SYLVIE DOUGLIS, BYLINE: NPR.
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DARIAN WOODS, HOST:
This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods. The Russian invasion of Ukraine and the response of much of the international community in the form of sanctions shows how economic tools can be wielded as weapons. Government finance is not just some impersonal exercise in number crunching - it can take on this moral dimension. Planet Money's Wailin Wong is here. Hi, Wailin.
WAILIN WONG, BYLINE: Hi, Darian. Yeah, this question of morality and government finance is a really big one. And right now there is another dispute between Ukraine and Russia that really speaks to this issue. It's a legal dispute over $3 billion in Ukrainian bonds that Russia bought in 2013. And to understand what's at the heart of this conflict, we have to introduce a concept with an incredibly evocative name - odious debt.
WOODS: Yes, odious debt - I first heard you talk about this term last week, and I had to dig in and learn more about it. So odious debt was first coined in 1927 by a Russian emigre and law scholar named Alexander Sack.
ANNA GELPERN: This is sort of a 1927 hashtag that has, you know, come through to this day and retained...
WONG: Anna Gelpern is a law professor at Georgetown who studies government debt and financial regulation.
WOODS: And the basic concept of odious debt is this - if a tyrant or a despotic government borrows money, the next government shouldn't have to pay that money back. That's the argument, at least. The argument is that the debt is not enforceable.
WONG: It's a principle that has inspired kind of a community of odious debt watchers - economists and legal scholars who study how these ideas might actually get used in international law. And right now, they're watching a case move through the English court system involving Russia, Ukraine and $3 billion that you might say has a pretty big stink to it.
WOODS: We'll dig into all of this after the break.
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WONG: This legal dispute between Ukraine and Russia has caught the attention of odious debt watchers like Anna Gelpern, and she says she hopes the current crisis creates an opportunity to talk about the moral and political dimensions of government borrowing because debates about debt and debt repayment tend to focus on tidy or technical questions like, does the borrower have enough money? What's the size of the debt burden? - that kind of thing. Odious debt is about something else.
GELPERN: It is really about a promise that is tainted at the outset and cannot be enforced. So even if it's 50 cents, even if you could pay it really easily, it is debt that is illegitimate at birth, and it is debt that should not be paid.
WONG: Canceling an odious debt means that people who, say, live in a country don't get saddled with the financial burdens from whatever regime was last in charge. The slate is wiped clean. And, like Anna said, it has nothing to do with the ability to repay. It's all about this odiousness, this foul stench that polluted the money at the moment it was borrowed.
WOODS: Colonial debts often get brought up as examples of this. Like, Cuba took on debt while it was a Spanish colony, and Cuba didn't have to pay it back after it became independent.
WONG: Alexander Sack, the legal scholar credited with the term, said that government borrowing should have the consent of the people and be for the benefit of the people. And all of this sounds really great in theory, but Sack's ideas have been very hard to put into practice - so hard, in fact, that they're actually still more legal theory than usable doctrine.
GELPERN: So what's in the interest of the people? You know, the government is kind of elected, but, you know, nobody believes that the process was genuinely - whatever - open, democratic. Does that mean that any borrowing of that government is not a binding contract? Well, what about a really crappy, inefficient project? You know, you build a bridge to nowhere or you're just sort of bad at governing.
What Sack did was create this unbelievably compelling term and rubric that covers all of these cases. The trouble here is that these are really hard to interpret and apply. That's why, you know, the debate in this space is just frustratingly perennial.
WOODS: And it's also why whenever there's a case that even has the whiff of odious debt, it's like this bat signal for legal scholars who study it. And right now, they're watching this legal dispute between Ukraine and Russia that precedes this horrific invasion of Ukraine at the moment.
WONG: Here's the back story. On Christmas Eve 2013, Ukraine issued $3 billion in sovereign bonds. Sovereign bonds are government debt, and they're a common way for countries to raise money. The bonds can be denominated in a country's local currency or in dollars or euros. They're typically issued under New York or English law.
WOODS: And the buyers of sovereign debt can range from individual people, like your grandmother buying you a U.S. savings bond as a gift, all the way up to big institutions, like mutual funds and banks.
WONG: These $3 billion in bonds that Ukraine issued in 2013 were denominated in U.S. dollars. And instead of multiple hedge funds or pension funds showing up to buy the debt, there was, in this case, a single customer.
WOODS: Russia bought the entire 3 billion, which is kind of unusual. It was part of this bigger financial package that it had offered the then-Ukrainian president, Viktor Yanukovych. It was to keep him from signing an association agreement with the European Union. Yanukovych was criticized for being a corrupt kleptocrat, and his move away from EU integration and toward Russia led to massive protests in Ukraine.
GELPERN: It's really money to keep Yanukovych in power that failed. Three months later, Yanukovych is deposed. There's unrest in the streets. The annexation of Crimea follows, et cetera, et cetera, et cetera.
WONG: The economic turmoil that resulted put Ukraine in danger of defaulting on its overall sovereign debt load, which is around $18 billion. So in 2015, the country negotiated new terms with its creditors, but there was one holdout. You can probably guess who that was.
WOODS: Yeah, it was Russia. It did not take the deal. Instead, Russia sued Ukraine via a trustee in an English court to get its money back.
GELPERN: Now, this is not a complicated case at one level. Did you get the money? Yes, I did. Did you pay it back? No, I didn't. Well, go and do it because you promised to do it.
WOODS: Ukraine doesn't use the term odious debt in its arguments. But Anna says this proceeding has become kind of a test case for odious debt because it raises questions about whether the bond deal was legitimate in the first place.
GELPERN: It was a bond that was clearly sort of a loyalty payment to a corrupt ruler from another who then proceeded to be violent.
WONG: Ukraine's lawyers talk about duress. They argue that, basically, Russia backed Ukraine into a corner in 2013, and Ukraine had no choice but to take $3 billion from Russia. And those coercive circumstances, which ultimately led to the annexation of Crimea and the war unfolding today, meant the whole debt was rotten from inception.
WOODS: This case has gone all the way up to the U.K. Supreme Court. The last hearing was in November. And the court is now deciding which parts of the case might merit a full trial.
WONG: I mean, if this bond case does go to trial, I mean, what does that trial look like? Then they're just, like, litigating the annexation of Crimea, like, in a case that's about ostensibly $3 billion in unpaid debt.
GELPERN: I think you hit the nail on the head. Are we going to limit this to a conversation about December 2013, which, doctrinally, arguably, is kind of where it is? But, you know, really, are we going to look like a bunch of idiots shutting our ears to the sound of explosions right now? It's a test of a lot of things and our ability to resolve these disputes in a way that does justice to their moral content. Our ability to do that is being tested, like so many other things.
WONG: This case, this debt didn't happen in a vacuum. It's part of ongoing geopolitical struggles between Ukraine and Russia that have become outright war. And like with these really thorny questions of economics and law, the court will have to figure out how much of that context to weigh on their decision.
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WOODS: The show was produced by senior producer Viet Le with help from Isaac Rodrigues. It was fact-checked by Corey Bridges. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.
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