What happens to a country’s debt when it ceases to exist

In August 2017, Russia’s Finance Ministry transferred $125.2 million to Bosnia and Herzegovina. Final payment on a debt the Soviet Union had contracted more than a quarter century earlier — goods imported from Yugoslavia, a country that by then had also been gone for over two decades. Two dissolved states, one transaction, 26 years later.

Let that sit for a moment. Neither party to the original debt existed anymore. The USSR: dissolved December 1991. Yugoslavia: dissolved sometime between 1991 and 1992 depending on how you count. And yet the money moved. Someone decided this debt should survive both dissolutions. Someone decided who owed it and who would collect.

The answer to who decides is not flattering to the institutions that provide it.

The void

There is no binding international legal framework governing what happens to sovereign debt when a state dissolves. This is not a gap; it’s not an oversight awaiting a multilateral treaty. It is the standing arrangement — the one that creditor nations have actively maintained against every attempt to replace it.

The Vienna Convention on Succession of States in Respect of State Property, Archives and Debts was adopted on April 7, 1983. It requires fifteen ratifications to enter into force. As of 2026, it has seven. It has never entered into force.

What the Convention actually says

Article 41, which governs dissolution of a state, required debt to pass to successor states "in equitable proportions, taking into account, in particular, the property, rights and interests which pass to the successor States in relation to that State debt." Article 38 separately granted newly independent states special status — predecessor state debt need not pass to them automatically. The UN Treaty Database records seven parties and seven additional signatories who have not ratified. The major creditor nations — United States, Germany, France, Japan, United Kingdom — are not among either group. They had the Convention in front of them, read what it required, and declined to sign.

The pattern is unmistakable: every major creditor nation refused a treaty whose provisions systematically disadvantaged them. The Convention’s equitable proportions standard tied debt succession to asset succession — the share of debt a successor state might inherit would be proportional to the share of the predecessor’s property it received. Newly independent states could reject predecessor debt outright in certain circumstances. These provisions represent a coherent legal framework that would have made some sovereign debts genuinely contestable. Creditor nations read this and refused.

The void is not a gap awaiting a treaty. It is the arrangement creditors prefer to any specific framework.

Russia’s deal

The Soviet Union’s external debt was approximately $66–70 billion at the time of dissolution, though methodological choices can push that figure toward $100 billion depending on what’s counted. In December 1991, twelve former Soviet republics signed an agreement allocating responsibility: Russia’s share was 61.3%, Ukraine’s approximately 16.37%, and the rest distributed across the other nine.

By mid-1992, the arrangement had collapsed. Only Russia was actually making payments. This wasn’t accident or Russian aggression — it was arithmetic. The other republics were in economic freefall and couldn’t service debts they’d been assigned by formula. The formula described a division; it didn’t create the capacity to pay.

Russia’s proposal was called the “zero option.” Russia would assume ALL external Soviet debt — every bit of it, not just its allocated share — in exchange for ALL Soviet foreign assets: embassies, bank accounts, gold reserves, claims on third countries. And crucially, Russia would be recognized not as a successor state but as the legal “continuator” of the USSR. Not the same thing. A successor state inherits some elements of a predecessor’s legal personality — it picks up certain obligations, certain memberships. A continuator IS the predecessor, uninterrupted, for purposes of treaties, institutional positions, and international standing. The UN Security Council seat. Every treaty relationship. Every institutional position. The difference between inheriting a seat at the table and being the person who was already sitting there.

Western creditors and the Paris Club got something they desperately wanted: a single solvent counterparty instead of twelve fractured ones. The smaller republics got relief from debts they couldn’t service in exchange for assets they couldn’t access anyway — Soviet embassies in cities they’d never been to, bank accounts they had no mechanism to claim. Russia paid off its Paris Club debts in 2006: approximately $38.7 billion, years ahead of schedule, partly on the strength of oil revenues. The final Soviet-era obligation — that $125.2 million payment to Bosnia — cleared in August 2017.

None of this followed from law. There was no legal framework dictating that Russia should become the continuator, that the zero option was the correct resolution, that Western powers should recognize a continuator rather than five, ten, or twelve separate successor states. The legal vocabulary was applied to a deal already struck by parties whose interests had aligned around a creditor-friendly outcome.

A legal vacuum filled by rational actors pursuing legible interests.

