“Princess Charming of Wall Street:” Forgotten Legacy of Sylvia Porter and Persisting Gender Inequality in Finance

A holder of fourteen honorary doctoral degrees and a syndicated columnist with a readership of over 40 million people, Sylvia F. Porter once was America’s most famous financial editor. She was the first woman in the history of U.S. journalism to challenge the male-dominated world of business and economics writing. Porter’s works on personal money management, income taxes, and United States government securities, span across more than four decades – from the turbulent 1930s, through the booming 1950s, and to the crisis-stricken early 1980s.

However, Sylvia Porter’s legacy has since faded away, and few are now familiar with the name that used to be synonymous with financial journalism. As the ongoing conversation on gender equality in finance is expanding to include women’s role not only as receivers and providers of financial services but as leaders and decision-makers, shaping the fundamental ways in which the financial system is structured, it is a fitting moment to revive the memories of Porter’s immense contribution to the field of finance, which she made through her writing, policy advising, and public appearances. While considerable progress has been made on providing women access to the financial sector of the economy, most of those efforts are focused on ensuring women’s essential rights to open a bank account separate from their husbands’, receive a business degree, and compete with men for employment at financial institutions on fair terms. Countless decades after Sylvia Porter’s extraordinary career took off, it is time to expand this focus and work on closing the gender gap not only in MBA programs and hedge funds or investment banks but in the establishments that oversee the operations of the entire financial system and have the power to profoundly impact it: central banks, regulatory institutions, and international organizations.

Sylvia Porter’s career is a telling example of the significance women leadership can carry in a male-dominated professional world. Although her leadership was mostly ideational by the virtue of her occupation as a journalist, Porter left a long-lasting mark on numerous aspects of America’s financial life. In 1935, shortly after graduating Hunter College, New York, magna cum laude with a degree in economics, Porter wrote an article for The American Banker that vocally criticized then-Secretary of the Treasury Henry Morgenthau Jr.’s handling of government debt. The article carried the byline of S.F. Porter to conceal her gender. When Secretary Morgenthau sent a request to meet with the author of the piece, presuming in his letter that S. F. Porter was a man, The American Banker responded with a vague note, from which all pronouns were conspicuously missing. Nevertheless, the Secretary persisted and eventually succeeded in his attempts to meet the author of the piece. Sylvia Porter arrived in Washington, D.C. in 1940 to advise senior policymakers on the issuance of a new class of government bonds. Porter was only twenty-two when she wrote the milestone article that would make her column a must-read for every secretary of treasury since Morgenthau. Despite her tremendous professional achievements and undeniable expertise, it was not until 1942 – eight years after the beginning of her career as a financial editor – that S.F. Porter revealed her full name and gender to the readers.

Nicknamed by the press the “glamour girl of finance” and the “Princess Charming of Wall Street” once her identity became public, Porter wrote about complex business and economics issues with authority assumed only by men at the time. Not only did she tremendously influence the way ordinary Americans handled their money but also worked to shape U.S. fiscal and monetary policy. Throughout the 1960s, she advised presidents Gerald R. Ford and Lyndon B. Johnson on the anti-inflation fight and export financing. In 1966 Porter recommended President Johnson the appointment of Andrew Brimmer, the first African American to serve on the Federal Reserve Board. She was regularly invited to speak on radio and television and gave hundreds of speeches to the audiences of financiers and policymakers.

Porter passed away in 1991, leaving as legacy of a score of books on money management and investment and a daily financial column circulated by 450 newspapers, read virtually by every economics professional in the nation. Her hope throughout a half-a-century-long professional journey was that women take charge of their personal finances. Today, nearly ninety years after Porter’s transformative career began to shape the landscape of the financial world controlled by men, at stake is something even more important: women’s access to spaces where critical decisions about the functioning of the financial system are made.

