The Magazine

Ukraine’s Odious Debts

A case for repudiation.

Apr 14, 2014, Vol. 19, No. 29 • By IRWIN M. STELZER
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It is a decade since America confronted the question of just how much financial assistance to provide Iraq, then burdened with billions in debt incurred by the Saddam Hussein regime. Now we face a similar problem in Ukraine, the important difference being that Iraq’s huge but mismanaged oil reserves gave it some prospect of repaying loans sooner rather than later, whereas the tapped-out Ukrainian economy has a long way to go before it will be financially viable. That day will be hastened if the government elected in May takes one giant step towards financial solvency and repudiates the billions in debt incurred by ousted president Viktor Yanukovych and the kleptocratic regimes preceding his—among the most corrupt in the world according to Transparency International—that have brought Ukraine to the edge of ruin. Debt repudiation will have to be part of any sensible program to reconstruct Ukraine’s economy.

White House protester, February 2014

White House protester, February 2014


Well over 2,000 years ago Aristotle wrote what might serve as the opening line for any policymaker wrestling
with the question of financing Ukraine. “At the time when a democracy replaces an oligarchy or a tyranny .  .  . some do not want to fulfill [public] agreements on the grounds that it was not the city [i.e., the government] but the tyrant who entered into them, .  .  . the assumption being that some regimes exist through domination and not because they are to the common advantage.”

So would a current-day policy wonk, his copy of The Politics tucked under his arm, tell the president of the new, democratic Ukraine government that Aristotle advises that he forget about past debts and devote the country’s current cash flow to meeting the needs of its impoverished masses and to reconstruction? Not quite. My Hudson Institute colleague Ken Weinstein, whose understanding of philosophers’ musings far exceeds that of this mere economist, tells me that Aristotle intended to provoke a discussion, rather than provide a clear guide to policy.

That discussion must include an inclination to support the sanctity of contract, while coping with the feeling that Ukraine’s 44 million people should not have their futures blighted by debts incurred by kleptocrats. In a sense, the case for repudiation is weaker than it was with Iraq, which did not elect the crowd that drowned the country in red ink, as did Ukrainian voters. Still, the case for repudiation, for wiping away the debts that funded the lifestyles of a handful of government officials and their private-sector counterparts, seems overwhelming, at least to American taxpayers who are being asked to fund repayment of the cost of palaces, zoos, and whatever else struck the fancies of the now-deposed gang of public- and private-sector cronies.

Such debts are known by students of the subject as “dettes odieuses”—odious debts, a concept developed by Alexander Nahum Sack, a minister in czarist Russia and, after the revolution, a professor of law in Paris. Sack argued (and I draw heavily here on my earlier piece in these pages, “Forgive Them His Debts,” April 21, 2003) that when a government changes hands, the liability for public debt remains intact, with one important exception:

If 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 the population that fights against it, etc., this debt is odious for the population of all the State. This debt is not an obligation for the nation; it is a regime’s debt, a personal debt of the power that has incurred it, consequently it falls with the fall of this power.

I leave to the lawyers the question of the current validity of this thesis, but confess that this economist finds the argument persuasive. The pile of Ukraine’s IOUs, “dettes de régime” Sack would call them, should not be repaid by the U.S. taxpayer, or allowed to interfere with the reconstruction of Ukraine’s economy. Needless to say, the eraser should be applied to the nation’s balance sheet simultaneously with an all-out effort to recapture the assets stolen by past regimes and their friendly oligarchs. That will require the cooperation of what we like to call our international partners, some of whom are less concerned than we are as to the origin of the deposits and investments that are squirreled away in their banks or invested in their real estate and companies. Equally important, it will be up to the new government in Kiev to set up a growth-friendly tax system, establish the rule of law and the sanctity of private property, and welcome investment capital from entrepreneurs around the world that are desperate for new opportunities and would be delighted to develop Ukraine’s vast mineral deposits.

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