Yugoslavia — when there’s no Russia

Yugoslavia’s dissolution produced no obvious continuator. Five successor states: Bosnia and Herzegovina, Croatia, the Federal Republic of Yugoslavia (Serbia and Montenegro), Slovenia, and Macedonia. None was large enough to absorb the whole thing. None had the leverage to demand continuator status on terms Western powers would find convenient.

On December 14, 1992, the IMF Executive Board declared Yugoslavia dissolved and designated all five states as equal successors. Debt apportionment used the “IMF key” — a formula weighted by contributions to the federal budget, social product, export earnings, population, and territory. The allocations per the World Bank’s apportionment analysis: FRY/Serbia 36.52%, Croatia 28.49%, Slovenia 16.39%, Bosnia and Herzegovina 13.20%, Macedonia approximately 5.4%. Five economically damaged, war-torn states. Five separate debtor counterparties, each negotiating individually.

The failed continuator claim

Serbia initially asserted the same legal status Russia had claimed — not merely successor state but legal continuator of the SFRY, entitled to full inheritance of the predecessor's international position and assets. The claim was rejected by the international community. Compare this directly with Russia's identical move a year earlier: Russia's claim succeeded because it was the obvious single candidate and because Western powers found continuity convenient — particularly regarding the nuclear arsenal and the Security Council seat. Serbia's claim failed because the wars of Yugoslav succession had made FRY pariah status near-unavoidable. Same legal maneuver, opposite results, within a year of each other. The "legal" outcome depended entirely on its political acceptability to major powers.

The Paris Club was owed approximately $4.5 billion by the former SFRY. It did not settle multilaterally. It negotiated separately with each successor state — a coordinated creditor bloc facing five individual debtors, each with different leverage, different economic conditions, and different political relationships with the creditor nations. FRY’s Paris Club debt was reduced by approximately $3 billion in agreements finalized after 2001. The Agreement on Succession Issues of the Former SFRY was signed June 29, 2001, and entered into force June 2, 2004 — nearly a decade after the state ceased to exist.

The formula looks neutral. Economic formula, objective criteria, apportionment by data. But neutrality of mechanism is not neutrality of outcome. The formula produced five separate debtors at five separate negotiating tables facing a single coordinated creditor bloc. Croatia negotiating alone in 1995 was not in the same position as Croatia negotiating alongside Slovenia, Bosnia, Macedonia, and Serbia. The Paris Club’s preference for bilateral arrangements — one debtor at a time — is not accidental; it is the structure’s operating logic. Collective debt, individual negotiations, coordinated creditors. The formula guaranteed this arrangement by treating the five states as independent actors from the moment it designated them.

And through all of it — the allocations, the separate negotiations, the decade-long succession agreement — no question was ever formally asked whether specific debts had been incurred for the benefit of the populations now expected to pay them.

South Sudan — the zero option as trap

The zero option is not a neutral mechanism. It produces different outcomes at opposite ends of the power spectrum — and at the weaker end, it functions not as relief but as a machine for maintaining debt obligations that have been severed from any realistic capacity to service them.

South Sudan became independent on July 9, 2011, following a January referendum in which 98.83% of voters chose independence. Under an arrangement formalized in September 2012, Sudan retained all external debt — approximately $38 billion — in a structure modeled explicitly on the Soviet zero option. In exchange, South Sudan committed to join Sudan in outreach for international debt relief, and the international community committed to firm debt relief for Sudan by September 2014.

IMF Country Report No. 12/298 documents what had happened to Sudan’s economy: the country had lost approximately 75% of its oil production, 66% of its export revenues, and half of its fiscal revenues when South Sudan became independent. The country that lost its primary revenue source kept the debt. The country that inherited those revenues was excused from it.

The September 2014 deadline was not met. It was extended repeatedly. US sanctions on Sudan, maintained during the al-Bashir government, complicated IMF engagement. Kuwait and Saudi Arabia — Sudan’s two largest bilateral creditors, holding over 29% of Sudan’s external debt — and Paris Club and non-Paris Club bilateral creditors held the rest. The relief that was promised as consideration for Sudan’s assumption of the whole debt never materialized on the terms offered.

