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Ukraine Versus the Vultures

OXFORD – Amid all of its other troubles, Ukraine cannot pay its creditors. The country needs more money, serious reform, and a rescheduling of its debt. Yet even the best efforts by the International Monetary Fund, the United States, and the European Union to achieve this will be hobbled by investment agreements that they themselves have pressed on Ukraine and many other emerging economies. Indeed, Ukraine could be left facing a string of complex and costly legal cases.

In recent years, shrewd creditor lawyers have argued that investment treaties give bondholders the same rights as foreign direct investors, and have smuggled sovereign-debt cases into international arbitration proceedings wherever they have found investment treaties with broad, open-ended definitions. The recent experiences of Argentina, Greece, and Cyprus highlight the “blowback” on sovereign-debt restructuring.

The first such case was Abaclat and Others v. Argentine Republic, which started in 2008. Thousands of Italian bondholders refused Argentina’s debt-restructuring deal, successfully arguing that the Italy-Argentina investment treaty gave them the right to pursue compensation through investor-state arbitration.

Resolving a sovereign-debt crisis requires a collective agreement by creditors, which can be achieved only by individual investors’ incentive to try to grab their money and run. That is why investment treaties that leave an opening for holdouts are counterproductive.