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THE CONUNDRUM OF PUBLIC AND PRIVATE IN SOVEREIGN : THE WHO, WHAT, WHEN, WHERE, AND HOW OF THE SOVEREIGN 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 , 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.

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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, ’s 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 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 and 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 , 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 , 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 incurs a debt not for the needs or in the interest of the State, but to strengthen its despotic regime, to repress its population that fights against it, etc., this debt is odious for the population of the state.”). See generally, U.N. Conference on Trade and Development, The Concept of Odious Debt in Public International Law, UNCTAD/OSG/DP/2007/4 (July 2007) (examining a definition of odious debt; analyzing transitional situations where successor regimes invoked the concept; contemplating arguments and criteria “concerning the facts as to whether the debt in question was ‘odious’ or actually conferred some benefits on the population or the new regime, or whether the transitional regime’s claim was based on an overly broad notion of ‘odiousness.’”). 11. Howse, supra note 10, at 22. 12. Id. at 13–14; see also, Michael Kremer, Seema Jayachandran, Odious Debt: When Dictators Borrow, Who Repays the Loan?, BROOKINGS INSTITUTION (March 1, 2003) https://www.brookings.edu/articles/odious-debt-when-dictators-borrow-who-repays-the-loan/. IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

Spring 2019 Public and Private Interests in Sovereign Debt 89 the Presidency of Viktor Yanukovych.13 November of 2013 was anticipated as significant for Ukrainians because it marked the signing of the Association Agreement with the European Union in Vilnius (November 25–27). Instead, on November 21, the government announced closer collaboration with Russia.14 Mass political rallies that would encourage President Yanukovych to sign the Agreement turned into mass protests after he came back from Vilnius without signing the Agreement.15 At that time student protests were peaceful; however, the government decided not to permit any protest whatsoever.16 On the night of November 30, 2013, police dispersed the students with outrageous brutality.17 Such governmental abuse of power should be considered against the background of its betrayal of a commitment to European integration; instead, the Ukrainian government led by Yanukovych established closer ties with Russia and precipitated unprecedented mass protests in Kyiv and throughout the country.18 December 1, 2013 was a beginning of the Revolution of Dignity, or “Euromaidan,” as it commonly referred to in Ukraine.19 Euromaidan entailed a massive struggle with the Yanukovych government until February 22 of 2014, and it took the lives of more than a hundred people, commonly known now as the “Heavenly Hundred.”20 Concomitantly, on December 17, 2013, President Yanukovych brazenly took the further step of meeting with President Putin in Moscow and, among other issues, discussed a series of loans of up to US $ 15 billion from Russia.21 The people of Ukraine perceived the loan as economic and political pressure of the Russian Federation on the Ukrainian government to orient its policy toward collaboration with Russia, and away from the European Union. For

13. The Law Tr. Corporation P.L.C. vs. Ukraine [2017] EWHC (Comm) 655 [4]. 14. Ukraine Protests After Yanukovych EU Deal Rejection, BBC (Nov. 30, 2013), https://www.bbc.com/news/world-europe-25162563. 15. Lviv Students Want EU Deal Signed, KYIV POST (Nov. 25, 2013), https://www.kyivpost.com/article/content/euromaidan/lviv-students-want-eu-deal-signed- 332427.html. 16. Odessa EuroMaidan: Heavy-handed Measures by Police and their Questionable Back-up, KHPG (Nov. 25, 2013), http://khpg.org/en/index.php?id=1385381658. 17. Ukrainian Police Oust Pro-EU Protest from Landmark Kiev Square (PHOTOS), RT (Nov. 30, 2013), https://web.archive.org/web/20131130091958/http://rt.com/news/ukraine- police-disperse-protest-509/. 18. Timeline: Political Crisis in Ukraine and Russia’s Occupation of Crimea, REUTERS (Mar. 8, 2014), https://www.reuters.com/article/us-ukraine-crisis-timeline/timeline-political- crisis-in-ukraine-and-russias-occupation-of-crimea-idUSBREA270PO20140308. 19. Yuriy Shveda & Joung Ho Park, Ukraine’s Revolution of Dignity: the Dynamics of Euromaidan, 7 J. EURASIAN STUDIEs 85 (Nov. 25, 2015). 20. A Timeline of the Euromaidan Revolution, EUROMAIDAN PRESS (Feb. 19, 2016), http://euromaidanpress.com/2016/02/19/a-timeline-of-the-euromaidan-revolution/; February 20 to be Commemorated as Heavenly Hundred Heroes Day—Decree, INTERFAX (Feb. 12, 2015, 15:00), https://en.interfax.com.ua/news/general/250245.html. 21. Meeting of the Russian-Ukrainian Interstate Commission, THE KREMLIN (Dec. 17, 2013), http://en.kremlin.ru/events/president/news/19852. IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