The oil transit problem

South Sudan, landlocked, had to ship oil through Sudan's pipeline and port infrastructure. Transit fee negotiations ran on a separate track from debt negotiations — which meant that South Sudan's revenue position and Sudan's debt position were handled independently. The practical effect: any linkage between "South Sudan keeps the oil revenues" and "Sudan keeps the debt" was formally severed. Two tracks, two negotiating forums, no acknowledged connection between asset retention and liability allocation. This isn't coincidence. It's a structural feature of how "zero option" framing operates when there's no genuine asset base to trade — the template runs; the substance it was designed around is absent.

Russia traded assets it actually held for liabilities it could actually manage. The scale worked; the oil revenues, foreign property portfolio, and institutional positions made the arithmetic feasible. Sudan traded revenues it no longer controlled for a debt it could not pay, in exchange for relief that did not materialize. The template was identical. The outcomes were mirror images. In both cases, what creditors obtained was the same: a named obligor with formal legal responsibility for the debt.

The doctrine that keeps losing

A legal argument exists — carefully constructed, built on real precedent, logically consistent — that was designed for populations in exactly the situations this article has been describing. It has never achieved binding legal recognition. The story of why is not one of legal incoherence or insufficient evidence. It is a story about which institutions would have to apply the doctrine and what it would cost them.

Alexander Nahum Sack was a Russian lawyer who taught in Saint Petersburg and later Paris. In his 1927 treatise, Les Effets des Transformations des États sur leurs Dettes Publiques et autres Obligations Financières, he formalized what became known as the odious debt doctrine. The formulation: “If a despotic power contracts debt, not for the needs and interest of the State, but to strengthen its despotic regime, to oppress the population that combats it, that debt is odious for the whole State. The debt need not be recognised by the Nation: it is a debt of the regime, a personal debt of the power that contracted it and consequently falls along with the power that contracted it.” Three conditions: debt contracted without the people’s consent, not for their benefit, and with creditors’ knowledge of those facts.

Sack didn’t invent the principle. He formalized it from two things that had already happened — Mexico’s repudiation of Maximilian’s regime debts in 1867, the United States’ refusal to let Spain’s colonial debt bind Cuba in 1898. These were not marginal precedents. They were the foundation: without them, the doctrine is legal philosophy; with them, it is a formalization of things states had already done.

The Sack precedents

Alexander Sack built his 1927 doctrine on two events he treated as established precedent, not theoretical examples. Mexico in 1867: after the fall of the French-imposed Maximilian regime, President Juárez repudiated debts the Maximilian government had contracted — including loans France had extended to sustain its own puppet — on the grounds that these debts served the regime, not the Mexican people. France objected, but ultimately restored full diplomatic relations in 1880 without recovering the contested debts. Cuba in 1898: in the Treaty of Paris ending the Spanish-American War, the United States refused explicitly to allow Spain's colonial debts to bind Cuba. The US position was that Cuba had derived no benefit from Spain's colonial borrowing, and its population should not inherit obligations contracted against their interests. Spain assumed the debts. These events were what Sack formalized into doctrine — which means that when critics describe odious debt as "academic," they are describing something two states had already done, and that a third had insisted upon, before Sack put it into writing.

The landmark arbitration is Great Britain v. Costa Rica, 1923, with Chief Justice William Howard Taft as sole arbitrator. The Tinoco case. Taft found that debts contracted by the Tinoco regime for the private benefit of the Tinocos, with the lending bank’s full knowledge, could not constitute valid public debt binding Costa Rica. The caveat matters — and advocates routinely miss it. Taft’s decision rested on the specific, documented fact of the bank’s knowledge and the debt’s demonstrably personal benefit to the Tinocos. Those specific conditions voided that specific debt. He did not establish that successor states can repudiate a predecessor regime’s debts as odious in general. Tinoco is narrower than its admirers claim, and the distinction matters.

Iraq in 2003 is where you see the doctrine confronting the institution that would need to apply it.

At the time of the US invasion, Iraq had approximately $130 billion in external debt — accumulated during the Iran-Iraq War and through the sanctions period — contracted by a regime the invading power was simultaneously characterizing as a criminal dictatorship. The argument practically wrote itself: a despotic regime, debt not incurred for the population’s benefit, and creditors who had lent to Saddam Hussein knowing precisely what his government was. According to Hinrichsen’s research (LSE Working Paper, 2020; Capital Markets Law Journal, Oxford Academic, 2021), odious debt was formally discussed at the first meeting between White House, Treasury, IMF, and legal advisors after the invasion.