Financial regulation is not something we think of when gender equality is brought up. But it is exactly because the topic has not been given the attention it deserves in the echelons of powerful financial authorities. When the conversation on gender in global and national financial governance is initiated, it tends to be confined to the feminine-stereotyped and masculine-stereotyped features of women’s and men’s leadership styles. Such traits as lower risk tolerance, weaker propensity for competitive behavior, and natural “protectiveness” are typically attributed to women and deemed desirable for individuals overseeing the functioning of financial institutions and markets, due to unsustainable leverage appetites and irresponsible risk management policies financial actors are susceptible to. In May 2010, almost two years after Lehman Brothers filed for what was the biggest bankruptcy in U.S. history, Time magazine featured Elizabeth Warren, Sheila Blair, and Mary Schapiro on its cover, with a subheading that read: “The women charged with cleaning up the mess.” Times was among the dozens of prominent publications advancing the narrative that female leadership in financial governance is the key to “cleaning up the mess” in the short run and economic stability and sustainable growth in the long run. The world needed less of self-interested, risk-taking male financiers and regulators and more of cooperative, caring female leaders.

Those narratives of expanding women’s involvement in supervision and oversight for the sake of safer financial practices - aside from being products of binary thinking grounded in poorly supported behavioral psychology research and gender essentialism - never materialized. National and international regulatory institution have indeed gained salience since the crisis exposed hidden fragilities of the modern financial system. Establishments like the European Banking Authority, the Bank for International Settlements, the Basel Committee on Banking Supervision, and the International Monetary Fund are now looked upon as upholders of global financial stability. While those organizations gained a considerably more prominent role in the operations of the global financial system since the devastating turmoil of 2007, women did not.

From 2007 to 2018, only four of the twenty-eight member-states of European Monetary Union - Cyprus, Serbia, Macedonia, and Norway - had a woman central bank governor. Despite the fact that global financial governance institutions did witness some improvement in its gender composition, women still comprise only 21 percent of all key decision-making bodies in national central banks across Europe, and an overwhelming 76 percent of leaders in supervision agencies globally are men. All twenty-four members of the IMF’s executive board are men, and the Basel Committee, established in 1974, is yet to have a woman chair.

The current state of gender equality in financial governance is therefore not much different from that of the business and economics world at the time Sylvia Porter was carving out her extraordinary professional path as one of America’s most celebrated financial experts. While women now have more liberties as consumers and providers of financial services, an astoundingly high proportion of seats at the tables where critical decisions about the global financial system are made still belongs to men. In her famously controversial 1959 speech to women journalism students, Porter expressed frustration with media hysteria surrounding the growing number of women joining the labor force, and the financial industry in particular, in which, as Porter noted, American women had been active since the 19th century. Exasperated, Porter proclaimed finance to be a “woman’s field,” hoping to once and forever put an end to the debate over whether women belong on Wall Street as authoritative decision-makers shaping the financial world. Regrettably, more than five decades later, the case is still being pondered.

Economic Integration vs Economic Nationalism: The Deutsche Bank Merger

Introduction

The European Central Bank (ECB), founded in 1998, established  monetary policies after the creation and implementation of the euro as a transnational currency in the Eurozone. The Euro currency, used by the majority of members in the European Union, helps create a single market, which is essentially one large region which allows for trade to be done between European countries without any form of regulations or tariffs. The Euro system promotes more than economic cooperation; it promotes integration and merging of different European banks to further promote the financial cooperation the ECB strives towards. While strides have been made in order to further integrate European banks, there has been push back from European nations such as Germany to have a  “national champion”  in the financial system in order to support national companies. German believes this national champion is Deutsche Bank, one of the oldest banks in Germany whose foundation was based upon supporting German exports.

However, this once powerful bank is currently on the verge of collapse. Beginning from the financial crisis in 2008, Deutsche Bank is at the center of financial scandals, low profits,and other issues which will be discussed later. Members of the management board of Deutsche Bank and German politicians believe the solution to saving Deutsche Bank is by merging with competitor Commerzbank, another old failing bank who focuses more on domestic companies. While German politicians are hopeful that the merger with Commerzbank will help solve many problems surrounding the German banking system, it does not eliminate the underlying desire for a German bank to aid German companies. Germany’s agenda to have a national bank support national companies goes against the ECB's long-term plan to establish a Pan-European banking system between different European banks.

