18, 2015), http://www.cadtm.org/Preliminary-Report-of-the-Truth. 2. Id. 3. Id. 4. Id. 5. Cephas Lumina, Report of the Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights, at 3 n.6, U.N. Doc. A/HRC/RES/20/23 (Apr. 10, 2011). 6. U.N. Human Rights Council Res. 37/11, U.N. Doc. A/HRC/RES/37/11 (Apr. 9, 2018). IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM Spring 2019 Public and Private Interests in Sovereign Debt 87 perspective is useful. Not only does it humanize the issue, but it explains the theoretical and practical complication of the process of enforcing agreements relating to sovereign-lending and borrowing. It also reveals the controversies and inefficiency of current dispute resolution processes.7 The issues of the responsibility of the sovereign borrower to its lenders as well as to the people of the state, and of defining collateral for the loan, become extremely complex, thus rendering any putative “rights” difficult to protect or to enforce. II. THE PARTIES, THE DECISION-MAKERS, AND INTERESTED SUBJECTS “A hundred wagon loads of thoughts will not pay a single ounce of debt.” Italian Proverb The focal point of the relationship between a lender and a borrower is negotiation. Parties to a loan agreement shape their expectations and conditions according to the financial and political environment. The agreement defines conditions of the loan and how it is expected to be enforced and adjudicated. The contractual arrangement is essentially the law that defines the responsibility of the borrower in the event the debt is not paid. Again, negotiation most often becomes the lynchpin of default on the debt. Should negotiation fail, the consequence may be litigation in a New York or London court, again, according to the agreement. When enforcement of an agreement is problematic, the issue of protection arises. Here is the central question: Who needs protection in sovereign debt relations? The question could be asked even more dramatically: Are there any victims of irresponsible lending and borrowing? What are the legal remedies and judicial forum for the protection of the legitimate rights and interests of those victims? What is the moral value of successful litigation in cases on sovereign default, and what is the price of litigation failures? To answer these questions, a brief analysis of the subjects of sovereign debt affairs, and those who have interests in them, might be helpful. III. THE SOVEREIGN BORROWER This is defined by the explicit characteristics of the party. Implicitly, the representative of the state enjoys the authority to borrow financial resources from the international market on behalf of the people of the country; moreover, on behalf of the next generations. The concept of sovereignty generally does not shed much light on the relations between people and their representatives. Although the concept of sovereignty emphasizes the “capacity of the state to enter into relations with other states,” it does not 7. See generally, Ann Gelpern, Sovereign Debt: Now What?, 41 YALE. J. INT. LAW (2016). IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM 88 Gonzaga Journal of International Law Vol. 22:2 reflect the interests of the people, who comprise the state, nor to any postulate that the people benefit from the “relations with other states.”8 It is simply assumed that a sovereign state acts for international peace and for the welfare of its people. Unfortunately, existing authoritarian regimes, corruption, self- dealing, and armed conflicts in different countries too often prove otherwise. The concept of sovereignty has as its foci great emphasis on the independence of the state in terms of its territorial jurisdiction and the governance and representation of people who populate that territory; however, it does not establish any standards for the quality of the governance or the nature of the political regime.9 E contrario, the concept protects the freedom of the sovereign to act within its territory in any manner it chooses. International or judicial interference usually occurs only after dictatorships’ outrage reaches its peak, and the country dives into a civil confrontation, armed conflict, revolution, and/or cessation of the previous regime/state. Ultimately, this context of sovereign lending and borrowing evokes the concept of odious debt. Along with awareness of creditors about the situation within a country, odious government and its creditors incur odious debt.10 The unresolved question here is, “What would be a legal forum for the adjudication or settlement of claims of odiousness that would not hurt the people and the economy of the recovering state?”11 The example of South Africa is quite illustrative. Even though apartheid has been legally defined as a crime against humanity, and the struggle of the people of South Africa was recognized as a fight for liberation, the decision on repudiation of debt incurred by the apartheid regime has never been fully resolved.12 One of the most recent examples of a blatant discrepancy between the will of the people and the acts of the government in sovereign borrowing was the loan of US $ 3 billion from Russia to Ukraine in December 2013, under 8. Montevideo Convention on the Rights and Duties of States art. 1, Dec. 26, 1933, 49 Stat. 3097, 165 L.N.T.S. 165. 9. STEPHEN D. KRASNER, PROBLEMATIC SOVEREIGNTY: CONTESTED RULES AND POLITICAL POSSIBILITIES 6–8 (2001). 10. ALEXANDER NAHUM SACK, LES EFFETS DES TRANSFORMATIONS DES ÉTATS SUR LEURS DETTES PUBLIQUES ET AUTRES OBLIGATIONS FINANCIÈRES 146 (1927) (defining the concept of “odious debt.”As translated from the original French, “[i]f a despotic power
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