90 Gonzaga Journal of International Law Vol. 22:2 the people, it was a matter of dignity, and it could not be expressed more clearly. From a legal perspective, at that point in time, any governmental borrowing in 2013 constituted a breach of Ukrainian Law. According to the Constitution of Ukraine and Ukrainian Budget Law, the government was not authorized to borrow in 2013.22 Drawing down of such a volume of by the government without ratification by the Verkhovna Rada (the parliament of Ukraine), and without having it properly allocated in the Law on the Budget of Ukraine 2013, was a usurpation of power, an abuse of power, and furthered a conspiracy with the Russian government.23 Nevertheless, the agreement on the first tranche of US $ 3 billion was signed on December 24, 2013. On February 22, 2014, the Verkhovna Rada of Ukraine (parliament) dismissed President Yanukovych, and he fled to Russia.24 On January 24, 2019, a Ukrainian court sentenced former President Viktor Yanukovych in absentia to 13 years in prison.25 He was found guilty of treason and complicity in an aggressive war waged by Russia against Ukraine.26 This brief summary raises the issue of the legitimacy of the government of Ukraine during Euromaidan. It also opens an array of other relevant questions, besides illegality of the loan. Among them is the purpose of the loans, and how their magnitude of US $ 15 billion could affect the sovereignty of Ukraine. What was the rationale of Ukrainian government officials to commit to such a huge loan, and, particularly, to the conditions of this agreement? According to Maximilian Hess, it could push Ukraine toward the 60 percent limit of the debt-to-GDP ratio: “[i]f Russia were to accelerate repayment on a sum larger than $3 billion, it would likely have forced Ukraine into economic collapse.”27 Another question, relevant to the purpose of the loan, is whether the purchase of such a volume of bonds by the Russian Wealth Fund is consistent with the Budget Code of the Russian Federation, as well as with their Law on the 2013 Budget. Investigation of this subject might shed light on the purpose of the loan, and the lender’s intention, thus explicating the reasons Russia put pressure on Ukraine. Finally, how does the

22. Putin on the Squeeze: the Yanukovych Debt. The Anatomy of Yanukovych’s “Loan” from Putin. Should Ukraine Repay It?, THE UKRAINIAN WEEK (July 18, 2016), https://ukrainianweek.com/Politics/170081 23. Id. 24. Parliament Votes 328–0 to Impeach Yanukovych on Feb. 22; sets May 25 for new election; Tymoshenko Free (VIDEO), KYIV POST (Feb. 23, 2014), https://www.kyivpost. com/article/content/ukraine-politics/euromaidan-rallies-in-ukraine-feb-21-live-updates-33728 7.html. 25. Court Finds Yanukovych’s Guilty of High Treason, Complicity in War Proven, UNIAN (Jan. 24, 2019), https://www.unian.info/politics/10419795-court-finds-yanukovych-s- guilt-of-high-treason-complicity-in-war-proven.html. 26. Id.; Verdict of Obolon District Court in Kyiv (Jan. 24, 2019), https://ips. ligazakon.net/document/view/v114878?an=2. 27. Maximilian Hess, of War: Russian Geo- in Ukraine’s Sovereign , FOREIGN POLICY RESEARCH INSTITUTE (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 91 strategy of Russia on the indebtedness of Ukraine relate to the waging of a war in Ukraine, as evidenced by its occupation of Crimea in March 2014, and by its military intervention in the Eastern part of Ukraine since then? After the Foreign Sovereign Immunity Act (FSIA) came into effect in the U.S.A. in 1976,28 and after the adopted the similar State Immunity Act of 1978,29 sovereign litigation became a norm. Since then, states became accountable for breach of contracts and were sued by banks and specialized hedge funds in the U.S.A. and the U.K. Nevertheless, the immunity of states’ government assets in the country and abroad remains relevant.30 Sovereign immunity protects the sovereign’s property and requires special procedures of dispute resolution. Having said that, the position of creditors remains vulnerable. Ironically, something that protects the people of the sovereign borrower can hurt the legitimate interests of the lender, which could also be a sovereign state that presumably represents the people of the creditor state. As an example, the financial crises in Greece touched the interests of the people of other European states. We could observe social tension in Germany that was related to the Greek default and to the restructuring of Greek debt.