Deutsche in Danger

Without any form of reformation, Deutsche Bank is heading down the path to be Germany’s equivalent to the fall of Lehman Brothers. The global financial crisis of 2008 was the beginning of the decline for the German bank, which only deepened as scandals and conflicts internally within the bank as well as with outside actors continuously arose one right after the other. For example, in 2018, Deutsche Bank released its net profits on the company website for the first time since 2014. The numbers show an underperformance in comparison to the targeted reports. In 2018, Deutsche Bank only made a net profit of $390 million, which is lower than the Reuters projected target at $517 million. Another issue, which only makes matters worse, is their dependency on foreign companies. In a market where competitors are banks such as J.P. Chase Morgan and Citi Bank group, whom dominate market in and outside of the United States, Deutsche Bank relatively is small compared to its competitors. This, among other financial issues, declining revenues, and adverse market conditions have laid out the foundation to the pending doom of Deutsche Bank. These issues do not fully address different external scandals Deutsche Bank has fallen under for the past several years with outside actors.

These external scandals only make Deutsche’s road to recovery even harder. For example, Deutsche Bank recently came to a settlement with the US Department of Justice for $7.2 billion for misleading investors in the purchases of residential mortgage-backed securities. Other scandals, such as the one in which Deutsche Bank lost about $1.6 billion worth of bonds bought in 2007, and a tax evasion scandal that led to Deutsche Bank to pay $94 million, spill over a large amount of money the German bank owes to different countries, specifically the United States. While such scandals are not necessarily rare in the banking world, their accumulation and the long period it is taking for the German bank to pay back the settlements only make Deutsche’s situation worse.

A Complicated Merger

If the merger happens, Deutsche Bank will reap more benefits than Commerzbank. It will cause  cost cuts will need to be done in order for the newly merged bank to soundly operate. One way this could be executed is through cutting employees. While a measure such as this is normal to any bank merger or acquisition, the reductions required from Deutsche Bank would be substantially less than if the bank restructured itself.  While the alliance allows both banks to expand their markets domestically and internationally, Deutsche Bank’s expansion into the domestic market will diminish its dependency on any international trade operations or need to lend to international companies.

Due to the fact that Commerzbank’s main clientele are small-medium enterprises in Germany, the merger of these two banks would create  the largest lender in Germany. The concept of having one large bank financing various companies in Germany follows an agenda of many German politicians, which is a large German bank supporting German companies. This concept of a megabank promotes the idea of a  national champion, which the German government favors. By having Deutsche Bank as the country’s primary bank to finance majority of Germany companies, politicians hope this will decrease the global footprint of foreign banks such as J.P Chase. Although the merger is a protectionist-like measure to limit external interference, it does not fix the flaws in the German banking system. The merge might even make the banking system of Germany more complicated.

The country’s banking is currently suffering from overcrowding. Overall, there are three pillars in which all German banks fall. The three pillars are; private banks, which are banks that deal with the financing of specific individuals; public banks, which normally pertains to commercial companies and co-op banks which is a combination of both private and public banks. With the amount of banks in each pillar ranging  from as small as 385 banks to as many as 1000 banks, this results in a system that is weak and underperforms. Although banks, including s Commerzbank, have attempted to salvage the situation through consolidations and merging with smaller banks, it did not prove to be helpful in reducing the number of players in the system since it did not erase the fact that there are too many banks in Germany.

This merger, if it occurs, will result in this new bank being the third largest bank in the Eurozone. While Germany is overall in favor of this merger, it still needs the ultimate approval of the European Central Bank in order for it to fully take place.

The European Central Bank has given a set of criteria which must be met by both banks for the merger to be approved. Nevertheless, the merger goes against the broader plan of the European Central Bank to have a Pan-European banking system where banks within the Eurozone will merge with other banks in the regions as well as finance companies beyond their national border. In 2018, the ECB created the Target Instant Payment Settlement (TIPS), which allowed transactions between European banks to be processed instantaneously, regardless of where the primary base of a bank is. Although only a few European countries use the TIPS, the hope is that all member-states will use the system to make financial transactions more timely and efficient. The Deutsche-Commerzbank merger will not wholly dissolve this program, but it will weaken the goal of having financial integration among member states. If the European Central Bank is promoting the idea of European banks merging and financing companies outside of their national borders, the idea of German companies only being supported by German banks goes against the agenda of the European Central Bank.

Recommendations

German politicians should focus their efforts on reforming their entire banking system instead of focusing  on saving Germany’s oldest, and not most efficient, banks. While it may be in Germany’s best interest to have German banks  support domestic companies, it is more important to reform the banking system. Through this, Germany will hopefully create a more financial market which will enhance the performance of banks within the financial system as well as reducing the risk in banks collapsing. The reforming of Germany’s banking system can also ease any worry of the European Central Bank system about Germany’s protectionist path. Although board members of the ECB have not released any form of hard push back against the merger, they have listed different demands or criterias which need to be met in order to gain the full approval for the merger to occur.  One of these criterias given by the ECB is for Deutsche Bank to increase their fresh funds, which is the amount of funds that are neither withdrawn or newly deposited funds into a bank. Criteria such as increasing the amount of fresh funds is just one way for Deutsche bank to create a safety net in case the merger is not successful.