The Paris Club explicitly refused to consider whether specific loans were odious. The doctrine was dropped in favor of standard restructuring. Iraq’s debt was reduced by approximately 90% in net present value terms — a larger haircut than almost any comparable restructuring. Hinrichsen’s analysis is direct: creditors at risk were willing to accept that larger NPV haircut specifically to avoid formalizing the odious debt doctrine, because applying it would “upset the normal order of sovereign-debt restructurings, potentially rendering other debt claims subject to dispute.”

Every major creditor nation has at some point made loans to authoritarian governments. Germany to Mobutu. France to Muammar Gaddafi. The United States to Marcos, to the Shah, to the Saudi government whose financial relationships span every administration. A functioning doctrine that rendered those loans uncollectable from successor democratic regimes was not a legal technicality. It was an existential threat to the sovereign lending business — not just for Iraq, but retroactively, for every debt a successor government might think to contest. The legal advisors advocated against it; the IMF and Treasury strongly supported standard restructuring. They were against the doctrine not because Iraq’s debt wasn’t odious but because enshrining it would complicate every future restructuring where the question might be raised. Which is all of them, potentially. Which is the point.

Ecuador in 2008 tells the other version of this story — and makes the same point by a different route. Rafael Correa’s government launched a debt audit commission in July 2007. The November 2008 report found documented irregularities across debt contracted from 1976 to 2007 and recommended default on bonds worth approximately $10.3 billion. Ecuador defaulted. Then it bought the bonds back at approximately 35 cents on the dollar, with over 90% creditor participation.

But here’s what Ecuador did not do: win a legal argument. The government used the moral force of the odious debt argument as leverage in a settlement negotiation. It deliberately avoided litigating the doctrine in any forum that might produce precedent — because a binding precedent was not the goal, and pursuing one might have failed. Ecuador settled before the doctrine could be adjudicated. The success of the strategy depended entirely on keeping the legal question open. When it was over, the precedential strength of odious debt was exactly what it had been when Ecuador began — theoretical. Sophisticated actors used the moral argument as a weapon. They didn’t try to enshrine it. They understood why enshrining it was impossible.

The architecture

The Vienna Convention and the Paris Club belong in the same frame. One is a multilateral treaty designed to introduce equity into sovereign debt succession, requiring equitable apportionment, protecting newly independent states, and subjecting debt inheritance to proportionality with asset inheritance. The other is an informal grouping of 22 creditor nations, administered from the French Treasury, operating without any formal international legal charter or binding multilateral mandate.

The states that declined to ratify the Vienna Convention — United States, Germany, France, Japan, United Kingdom — are, without exception, Paris Club members. The same nations that rejected the treaty framework administer the informal forum that replaced it. This is not a conspiracy; it requires no coordination beyond the simple fact that these nations’ interests pointed the same direction. The pattern is plain: they knew what the Convention required, declined it, and retained an alternative arrangement that works better for them.

The Paris Club has restructured approximately $616 billion in sovereign debt across 102 countries in more than 484 agreements since its first meeting in 1956. It sets norms for sovereign debt restructuring through practice — not through any treaty authorizing it to do so, not through any democratic mandate, not through any legal standard other than the standards its members enforce on each other through consensus. Any single major creditor can block any norm that threatens its interests. The Paris Club explicitly refuses to consider whether specific debts are odious. The IMF’s conditionality requirements are the practical prerequisite for accessing Paris Club restructuring — you must have an active IMF program to get to the table — and the IMF is governed by weighted voting that reflects the capital contributions of its major shareholders, who are the same major creditor nations.

The legal vocabulary in this domain — “equitable apportionment,” “zero option,” “odious debt,” “continuator state” — does not govern these outcomes. It describes them afterward. Russia became the USSR’s continuator not because law required it but because powerful states found it convenient and announced that it was so. Yugoslavia’s debts were apportioned by formula not because equity demanded it but because the formula produced five manageable individual debtors. Sudan kept the debt not because any legal principle required the revenue-losing state to bear the liability but because the template ran and no one with power to object objected.