IV. CREDITORS OF SOVEREIGN BORROWERS

The creditor is the most obvious figure whose interests could be jeopardized by an irresponsible borrower. Lenders include a variety of classifications: sovereign lenders (foreign governments); international financial organizations; private entities (individuals or a collective). Typically, government-to- takes the form of bilateral loans that cannot be enforced in private courts.31 Development of financial markets, as well as the evolution of litigation strategies, brought to the fore a new category of subjects: specialized distressed funds, hedge funds, and other financial institutions. Such institutions also act as plaintiffs, suing defaulting states. They include banks, funds or money-managing investment firms, and other companies, including insurance companies or those with a primary business activity outside financial markets. Among them are also firms active in commodities trading, which litigate on the basis of promissory notes or letters of credit. 32 Since the 1980s, the litigation strategies of these financial institutions developed dramatically, also driving up the cost of default.33 For

28. Foreign Sovereign Immunity Act, Pub. L. No. 94-583, 90 Stat. 2891 (1976) (codified as amended at 28 U.S.C. §§ 1330, 1391(f), 1441(d), and 1602-11 (2000)). 29. State Immunity Act of 1978, c. 33. 30. Julian Schumacher et al., Sovereign Defaults in Court (Eur. Cent. Bank, Working Paper No. 2135, Feb. 2018). 31. Id. at 41. 32. Id. at 68–69. 33. Id. at 7–8, 12 (“158 litigation disputes initiated by foreign commercial creditors IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

92 Gonzaga Journal of International Law Vol. 22:2 example, in the suit by Montrose Capital LLC v. Liberia, the face value amounted to US $ 26 million, while the claim was US $ 129.5 million. Three reputable experts discuss “selected litigation success,” among them Argentina, Panama, and Congo. According to their research, in 2016: Argentina settled at more than 10 times the original principal. The two main holders of defaulted floating rate notes (FRANS) were Elliott (through NML) and Bracebridge which received $1,194 bn and $1,146 bn for FRANs with a principal of just $132 m and $120 m, respectively. That is a more than 900% return and does not account for the fact that the bonds were bought at a deep discount. … The Wall Street Journal estimates that Elliott made 10 to 15 times its original investment, even after taking into account more than $100 m legal and other expenses.” 34 As another example, “in 2001, FG Hemisphere filed suit against the Republic of Congo in 2001. The original claim amounted to $35.9 m and in 2002, FG was awarded a judgment of $151.9 m (01 Civ. 8700, Pacer ). In April 2007, FG reported full satisfaction (01 Civ. 8700, April 12, 2007), implying a gross return of more than 400%.”35 The composition of actors on the side of creditors can be even more complex. One of the most unusual collaborations was a sovereign loan agreement of US $ 3 billion from Russia to Ukraine. This is de facto agreement between Ukraine and the Russian Federation was discussed by President Yanukovych and President Putin on December 17, 2013.36 De jure, the Russian government structured the credit to Ukraine in the form of Notes that were listed on the Irish Stock Exchange. The Notes were constituted by the trust deed. The named parties to the deed are Ukraine and the Law Debenture Trust Corporation p.l.c. (Law Debenture) as the trustee of Notes with a nominal value of US $3 billion and carrying interest at 5 percent. Instead of a bilateral agreement between the states, this agreement used market trade instruments, . It created confusion as to whether the loan and the debt are official or private in nature, and ultimately, jeopardized the efficiency of every existing dispute resolution mechanism. According to the agreement, the Notes were supposed to be governed by English law, particularly by the law of contracts, and it provided that English courts would have exclusive jurisdiction over arising disputes. If the agreement was bilateral, the dispute resolution process would not be referred to the court, but to the Paris Club of creditors. As Anna Gelpern states: “The bond was deliberately designed to be both official and private. It