All in all, the merger reflects many things internally in Germany as well as the Eurozone. Internally in Germany, the ongoing negotiations to save one of the oldest banks in Germany is a reflection to preserve their pride of national banks financing national companies. Even in an overcrowded banking system, politicians hope the new merged will be the answer to their prayers. Externally, through the lens of the European Central Bank, the possibility of the third largest bank in all of Europe who wants to have a global footprint as large as American banks and finance all German companies is an ambitious dream for Germany to have their cake and eat it too.

The Deficit the EU Should Really Worry About Is Not Fiscal – It’s Democratic

Earlier in February, the European Commission – the executive arm of the EU – published a report outlining a pessimistic economic outlook and persistent substantial market risks in the region, with the projected real GDP growth rate under 2 percent for 2020. The report came at a time the strength of European institutions is tested not only by poor macroeconomic indicators but also by declining citizen confidence in the ability of supranational governance to be transparent and accountable. According to a 2018 Eurobarometer poll, less than two-thirds of Europeans are satisfied with the opportunities for individual citizens to participate in political life. More alarmingly, voter turnout for the European Parliament elections has fallen by over 30 percent since 1980s and now constitutes only 40 percent of the EU population.

Weakening citizen trust – the main symptom of the EU’s growing ‘democratic deficit’ – and worsening economic performance are, however, not just coinciding with one another by chance. The perceived legitimacy of the EU, more so than that of the majority of political arrangements, is highly dependent on its delivery of satisfactory economic results to member-states. Economic self-interest, as illustrated by Britain’s break from Brussels, is a powerful driver of both regional integration and disintegration. Despite the limitations of examining the European project through a performance efficiency lens, the notion that a single common market – with standardized regulations and supervisory mechanisms – is good for member states continues to prevail in explanations of the EU’s emergence and survival.

The 2010 crisis, low levels of growth, high unemployment, and Italy’s current standoff with Brussels over its 2019 budget all undermine result-based legitimacy of the EU and can leave lasting damage on its authority. National governments and the public might be prompted to question the economic desirability of staying in the Union. While unlikely to follow the path of the UK and withdraw completely, countries can potentially model their conduct after Italy and undermine the internal cohesion of the EU by disregarding its rules.

No less urgent are concerns about the transparency and accountability of the European system of governance, oftentimes perceived as an elitist, unelected technocracy. Many citizens believe that supranational decision-making is becoming only more inaccessible to them due to its increasing complexity. The worsening of regional democratic deficit manifests itself in lower voter turnout and overall weaker citizen support for the European project.

The perceived failure of regional institutions to provide member-states with clear and otherwise unattainable economic benefits and the unresponsiveness of EU governance to the concerns of ordinary citizens both pose a major threat to the continuous success and even survival of the European project. However, the debate surrounding these two shortcomings of the current institutional setup not only tends to overlook the interconnectedness of the two issues but oftentimes portrays democratization of regional governance and economically optimal outcomes as being at odds with each other. From the ancient Greeks to the modern-day libertarians, the ‘short-sightedness and ignorance’ of the masses are cited as the reasons institutional arrangements – especially in spheres so technical as fiscal and monetary policy – should be protected from excessive popular influence if they are to yield desirable results. In the sphere of European economic and financial governance, however, the opposite seems to be true.

The undemocratic procedures by which European budgets and money are managed erode not only citizen confidence but the performance efficiency of European institutions. Greece provides perhaps the most telling lesson in the importance of transparency and accountability in economic governance on the national level, which is no less applicable to supranational institutions. It was, after all, falsification of data on the levels of sovereign debt that triggered the country’s crisis in 2010 and its subsequent spillover into the rest of the eurozone. The Greek government’s failure to accurately report on the country’s financial standing led to dramatic downgrades of Greek government bonds and overall reduced the attractiveness of the country’s financial markets.

