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Spoils Don't go to the Aggressor

posted by Mitu Gulati

Mark Weidemaier & Mitu Gulati

Ukraine has suffered an unprovoked invasion by a militarily more powerful neighbor, Russia, that covets its territory. The weaker Ukraine, in danger of being overrun, desperately seeks external financing for defense and to support its population. What might we think the rules of international law would be regarding the responsibility to pay that debt?

The relevant law here is antiquated. There are a handful of precedents from the nineteenth and early twentieth centuries where, best we can tell, the law was whatever it was convenient for the victor to assert. But, if one were to try and extract a doctrine out of those precedents, it would be that, while a victorious invader inherits the debts of the nation it invaded, it does not necessarily inherit debts incurred to resist the invasion. The doctrine even has a name: the law of “war debts”. To quote a 1924 treatise, “A creditor who advances money to a belligerent during a war to some extent adventures his money on the faith of the borrower’s success”.

That’s nuts. That doctrine incentivizes potential lenders to invest in the debt of the more powerful actor, even if the less powerful actor has a legitimate right to self-defense. It is perhaps not surprising that such an upside-down rule existed in the colonial era, when great powers constructed the law to justify their acquisition of territory (the original articulation of this doctrine seems to come from Britain after the Boer War). But today? In the supposed post-colonial era when borders are supposed to be sacrosanct absent the most egregious violations of human rights and colonial acquisitions by force are not supposed to happen? When an aggressor launches an unprovoked attack (Mr. Putin has his own version, we recognize), it seems logical both that that the aggressor should bear the cost of the victim’s self-defense and those who funded it should be the ones at risk. This rule internalizes the cost of misbehavior and might help deter aggression. This rule seems to set the right incentives whether or not the aggressor nation winds up being victorious.

In the Russia-Ukraine context then, who should be responsible for the extra borrowing that Ukraine has to do to defend itself? If the goal is to cause the misbehaving actor to internalize the costs it is imposing, the answer is surely Russia. Furthermore, to the extent lenders helped finance the Russian invasion, they are the ones who should face a high risk of nonpayment, not those who funded the Ukrainian defense. If we were to imagine a situation, post-war, where the international community had to allocate a limited pool of assets (e.g., frozen Russian reserves), we’d probably say that claimants who funded Ukraine’s self-defense should have a higher priority than claimants who helped fund Russian misbehavior. That is especially so if the lenders to Russia had reason to expect misbehavior. Maybe Russia even told them in its risk disclosures whilst borrowing – “Hey, don’t be surprised if I get sanctioned in the future – because I tend to misbehave”. (see Tracy Alloway (here), Adam Tooze (here), and us (here) on this).

None of this is rocket science. One of the things that legal rules are supposed to do is to incentivize good behavior and disincentivize bad behavior. As of this writing, the World Bank has just announced an emergency financing package of $700 million for Ukraine. Maybe that lending will be repaid by Russia, in a post invasion scenario on the theory that multilateral institutions such as the World Bank are not allowed to finance military expenditures. We don’t remember seeing any multilateral organization exception in the law of war debts though.

More important though, Ukraine needs financial assistance to defend itself and is surely going to be trying to borrow from the private markets. And lenders are going to be reluctant to fund it (or, will charge more) if they think they face significant risk of non-payment if Russia wins. Whether one liked it or not, risk disclosures would probably have to be made in the prospectus regarding the doctrines of state succession and war debts.

But what if the rule instead were that those who provided financing to Ukraine during these dire times were to have first shot at those frozen Russian assets in the post war period? (in legal lingo, priority)? Those risk disclosures and the pricing of the financing of the Ukrainian resistance might be different.

Maybe, just maybe, the free nations of the world (including those former colonial powers who created these doctrines) should announce a new and improved doctrine of war debts for the modern era: Spoils don’t go to the aggressor.

Comments

Really interesting perspective on this, as always. Hard to rectify the conflicting goals of 1. bet on the winner so your loans get repaid; and 2. disincentivize private financiers from making loans to bad actors

Who gets to decide who the bad actors are though? Even if you simplify it to say the aggressor is the "bad actor." In the fog of war, how do you determine that?

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