against 34 defaulting sovereigns (not counting retail cases and multiple lawsuits by the same creditor). Of these, 130 cases were filed in the . Only 23 cases were filed in England and five are the arbitration cases.”). 34. Id. at 60. 35. Id. at 61. 36. Meeting with President of Ukraine Viktor Yanukovych, THE KREMLIN (Dec. 17, 2013), http://en.kremlin.ru/events/president/news/19849. IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

Spring 2019 Public and Private Interests in Sovereign Debt 93 is private in form, official in substance, and can morph to Russia’s advantage.”37 In this particular configuration of players, Law Debenture acted as the claimant in The Law Debenture Trust Corporation P.L.C vs. Ukraine,38 and later, as the respondent to the appeal.39 The sole subscriber of the Notes was the Russian Federation, and Russia has been the beneficial owner of the Notes at all times since their issuance.40 The Russian strategy, expressed in conditions of the agreement, is well understood by experts.41 It is obvious that the Ukrainian government did not act in the best interests of the Ukrainian people in entering into the agreement. If the government had acted as a fiduciary of the Ukrainian people, it would never have accepted this offer from Russia, especially on the expressed conditions in the agreement. Not surprisingly, less than two months later, former President Yanukovych, Prime Minister Azarov, and other members of that government fled the country and remain in Russia to this day42 It is a classic example of interaction between two corrupt governments, but it underestimated the strength and determination of Ukrainian civil society. It resulted in international armed conflict, which ultimately eliminated not only any possibilities of negotiation, but made any available dispute resolution jurisdiction ineffective.43 While the discussion of some of the issues of this case will follow, the main point here is to stress the complexity of public and private interests in sovereign debt affairs, and to demonstrate how the lack of integrity and sustainability can affect peace and stability. There is tremendous public responsibility behind the negotiation framework on sovereign debt, and if it includes personalities of varied status, the contractual nature of the relationship juxtaposes the interests of the main parties with those whom these parties ostensibly represent.44 The following table juxtaposes who is involved in sovereign lending and borrowing, and whose interests ultimately are affected:

37. Anna Gelpern, Russia’s Bond: It’s Official! (…and Private…and Anything Else It Wants to Be…), CREDIT SLIPS (Apr. 17, 2015), https://www.creditslips.org/creditslips /2015/04/russias-ukraine-bond-its-official-and-private-and-anything-else-it-wants-to-be-.html. 38. The Law Debenture Tr. Corp. P.L.C. v. Ukraine, supra note 13. 39. See Ukraine v. The Law Debenture Tr. Corp. P.L.C. [2018] EWCA (Civ) 2026. 40. Id. ¶ 4. 41. Hess, supra note 27, at 2 (“Russia using the Eurobond in a legally unprecedented way to gain political leverage over Kyiv and to limit Ukraine’s access to global markets.”). 42. David M. Herszenhorn, Interpol Calls for Arrest of Yanukovych and Other Former Ukraine Officials, N.Y. TIMES (Jan. 12, 2015), https://www.nytimes.com/2015/01/13/world /europe/interpol-calls-for-arrest-of-yanukovych-and-other-former-ukrainian-officials.html. 43. Hess, supra note 27, at 1. 44. The Law Debenture Tr. Corp. P.L.C. v. Ukraine, supra note 13, at [52]–[53]. IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

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Diversity of interests: public sovereign creditor interest vs. public sovereign debtor interest private creditor interest vs. public sovereign debtor interest private creditor interest vs. private interests of the people of borrowing state public sovereign debtor interest vs. international and domestic financial market public sovereign debtor interest vs. creditors’ interests in restructuring sovereign debt public sovereign debtor interest vs. interest of people of the sovereign/s that agreed to restructure the sovereign debt

public sovereign debtor interest vs. private and public interests of its people public and private interests of the people of the sovereign creditor vs. public and private interest of the people of the sovereign debtor