That same year, several EU audit institutions published a joined report that acknowledged the importance of fiscal transparency and proper oversight of public finance management in crisis prevention and mitigation. Following the financial turmoil of 2010, a new strategy for the development of the European Monetary Union (EMU) identified “democratic legitimacy and accountability” as one of the five building blocks forming a more robust monetary system. All in all, EU officials seem to be coming to the realization that democratic accountability is more than a just complementary dimension of political legitimacy. It is an essential component of a sound economic and financial structure, upheld by both voter and investor confidence.

The unwillingness of technocratic elites to introduce democratic controls to the procedures that govern EU’s financial and monetary affairs will only strengthen the appeal of populism. Arguments pointing out the benefits of a technocratic form of governance over national economies and public finance are typically underpinned by the assumption that the average voter cannot be trusted with control over her country’s power of the purse. Such contempt for the ordinary citizen is what gives validity to claims like that of Michael Grove, who, at the height of Brexit, announced that the UK people “have had enough of experts.”

What makes technocratic arguments more dangerous is their propensity to shy away from the evident need for greater economic and financial literacy among the populace. Aside from the established associations this form of literacy has with countries’ national prosperity, citizens with a clearer understanding of the issues discussed away from the prying eyes of the public have better chances of becoming legitimate participates in policy debates that affect their everyday lives. It is, of course, unreasonable to expect an ordinary European to acquire the technical expertise necessary to understand all the intricacies of fiscal and monetary affairs of their countries and the EU, yet unelected officials deliberating on vital issues behind closed doors out of an irrational fear of the masses should seem no less absurd.

Security Implications of Post-Brexit Fragmentation in European Financial Governance

Combating illicit finance, ensuring the stability of capital markets, and preventing crises are not purely financial concerns anymore. Not only has the relevance of military power arguably declined and that of economic power rose since the end of the Cold War, but financial markets themselves underwent major securitization. Budgetary and financial considerations have always constrained foreign policy, but finance and security now merge in less obvious ways. The intensified surveillance of banking after 9/11, rising popularity of financial, rather than trade, wars, and the growth of government interest in acquiring financial data are all making it ever more difficult and dangerous to treat the governance of finance and security as only loosely connected.

The expanding overlap between finance and security should raise additional concerns over the so-called “Brexodus,” the shift of financial power and competence away from the UK and toward the Continent. The UK’s loss of access to the integrated financial market will not only hit bankers and investors. Its implications are of national, regional, and global security importance. The European Supervisory Authorities (ESAs), created to integrate financial supervision within the EU, are now preparing to relocate the headquarters of its major regulatory agency, the European Banking Authority (EBA), from London to Paris. The UK’s departure from the EU will exacerbate preexisting gaps in cross-border cooperation in combating illicit finance, which previously allowed for the movement of dirty funds revealed in the Panama Papers and the Global Laundromat series. Meanwhile, British firms continue to benefit from massive inflows of foreign capital, a significant portion of which the British government believes to be laundered, and London remains one of the most attractive destinations for potential ‘golden visa’ holders. Considering the reputation of the city as the money-laundering capital of the world, the relocation of such a prized regulatory body as the EBA is an especially salient issue, since Britain will now have to assume responsibility for building an independent administrative capacity to counter the estimated £90 billion worth of illicit financial flows that go through London each year. This number constitutes a staggering 17 per cent of total global money laundering – an amount challenging to handle in the absence of Europe’s regulatory framework the UK will lose access to. Having more than one-sixth of the world’s money laundering transactions face less regulation than ever before opens new opportunities for proliferation and terrorism financing, let alone tax evasion and anonymous shell companies.  

Back in 2016, British authorities lamented the deterioration of the UK’s status as a world leader on anti-corruption due to the continuing lack of transparency domestically. Now, its reputation as the upholder of European financial market stability is under threat, too. More than 90 percent of the euro-denominated derivatives business of euro banks are currently cleared via central counterparty clearing houses (CCPs) in the UK. Central clearing is a crucial function of the global financial system that ensures investors can access liquidity in multiple currencies across multiple markets. Britain handles the majority of euro banks’ interest rate and credit derivative transactions, as well as a significant number of commodity and equity derivatives. In light of Brexit, EU experts worry the potential CCP failure will result in massive, volatile movements in the comparative cost of using UK CCPs, which might trigger the transfer of hundreds of thousands of trades worth trillions of euros. Such disruption is likely to cause a liquidity drain and erode profitability in the short-run and leave systematic consequences on the global financial system in the long-run. With those concerns in mind, Yves Mersch, Member of the Executive Board of the European Central Bank, encouraged EU authorities to consider taking action to ensure the Eurosystem has adequate control over the impact of clearing activities in the UK. What it ultimately means is a transition towards a new European and global clearing system, over which London will have considerably less influence. Such a dramatic departure from the “London-centrism” of regional financial markets will undoubtedly give Britain more autonomy, but it will also weaken the UK’s ability to impose its preferences on regional and, consequently, global financial governance.