International law governing sovereign debt succession is, in the domain where it exists at all, creditor law. It was written by creditors, administered by creditor-controlled institutions, and successfully defended against every serious challenge. The Vienna Convention sits in the UN Treaty Database with seven ratifications. The Paris Club sits in the French Treasury with 484 agreements. The doctrine of odious debt sits in legal scholarship, cited, admired, and inapplicable.

Closing

In August 2017, Russia transferred $125.2 million to Bosnia and Herzegovina. The USSR is gone. Bosnia exists because Yugoslavia is also gone. The money moved because a chain of political decisions, informal arrangements, and creditor preferences — taken in the early 1990s, in rooms the debtor populations never entered, by institutions with no legal mandate beyond the norms they enforce on each other — had built a structure designed to outlast the states it bound.

Alexander Sack, in 1927, identified the mechanism with precision. He built a doctrine on actual historical precedent that should logically have applied to the Soviet Union’s debts under authoritarian rule, to Yugoslavia’s debts, to Iraq’s debts contracted by a dictatorship that creditors knowingly sustained. He described a principle that the world had already applied twice, in Mexico and Cuba, and formalized it as law.

For nearly a century, his framework has collected citations and nothing else. Not because it’s wrong. Not because the evidence is thin. Because the institutions that would need to apply it are the same institutions it was designed to constrain.

The question of who would reform a system whose administrators are its beneficiaries is worth leaving unanswered. The reader knows.

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Media

Kingdom of Serbs, Croats and Slovenes (National Bank), 10 dinara (1920). The obverse allegory of “Progress” was engraved by Robert Savage. – Wikipedia

Key Sources and References

Vienna Convention on Succession of States in Respect of State Property, Archives and Debts (1983), UN Treaty Collection. Adopted April 7, 1983; not yet in force; seven ratifications as of 2026.

Simon Hinrichsen, “The Iraq Sovereign Debt Restructuring,” Capital Markets Law Journal, Volume 16, Issue 1, Oxford Academic, January 2021, pp. 95–114. DOI: 10.1093/cmlj/kmaa031

Simon Hinrichsen, “The Iraq Sovereign Debt Restructuring,” LSE Working Paper, 2020. Available at eprints.lse.ac.uk/108960

Robert Howse, “The Concept of Odious Debt in Public International Law,” UNCTAD Discussion Paper No. 185, July 2007. United Nations Conference on Trade and Development.

Agreement on Succession Issues of the Former Socialist Federal Republic of Yugoslavia, signed June 29, 2001, entered into force June 2, 2004.

IMF Country Report No. 12/298 (2012), Republic of Sudan: 2012 Article IV Consultation. International Monetary Fund.

Center for Global Development, “Who Are Sudan’s Two Biggest Creditors? And Why Is It Something to Worry About?” cgdev.org.

Paris Club, “The Debt Treated in Paris Club Agreements.” clubdeparis.org. Statistics current as of 2026: 484 agreements, $616 billion, 102 debtor countries.

The Moscow Times, “Russia Makes Final Soviet-Era Debt Payment to Bosnia,” August 22, 2017.

IMF, “List of Members’ Date of Entry.” imf.org/external/np/sec/memdir/memdate.htm. Records SFRY successor state membership dates; Executive Board action of December 14, 1992 is the operative date recorded for Yugoslavia dissolution and succession designations.

RFE/RL, “Russia Pays Off Soviet-Era Paris Club Debts,” August 2006.

Alexander Nahum Sack, Les Effets des Transformations des États sur leurs Dettes Publiques et autres Obligations Financières, Paris: Recueil Sirey, 1927. Reviewed in American Journal of International Law, Cambridge Core.

CADTM, “Demystifying Alexander Nahum Sack and the Doctrine of Odious Debt.” cadtm.org.

Great Britain v. Costa Rica (The Tinoco Case), Arbitration Tribunal, 1923. Chief Justice William Howard Taft, sole arbitrator.

World Bank, “Former Yugoslavia’s Debt Apportionment.” documents1.worldbank.org/curated/en/735471538244644355

Debt Justice, “Ecuador.” debtjustice.org.uk/countries/ecuador.

Adam Feibelman, “Ecuador’s 2008–2009 Debt Restructuring: A Special Case?” SSRN Working Paper, 2017. papers.ssrn.com/sol3/papers.cfm?abstract_id=2960650