The concept of mutual responsibility is naturally quintessential in debt transactions. An example of such an approach is the promulgation of international rules in the form of the “Consolidated Principles on Promoting Responsible Sovereign Lending and Borrowing,” issued in January 2012 by the United Nations Conference on Trade and Development (UNCTAD).45 Through prudence and discipline, the document governs control over the process, particularly in ex ante investigation and post-disbursement monitoring.46 The document also stresses transparency and disclosure.47

V. THE CONUNDRUM OF PUBLIC AND PRIVATE INTERESTS

“Running into debt isn’t so bad. It’s running into creditors that hurts.” - Unknown origin

Sovereign lending and borrowing is comprised, by definition, of two major concepts: sovereignty and commercial activity. Such public and private interests require discrete considerations not only in the terms of agreements, but also with respect to the methodologies of resolving disputes that arise from them.48 A central threshold issue is what forum has jurisdiction that is adequate to resolve cases that involve such complexity. The discrepancy between factual and legal borrower should raise awareness regarding the link

45. See generally U.N. Conference on Trade and Development, Principles on Promoting Responsible Sovereign Lending and Borrowing (Jan. 10, 2012). 46. Id. at 7. 47. Id. at 9–10. 48. Id. at 9. IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

Spring 2019 Public and Private Interests in Sovereign Debt 95 between the action of creditors, including their legitimate acts and expectations, and the breach of the economic and political rights of the people represented by the sovereign borrower. The creditors also bear responsibility to the creditors’ financial institutions. They have a duty of diligence in assessing the quality of the governance of the sovereign borrower as to its legitimacy, its accountability, its transparency, its ethics, and its recognition of the rule of law.49 Sovereignty doctrine ultimately is not suitable to modulate the contractual relationship between private and public parties, especially in politically complex cases within a framework of domestic jurisdiction.50 Controversy over sovereign lending and borrowing is a source of tension because of the practical inability to resolve the issues of sovereign efficiently.51 A “case by case approach” creates a unique regime of international sovereign debt management that utilizes a mix of public and private judicial remedies, which, unfortunately, in its present form, satisfies neither private nor public interests and ultimately leaves room for political manipulation.52 When a government switches its “sovereign hat” to its “commercial entity hat,” or vice- versa, in the context of sovereign debt affairs, the lenses of justice become very difficult to calibrate. The contractual approach, weighed by the concept (features) of sovereignty, assumes inherent (immanent) credit transaction risk multiplied by the complexity of public interests in sovereign debt interactions.53 Moreover, the issue is complicated not only by the different status of the parties to such agreements, but also by the unique reasons of incurring the sovereign debt. It is essential that sovereign borrowing is concluded for the benefit of people of the borrowing state. The transfer of funds from a private creditor to a sovereign borrower transforms the nature of borrowing funds from private finance to public finance. Ultimately, the concepts of the public interest, public policy, and public financial resources come into play. The loan and the debt become a part of the public finance system of the state. It influences budget policy and the financial and monetary policy of the state; it also impacts social security and ultimately the financial stability and general welfare of its citizens.54 Regardless of the private or sovereign nature of the creditor or its representatives/trustees, the issue of mutual responsibility is an integral part

49. Id. at 6. 50. Id. 51. U.N. Conference on Trade and Development, Responsible Sovereign Lending and Borrowing, 5–9, Conf.157, (Apr. 2010). 52. Id. at 6. 53. See U.N. Conference on Trade and Development, Responsible Sovereign Lending and Borrowing, supra note 51; U.N. Conference on Trade and Development, Principles on Promoting Responsible Sovereign Lending and Borrowing, supra note 45. 54. U.N. Conference on Trade and Development, Responsible Sovereign Lending and Borrowing, supra note 51, at 19. IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

96 Gonzaga Journal of International Law Vol. 22:2 of sovereign debt interaction.55 Establishing mutual responsibility in the context of a public-private agreement is a challenging task. It requires special standards for disclosure, information exchange, transparency, accountability, collaboration at every stage of the transaction, involvement of various components of the democratic system, and strong professional and ethical standards.56 By definition, mutual responsibility excludes political manipulation, and it cannot contradict the interests of the people, particularly if such interests are clearly expressed.