Some view fragmentation of financial governance as less detrimental, claiming it decreases chances of systemic risk due to more diversified and thus more robust regulatory systems. Jon Danielsson of London School of Economics and Political Science argues that divergent governance regimes protect against synchronized reactions of financial firms – one of the few mechanisms capable of triggering a collapse of an entire financial system. However, many consider it undesirable for the new British regulatory system to differ too dramatically from that of the EU. Fearing Brexit might pose a systemic risk not just to the domestic market but to the global financial system, Piers Haben, Director of Oversight at the European Banking Authority, has called for Britain’s exit from the EU’s financial system to be “as smooth as possible,” implying that the UK and EU should not do much to alter their regulatory regimes. Depending on what side of the argument one is on, Brexit can mean both greater and lesser systemic risk. What is certain is that there should be a balance between centralization, which provides convenience for market participants, and decentralization, which mitigates risks. Achieving such delicate balance requires key actors’ trust in one another and an environment conducive to successful negotiations. Brexit is very unlikely to encourage either of these things.

On the Continent, however, things are not looking entirely grim for the future of financial governance without extensive British involvement. While the prospects of a hard Brexit are becoming more and more likely with each week of unsuccessful negotiations, European financial governance is growing its emphasis on operational, rather than regulatory, functions, both regionally and globally. Scholars speculate that the UK’s presence in the EU was, in fact, a major friction preventing the euro area from further centralization of institutional governance. Now that this impediment is removed and the political support for a financial union is sufficiently high, the ESAs will find it easier to come to cooperative positions without the need to factor in the peculiar preferences of the largest financial market in Europe. The ESAs will be able to take a more assertive position and assume a more prominent role internationally. “If you’re tired of London, you’re tired of life,” the famous saying goes, but Brussels will have no choice but to make the most out of its inevitable break from the City.

Ukraine’s Debt to Russia: Efficient Breach Vindicated

Russia has had quite a year. The Kremlin’s militaristic gallivanting has become a staple of this year’s news cycle, with perhaps its most pugnacious acts of hostility being those involving Ukraine. While Russia’s armed harassment of Ukraine has received the lion’s share of the media’s attention, it is its financial badgering with respect to sovereign debt that may prove to be most harmful of all to the bedeviled nation.

In this article, I endeavor to explicate briefly Ukraine’s sovereign debt dispute with Russia, with an eye towards arguing how Ukraine might make use of different international legal remedies to exculpate itself from its regrettable situation. One of the most discussed of these remedies is the legal notion of “odious debt,” and many—most prominently Georgetown University Professor Anna Gelpern and Newsweek’s Anders Åslund—have argued that the “odious debt” legal remedy is Ukraine’s golden ticket out of repayment. I will argue that the legal grounds for the use of the “odious debt” solution are shaky at best, but that rather “efficient breach” is the optimal legal remedy for Ukraine in this case. On the first day of 2016, Russia formally began legal proceedings against Ukraine over the non-payment of their $3bn debt, as reported by the Financial Times. This issue will now come down to a courtroom battle, and to understand the legal implications of this dispute, we need to understand its history.  

The story behind Ukraine’s sovereign debt to Russia is convoluted. The Economist called it “the world’s wackiest bond.” Ukraine has had many issues with external debt as of late. In August of 2015, Ukraine finished negotiations with numerous creditors (primarily investment houses) over Ukraine’s international bonds, altogether valued at around $18 billion. These renegotiations included a slashing of 20% of the bonds’ principal on average, as well as postponement of repayment until 2019. Even in August, Russia’s immediate rejection of these terms adumbrated the growing conflict brewing today over the $3bn bond that Ukraine was due to pay Russia on December 20th, 2015.

