Dismissal of Suit Brought Against the Russian Federation by French Holders of Tsarist-era Bonds

November 4, 2015

Cleary Gottlieb represented the Russian Federation in its successful defense against claims brought before the Paris Court of First Instance by the International Federative Association of Holders of Russian Bonds (“AFIPER”) and certain individual bondholders with respect to two series of bonds issued or guaranteed by the Russian Empire in 1906 and 1908. On November 4, 2015, the court dismissed the claims on the basis of the Russian Federation’s sovereign immunity.

The bonds were issued to refinance war debts from the Russo-Japanese war of 1905, and to finance the construction of a railroad from Northern Russia to Donetsk. After the Bolshevik revolution, the Soviet Union issued a decree in 1918 cancelling all external debt of the Russian Empire. Because the bonds were widely held in France, they were the subject of regular diplomatic exchanges between the French and Soviet Governments. After the fall of the Soviet Union, the Russian Federation and France entered into a Treaty discharging all pre-1945 debts, in exchange for a payment of $400 million that the French Government was to distribute among bondholders.

Despite the Treaty, two lawsuits were initiated by French bondholders and a bondholders association in 2002. Cleary Gottlieb obtained the dismissal of these lawsuits on the grounds of sovereign immunity in 2003, and the dismissal of one of the lawsuits was confirmed by the Paris Court of Appeals in 2005.

Ever relentless, a new bondholders association (whose honorary chairman was the chairman of the prior association) initiated a lawsuit in 2012, claiming that French law relating to sovereign immunity had evolved, and that the Russian Federation had recognized its status as the successor to the debts of the Russian Empire in an unrelated legal action in Nice. Cleary Gottlieb, on behalf of the Russian Federation, argued that French law relating to sovereign immunity had not evolved in any manner material to the case, that the legal action in Nice was irrelevant, that the bonds were discharged by the Treaty and validly cancelled by the 1918 Soviet decree, that the statute of limitations had expired, and that the bonds in any event had no value because they were denominated in a currency that no longer exists.

As in the earlier case, the Paris Court of First Instance dismissed the case, ruling that the Russian Federation was entitled to sovereign immunity because the issuance of the bonds was an inherently sovereign action. In accordance with French jurisprudence, the sovereign nature of the bonds was evidenced by the presence of tax exemption clauses that could only be granted by a sovereign, and by the fact that the proceeds of the bonds were used for public purposes (refinancing war debts and construction of a railroad).