VI. THE FIDUCIARY SOVEREIGN, JUS COGENS, AND WHAT WENT WRONG IN UKRAINE

“Promises make debt, and debt makes promises.” - Dutch Proverb

Because of the discrepancy between the legal and factual borrower, consensus within a state, and an external assurance that such consensus has been maintained, is crucial.57 Such consensus provides a framework for mutual responsibility in international relations and particularly, in sovereign lending and borrowing.58 Irresponsible borrowing policy often arises from undeveloped democratic institutions, which, in turn, are often accompanied by undeveloped democratic values within a society. Liability of the government is a political issue, but it might become juridical if the actions of the government officials are criminal.59 The upshot of this article is that a fiduciary paradigm is the most appropriate framework for the examination of interaction between the people of the state and their government. Such a framework should also inform adjudicative tribunals, and principles of international relations generally. Evan J. Criddle and Evan Fox-Decent proclaim “the new popular sovereignty: fiduciary states in international law.60“ The theory they defend is that: [T]he state and its institutions are fiduciaries of the people subject to state power, and therefore a state’s claim to sovereignty, properly understood, relies on its fulfillment of a multifaceted and

55. U.N. Conference on Trade and Development, Principles on Promoting Responsible Sovereign Lending and Borrowing, supra note 45, at 4. 56. See generally, id. (establishing the aforementioned principles as critical aspects of responsible lending and borrowing). 57. Id. at 6 (explaining that involvement of the people is necessary since they repay the debt, and that transparency of that agreement is equally important). 58. Id. at 8. 59. U.N. Conference on Trade and Development, Responsible Sovereign Lending and Borrowing, supra note 51, at 20. 60. Evan J. Criddle & Evan Fox-Decent, A Fiduciary Theory of Jus Cogens, 34 YALE J. INT’L L. 331, 347 (2009); see also EVAN J. CRIDDLE & EVAN FOX-DECENT, HUMAN RIGHTS AND JUS COGENS: HOW INTERNATIONAL LAW CONSTITUTES AUTHORITY (2016). IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

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overarching fiduciary obligation to respect the agency and dignity of the people subject to state power. One of the requirements of this obligation— perhaps the main requirement—is compliance with jus cogens. Put another way, a fiduciary principle governs the relationship between the state and its people, and this principle requires the state to comply with peremptory norms.61 The requirement of compliance with jus cogens is crucial here. The Vienna Convention on the Law of Treaties, particularly Article 53, “Treaties Conflicting with a Peremptory Norm of General International Law provides: A treaty is void if, at the time of its conclusion, it conflicts with a peremptory norm of general international law. For the purposes of the present Convention, a peremptory norm of general international law is a norm accepted and recognized by the international community of States as a whole as a norm from which no derogation is permitted and which can be modified only by a subsequent norm of general international law having the same character.62 Evan J. Criddle and Evan Fox-Decent identify public corruption as one of the emerging peremptory norms.63 Viewed from the fiduciary theory’s perspective, the international norm against public corruption merits peremptory authority within international law. The prohibition against self-dealing meets the fiduciary theory’s substantive criteria by advancing the best interests of the people rather than state officials (integrity), refusing to privilege certain private interests over others arbitrarily (formal moral equality), and manifesting due regard for the interests of its beneficiaries (solicitude). The anticorruption norm also satisfies the specific substantive criteria because it requires the state to treat its national patrimony (e.g., tax revenue, resources, public services) as a public good to which every national has an equal claim under the rule of law and relevant municipal legislation. Like the prohibitions against summary execution and torture, the prohibition against corruption is necessary to ensure that the state regards its nationals as ends in themselves and never merely as the means for the ends of others. More broadly still, there can be no derogation from the norm against corruption because corruption is the antithesis of the other- regarding mandate the fiduciary state enjoys to secure legal order. For these reasons, the fiduciary theory elevates the international