The bond in question was issued in December of 2013. Listed on the Irish stock exchange, the bond was clearly backed by spurious motives. As the Economist’s Christmas double-issue summarized:

The bond was essentially a bribe to Viktor Yanukovych, Ukraine’s now-ousted president, who was dithering between European and Eurasian integration. Senior Ukrainian officials say that the government itself never saw the money; most probably it was spirited out of the country by Mr. Yanukovych’s cronies.

While some might disagree with such a malicious characterization of the Russian debt, they would be in the minority, as numerous reputable sources—from the Financial Times, to Reuters, to Bloomberg—have lamented Ukraine’s unfortunate situation. Vladimir Putin proposed a staggered plan in November in which Ukraine would pay back the debt over three years, but the stipulation that a western government or bank serve as guarantor went unfulfilled, and the deal fell through. Some have attempted to argue that the whole issue of a legal remedy to Ukraine’s debt to Russia does not merit consideration, as the debt is commercial, not sovereign. On this issue most of the international community disagrees with Kiev, including the IMF, that on December 16th confirmed the sovereign status of Ukraine’s debt to Russia.

So, where does this leave us? The December 20th deadline has come and gone, along with the 10-day grace period thereafter, and Russian President Vladimir Putin has given the green light to file a lawsuit against Ukraine. In short, the bond, as it stands, will not be repaid. Given that the solution doubtlessly lies at the tail end of arduous, drawn-out courtroom arguments, let us now delve into some potential legal remedies to which Ukraine may take recourse as it attempts to rid itself of this debt.

As Anders Åslund argues in his piece on Ukraine’s debt to Russia, published on the Atlantic Council’s site, one potential legal remedy is proposed by Professor Gelpern from Georgetown, who argues that “Ukraine should not pay this debt because it amounts to "odious debt.” I refute this argument, as the argument for the applicability of the “odious debt” remedy is tenuous at best in this scenario.

“Odious debt,” as defined recently by the Centre for International Sustainable Development Law (CISDL), is a debt that meets three criteria: “it was contracted without the consent of the population of a debtor state, without benefit to it, and the creditor had knowledge of the circumstances.” To borrow the summary of odious debt from Jeff King of CISDL, this means that “under the contemporary definition… a debt is said to be odious when there is an absence of popular consent, an absence of benefit, and creditor awareness of these two elements.” As those familiar with the field of International Law will know, the sources of International Law are treaties, customary international law, and general principles. While some may disagree with the legitimacy of certain sources of International Law, these are the principles that will govern the courtroom arguments between Ukraine and Russia. Given that Russia and Ukraine are not signatories of any binding treaty that references odious debt, and there is no “general principle” of odious debt, to prove the applicability of the odious debt remedy in this situation, it is necessary to prove that it has crystallized as customary international law in a way applicable to Ukraine’s case.  

For customary international law to be considered binding, certain thresholds must be met; namely, the “thresholds in customary international law of uniformity, consistency and generality of practice, together with the requisite opinio juris,” as explained by King. Thus, Professor Gelpern and those who advocate for the doctrine of “toxic debt,” are arguing against the customary international “rule of repayment,” arguing instead that there are cases where forgoing repayment is a legal norm of customary international law due to toxic debt.

Upon examining the legal history of “toxic debt” as a defense against repayment, one can recognize that the argument is instantaneously weakened given that for most of the history of the “toxic debt” doctrine, the defense only referred to cases of “cessation and dissolution of a state, where the legal personality of the borrowing state often remains intact.” As the Ukrainian case involved neither cessation nor dissolution, the interpretive window whereby the “toxic debt” defense might be applicable is quite small.

Next, we can look for cases in which a successful application of the “toxic debt” defense has been outlined. In the Tinoco Arbitration case, we saw that for the debt to be toxic, there must not only be a change in regime (normally revolutionary), but also a failure on the part of the bank or government in question to show that the funds were used for “legitimate governmental use.” Few doubt that Ukraine’s debt was not used for legitimate governmental purposes, but the lack of a concomitant regime change renders the application of the “toxic debt” defense unsupported by precedent.

