Thomas Laryea is an international law and policy expert at Orrick, Herrington & Sutcliffe. He specialises in advising governments and creditors on international finance matters. In this post, he explores the legal ramifications for international economic law following Russia’s invasion of Ukraine.
The armed conflict between Russia and Ukraine has already had profound geopolitical repercussions, as well as tragic human costs. It is also highly complex for international economic law and the institutions that govern it. In particular, the IMF.
Before we dive into the central issues, however, some context.
After the collapse of the Soviet Union in 1991, the former republics of the bloc were broken up into their own states. law. A dissolution under international law would have been messy, not least because it would have meant that the Soviet Union’s assets and liabilities would have to be allocated among the new successor states. However, Russia insisted that it be treated as the continuing state. That meant Russia retained all its international assets (such as foreign exchange reserves) and liabilities (such as obligations on international debt contracts).
This approach also meant Russia continued the Soviet Union’s membership and status in international organisations such as the UN Security Council. And the former Soviet Union republics became new states under international law.
Now to today. What are the international economic law implications of Russia’s invasion of the Ukraine?
The IMF, in a joint statement with the World Bank, signalled on Tuesday that it’s responding to Ukraine’s request for emergency financing, and is continuing to work on making an additional $2.2bn available for the nation before June’s end.
But what would happen if Russia were to apply for IMF financing to cushion the blow from the sanctions?
Russia’s invasion of Ukraine does not breach its obligations under the IMF’s Articles of Agreement: Russia remains a full member of the IMF member and remains eligible for financing from the Fund. Russia could therefore immediately draw on its circa $5bn “reserve tranche” in the IMF without any conditions. Beyond that, however, the geopolitical reality suggests that securing the IMF Executive Board votes to approve additional financing would be impossible.
Economic sanctions and other restrictions
The scale of the economic sanctions against Russia has been unprecedented, with Russia’s central bank, financial and banking system all targeted.
The nature of the sanctions imposed on Russia could mean that those measures fall foul of the IMF treaty. For instance, as the measures restrict the availability, or use, of foreign exchange by private parties in international payments, this could constitute “exchange restrictions”, breaching the IMF treaty, unless approved by the IMF Executive Board. However, since 1952, the IMF has approved exchange restrictions that are imposed “solely for the preservation of national or international security”. I would expect that the exchange restrictions imposed against Russia would be approved on this basis.
In order to cushion the rouble’s fall and conserve the country’s now-limited store of foreign exchange reserves, the Russian authorities have also imposed a series of measures, such a restricting Russian residents from using foreign exchange to service foreign debt. Those measures would also be in breach of Russia’s IMF obligations, unless the IMF Board approves it. A basis for IMF Board approval is that such measures are imposed temporarily, for balance of payments reasons and their effect is non-discriminatory across residents of other IMF member countries. Based on past precedents, Russia has a fair argument for IMF approval of at least some of the restrictions that it has imposed.
The international legal effect of the restrictive measures that Moscow is imposing may be much broader than many international investors realise. The IMF treaty gives extraterritorial effect to some of the payment aspects of the economic sanctions against Russia and its central bank’s attempts to conserve its reserves. Article VIII, Section 2(b) of the IMF’s treaty renders a contract for payment in foreign exchange unenforceable, where such payment is “contrary to an exchange control regulation imposed consistently with the IMF’s [treaty].” Any exchange restrictions approved by the IMF, or any restrictions on capital movements (which the IMF treaty generally authorises IMF member countries to impose), are consistent with the IMF treaty for these purposes. What this means in practice is that, if a US-based holder of a Russian corporate bond does not receive payment because Russia has imposed an IMF-approved exchange restriction, that bondholder might not be able to enforce its claim for non-payment in any of the IMF’s 190 member countries.
A quick word on sovereign bonds
In the run-up to Russia’s invasion of Ukraine, the prices of Ukraine’s sovereign bonds traded lower, and they might fall further in a prolonged conflict. A debt restructuring looms. Ironically, Russia is reported to remain a holder of its bonds even though it fought Ukraine in court during its bond restructuring in 2016.
Some bond market participants have also begun to wonder whether a default event would be triggered if it ceased to become a member of the IMF if Russia took control of the country. This question conflates two distinct international law issues: (i) the recognition of a state and (ii) recognition of a government. If Russia were to take over the government in Ukraine, it’s likely that the international community would refuse to recognise that government and, in any case, Ukraine would still retain its statehood and, therefore, would continue as a member country of the IMF.
Another issue is whether Russia will make its upcoming payments on its sovereign bonds, with the first hard currency payments due on March 16. With the payment system restrictions and the obvious incentives on Russia to conserve financial resources, a default seems likely.
The quest for peace and security is the international priority at this juncture. Unfortunately, the economic fallout may be prolonged and the international economic law consequences may be felt for years to come.