61. Evan J. Criddle & Evan Fox-Decent, A Fiduciary Theory of Jus Cogens, 34 YALE J. INT’L L. 331, 347 (2009). 62. U.N. Convention on the Law of Treaties art. 53, May 23, 1969, 1155 U.N.T.S. 344 [hereinafter Vienna Convention]. 63. Criddle & Fox-Decent, supra note 61, at 333. IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

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norm against public corruption to the status of nonderogable jus cogens.64 Even though sovereign debt usually does not harm human rights as much as violation of humanitarian law, and is not as obvious as torture or slavery, it can be employed, nonetheless, as a part of an aggressive strategy. The Ukrainian case proves that a sovereign loan, involving corrupt governments, can actually reflect an attempt to impose absolute power of one state over another.65 Aggressive political, economic, and financial strategies of Russia toward Ukraine were not less than an attempt to extend the borders of direct Russian influence, maintaining de jure independent, but de facto absolutely dependent Ukrainian state and Ukrainian authorities. When these policies failed, President Yanukovych, Prime Minister Azarov, and other members of the then-Ukrainian government fled to Russia.66 Subsequently, President Putin waged an aggressive war against Ukraine. The chronology of the events described below demonstrates the chain of causes and outcomes of the Russian effort to dominate Ukrainian policies and to prevent Euro integration and a Ukrainian alliance with NATO.

Timeframe Event August– Russia blocked virtually all imports from Ukraine67 December 2013 November 21– Protests, mostly students, against suspension of December 1, Association Agreements, particularly Deep and 2013 Comprehensive Free Trade Area (DCFTAs) between the EU and some partner countries at the Eastern Partnership Summit in Vilnus, Lithuania (November 28-29, 2013)68 December 1– Demands for Yanukovych to resign. The Government January 16, strikes back 69 2014 December 17, Official meeting of President Yanukovych with 2013 President Putin in Moscow. Among other agreements, the Russian National Wealth Fund would buy $15 bln

64. Id. at 372. 65. See The Law Debenture Tr. Corp. P.L.C. v. Ukraine, supra note 13. 66. Herszenhorn, supra note 42. 67. Nicu Popescu, The Russia-Ukraine Trade Spat, EUR. UNION INST. FOR SEC. STUDIES (Aug. 26, 2013), ://www.iss.europa.eu/sites/default/files/EUISSFiles/Alert_Ukraine_trade.pdf (“[T]he trade spat was probably just the first warning shot in what could escalate into a full blown trade war, the ultimate aim of which would be to prevent Ukraine from signing an Association Agreement with the EU at the Eastern Partnership summit in Vilnius in late November, thereby preventing further economic integration with the European Union and steering it in a Eurasian direction instead”). 68. A Timeline of the Euromaidan Revolution, supra note 20; Eur. Comm’n, Factsheet: Eastern Partnership Summit, at 1, MEMO13/1057 (Nov. 26, 2013). 69. A Timeline of the Euromaidan Revolution, supra note 20. IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

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of Ukrainian Eurobond. Russia also lowered the price for Russia natural gas to $268 per 1,000 cubic meters instead of $400, which is what Ukraine was paying at that time 70 December 24, Ukraine sold US $3 billion Eurobond to Russia’s 2013 National Wealth Fund71 January 16, Anti-civil rights are rammed through parliament72 2014 January 19–27, Peaceful protests turn violent73 2014 January 28– Negotiations with the government continue74 February 20, 2014 February 17, Russian Finance Minister Anton Siluanov announced 2017 that Russia will buy Ukrainian Eurobonds for a total of $2 billion75 February 18– Protestors were killed in two major attacks76 20, 2014 February 21, Viktor Yanukovych fled the country77 2014 February 22, A new government of Ukraine was formed78 2014 February 26– The buildings of Crimea’s Parliament and Council of 27, 2014 Ministers were seized by armed people; the border between Crimea and mainland Ukraine is closed79 February 28– The blockage of Ukrainian military units in Crimea, March 1, 2014 withdrawal of Ukrainian servicemen80 March 1, 2014 President Putin requested authorization by the State Duma of the Russian Federation to use military force