There is only one subset of legal scholarship on “toxic debt” that may support the applicability of the defense in Ukraine’s case: O’Connell’s “hostile debts” doctrine. Also referred to by scholars such as Mohammed Bedjaoui as “subjugation debts,” this subset of “toxic debt” is defined as “debts that are contracted by a state representative without the population’s consent and against its interests, with both these issues to the creditor’s knowledge.” While this may sound perfectly fitting in Ukraine’s case, Bedjaoui—the intellectual father of “subjugation debts”—suggests a “very high threshold for the standard,” specifically: “debts contracted by a State with a view to attempting to repress an insurrectionary movement or war of liberation in a territory that it dominates or seeks to dominate, or to strengthen its economic colonization of that territory.” While most of the evidence suggests that Mr. Yanukovych did not use the funds for the benefit of his country, it would be challenging for anyone to make the argument that Yanukovych used the $3 billion to quell insurrection.

In summary, given the lack of precedent in utilizing the “toxic debt” defense in cases where no revolutionary regime-change took place, the “toxic debt” defense is weak in Ukraine’s case. There is a small possibility that Ukraine could argue its bond debt to Russia is a “subjugation debt,” but here there is no precedent of such an argument being made when it has not been proven that the state leader who incurred this debt utilized the funds to quell an insurrection. Moreover, all of these considerations necessitate the assumption that the “odious debt” doctrine can be considered customary international law, which, on its own, is questionable. While, in theory, legal scholars might wish that such a norm had crystallized in the system, there appears to be no case in recent history where a tribunal has accepted the “toxic debt” defense. Moreover, there is a dearth of opinio juris et necessitatis, meaning that for the “toxic debt” defense to crystalize as customary international law in the future, we must not only see more states decline to pay “toxic debt,” but we must see more states officially argue that the reason for their forgoing repayment is their belief that they are absolved of the responsibility because of the “toxic debt” defense.

As I have argued, there is little chance that a “toxic debt” defense will exculpate Ukraine from paying Russia; so, the question remaining is, what might? In general, my perspective on international law derives from an economic perspective of international law similar to that advocated by Dunoff & Trachtman. Put colloquially, this is a legal perspective based on optimal welfare outcomes, not one based on any a priori assumptions of the morality and bindingness of international law. For this reason, the case of Ukraine offers an interesting case where Posner & Sykes’ argument of “efficient breach of international law” may pertain. The logic behind Posner’s “efficient breach” theory is that if the costs of compliance outweigh the costs of non-compliance, then a breach of international law—such as the customary law of repayments in Ukraine’s case—is efficient, and thus, can be an optimal remedy.

In the case of Ukraine’s sovereign debt, simple non-compliance with the law of repayments may be optimal. Differently stated, one of the best present legal strategies for Ukraine might simply be not to pay back Russia until they concede more in negotiations. The reasoning behind this ploy is simple: few entities aside from Russia are against Ukraine in the case of its bond debt. Most of its private international bondholders have already settled a restructuring package with Ukraine. Moody’s—the international rating agency—has made it clear that it expects Russia eventually to restructure Ukraine’s debt. Perhaps most importantly, however, is the surreptitious way in which the IMF has gone about altering its rules for aid provision, so as indirectly to show its support for Ukraine. On the 15th of December, the FT reported that the IMF decided “to change its strict policy prohibiting the fund from lending “to countries that are not making a good-faith effort to eliminate their arrears with creditors.” The decision was criticized by Moscow, as it will allow the IMF to continue doing business as usual with Kiev even if it fails to pay its sovereign debt to Russia.”

Most of the western world—i.e. most of the power players in international finance—are in Ukraine’s camp. Ukraine is trapped by a predatory bond deal orchestrated by a lecherous former leader with no desire to use the funds to strengthen Ukraine. While Ukraine has been left with a repugnant debt to pay, it is not one that meets the legal thresholds necessary to deem it “toxic debt.” That said, if one is willing to accept an economic perspective of international law in place of a moralistic one, then “efficient breach” seems to be both the current choice Ukraine has selected in proceeding to deal with its debt, as well as the legal course of action that may be most beneficial for Ukraine, as even the IMF—one of the most important entities with a role in determining Ukraine’s economic wellbeing—appears to be supporting Ukraine in its abstention from repayment by the accommodations it is making in its policies. With Russia’s foreign reserves tanking, and its economic outlook growing dimmer each day due to the plunging price of oil, it is likely that Russia will eventually take whatever they can get from Ukraine, and, like Moody’s predicted, will agree to restructure Ukraine’s debt after a period of suffering efficient breach.