70. Shaun Walker, Vladimir Putin Offers Ukraine Financial Incentives to Stick with Russia, THE GUARDIAN (Dec. 18, 2013), https://www.theguardian.com/world/2013/dec/17 /ukraine-russia-leaders-talks-kremlin-loan-deal. 71. Hess, supra note 27. 72. A Timeline of the Euromaidan Revolution, supra note 20. 73. Id. 74. Id. 75. Russia to Buy Eurobonds Worth $2 Bln from Ukraine This Week, INTERFAX (Feb. 12, 2014), https://en.interfax.com.ua/news/economic/190508.html. 76. A Timeline of the Euromaidan Revolution, supra note 20. 77. Id. 78. Id. 79. Chronology of the Annexation of Crimea, EUROMAIDAN PRESS (March 5, 2015), http://euromaidanpress.com/2015/03/05/chronology-of-the-annexation-of-crimea/. 80. Id. IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

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“until the social and political situation in that country is normalised.”81 March 16, 2014 The illegitimate referendum on the region’s annexation by the Russian Federation was carried out in an expedited manner82 March 18, 2014 President Putin signed the law on incorporation of Crimea into the Russian Federation83 March–April Simultaneous and similar unrest in big cities in 2014 Southern and Eastern parts of Ukraine84 April 7, 2014 Pro-Russian forces proclaimed Donetsk People’s Republic85 April 28, 2014 Pro-Russian forces proclaimed Lugansk People’s Republic86

The table could be continued through the present, as this international conflict is ongoing. The loan of US $ 3 billion, as well as an attempt to borrow another US $ 1.985 billion by the government of President Yanukovych, occurred when the Ukrainian people seriously questioned the Ukrainian government’s legitimacy. The sovereign loan from Russia to Ukraine is a part of a wide-scale strategy of interference and occupation by a foreign sovereign power, first de facto, particularly through the borrowing of US $15 billion, and then de jure, as evidenced by the events in Donbas (region comprised of Donetsk and Lugansk) and Crimea. To the present day, Russia continues to support President Yanukovych, even as he and former Prime Minister Azarov have escaped criminal prosecution in Ukraine. Corruption constitutes the highest level of risk for the people of a sovereign lender and for the borrower or its agent/trustee. Courts and tribunals should support and apply the idea of categorization of corruption as a jus cogens norm. Finally, in the context of fiduciary duty theory, the phenomenon of self-dealing in sovereign debt interactions, both in terms of incentives and of interests of sovereign lenders and borrowers, cannot be

81. President Vladimir Putin, Address to the Federal Assembly of the Russian Federation, President of Russia, (Mar. 1, 2014), http://en.kremlin.ru/d/20353. 82. Iryna Zaverukha, The Trajectory of Crimean Flight 2014: Falling Through the Cracks Between the Rock of “Refugee” and the Hard Place of “Internally Displaced Person”, 49 THE INT’L LAWYER 374, 384–86 (2016), https://www.americanbar.org/content/dam/aba /uncategorized/international_law/_til_49- 3.authcheckdam.pdf. 83. Chronology of the Annexation of Crimea, supra note 79. 84. Iryna Zaverukha, Terra Incogniate on the Map of Europe: Crimea and the Donetsk and Luhansk Regions, ABA SEC. OF INT’L L. - EUR. UPDATE -UKR. SPECIAL ED. at 2, 4–5 (June 2017), https://www.americanbar.org/content/dam/aba/administrative/international_law /Europe%20Hot%20Topics%20Ukraine%20Issue%2015.authcheckdam.pdf. 85. Ukraine Crisis: Protestors Declare Donetsk ‘Republic’, BBC NEWS (Apr. 7, 2014), https://www.bbc.com/news/world-europe-26919928. 86. Federalization Supporters in Luhansk Proclaim People’s Republic, TASS (Apr. 28, 2014), http://tass.ru/en/world/729768. IRYNA ZAVERUKHA 3.24.20 FINAL (DO NOT DELETE) 3/24/2020 12:31 PM

Spring 2019 Public and Private Interests in Sovereign Debt 101 ignored. To do so is to imperil the peace, as well as the social and financial well-being, of the entire planet.