Offsetting Inter-State Debt in International Law

Since the immobilization of Russian Central Bank (RCB) assets across multiple jurisdictions in response to Russia’s aggression against Ukraine, officials and commentators have debated the legal permissibility as well as the political and economic wisdom of using those assets to fund Ukraine’s defense and reconstruction. While the EU has agreed to issue a loan to Ukraine backed by the EU budget, the debate over the use of the RCB assets has not been resolved. As the President of the European Council stated, the Union ‘reserves its right to make use of the immobilised assets to repay this loan.’

The various proposals (e.g. Dixon, Buchheit, and Singh) for the use of the RCB assets frozen since 2022 have raised novel and difficult questions for international law, which have been discussed at length. From the scope of immunities, to the permissibility of general interest countermeasures, to the meaning of reversibility in the law of countermeasures, the debate has gone to the core of fundamental institutions of international law. What has received far less attention in the commentary, although it is of equal practical significance, is an aspect that has appeared in several of these proposals: the set-off of debts in international law, namely the cancelling out of mutual debts between two States instead of these States paying them back separately.

Various proposals for transferring RCB assets to Ukraine have characterized the transfer as a ‘down payment’ on, or as a ‘payment on account’ towards, Russia’s compensation obligation to Ukraine for the damage caused by the war. According to these proposals, the debt to Russia resulting from seizing the frozen RCB assets could be offset against Russia’s reparations debt to Ukraine. The proposals differ in their structure and detail, and many of their steps would require further analysis and assessment (for instance, whether the Russian reparation debt is ascertained and whether Ukraine could validly transfer its compensation claim against Russia to the confiscating States). We leave these issues aside. Our concern here is narrower: whether international law permits the set-off of mutual debts, particularly when done unilaterally and outside any settlement framework, agreement or dispute settlement by a third party. We argue that a lawful unilateral set-off by one party must necessarily be based on a specific permissive rule of international law.

The following discussion turns to this under-explored but highly consequential issue, examining whether international law permits such unilateral set-off. We begin with a brief overview of the law of set-off in domestic jurisdictions, before turning to international law and the extent to which the offsetting of debts is recognised in this system. As we will note, the issue poses no problems when States agree to the setting-off of their debts. Much more complex and uncertain is, however, the recognition of a State’s right to resort to set-off unilaterally. In other words, while set-off is accepted as a mechanism for settling debts that States may agree on, there is currently insufficient evidence of a rule permitting the unilateral set-off of debts among States.

Two caveats before we proceed. First, we address only the point of principle in this post and not any of the specific proposals in relation to Ukraine’s reparations. Second, in light of the complexity of the issue and the dearth of literature on the topic in international law, this post offers some preliminary remarks, which we will expand upon in subsequent work.

1. Set-off in domestic law

The concept of set-off has its origins in Roman law. Today, it exists in nearly all legal systems.  Set-off describes the mutual extinction of debts without an exchange of performance: reciprocal debts are cancelled, such that each party is relieved from performing to the extent that its debt has been extinguished.

Across jurisdictions, set-off by law can be classified into three different operational models (as opposed to set-off by agreement). First, there is automatic set-off (operation ipso iure), where debts are automatically extinguished if they coexist; however, this approach is rarely found in practice nowadays. A second model requires the set-off to be pleaded in court (e.g. statutory set-off in the UK). The third model is the extra-judicial mode by way of unilateral declaration. With this form of self-help, one of the parties performs the set-off through an informal and unilateral declaration based on statutory authorization. This is the model most relevant to the set-off of inter-State debts, and the one that commentators relied on in the context of Ukrainian reparations.

While each domestic jurisdiction has its own way of regulating set-off, four prerequisites to its exercise are common to most jurisdictions. First, the performances owed by both parties must be of the same kind. This criterion is always fulfilled if two pecuniary obligations are set off against each other. The second criterion is mutuality, meaning that the debts in question are owed by one party to the other. Third, the debts must be matured in the sense that they are performable at the time of the set-off. And fourth, the other party’s debt must be ascertained; this requires an agreement, a judgment, or an award.

2. Set-off by agreement in international practice

Turning to international law, the least controversial and most common form of inter-State set-off is set off by agreement, where States explicitly agree to offset their mutual claims. In such cases, set-off functions as the international equivalent of contractual set-off in domestic law. A few examples should suffice to illustrate the point:

In the Franco-Portuguese Pardo Treaty of 30 January 1786, which established the northern border of Portuguese Angola in the Lower Congo and the Portuguese coastal enclave of Cabinda, the parties agreed to set off the claims resulting from damages caused by France’s destruction of a Portuguese fortress against the compensation payable by Portugal. The Treaty also stipulated that the principle of set-off shall also remain in force for any future claims that may arise.

In 1808, Emperor Napoleon and the King of Saxony, in his capacity as Duke of Varsovia, agreed to settle mutual obligations arising from goods and services traded between the Polish Government and Marshal Davoust.

The Founding Documents of the Iran-U.S. Claims Tribunal provide a third example of an inter-state set-off by agreement. The General Declaration established that all Iranian deposits and securities in U.S. banking institutions in the U.S. were to be held in escrow by a Central Bank in a special interest-bearing security account. They further agreed that all funds in this account would be used to satisfy claims against Iran in accordance with the Claims Settlement Agreement (see paras 6–7).

As these instances demonstrate, agreed set-off has been employed in treaty-based settlements without difficulty, providing States with an efficient mechanism for resolving reciprocal financial claims.

3. Unilateral set-off in international practice 

By contrast, far more difficult are claims that a State may unilaterally set off its own debt against a claim it holds vis-à-vis another State. By this we mean that a creditor State may cancel or reduce its own debt towards the debtor State by means of a unilateral declaration, in line with the third domestic model discussed earlier.

In 1925, the British Admiralty Transport Arbitration Board ruled that the British Admiralty had the right to unilaterally set off a claim for compensation against Russia’s existing debt towards the UK. The UK then sought to rely on its set-off against Russia in the Finnish Shipowners arbitration. Finland claimed some money for damage to its ships from the UK (relying on succession from Russia), which the UK said the earlier set-off covered. In a memorandum, Finland objected to the set off in the following terms:

Information is not available as to the nature, the source, the modalities, or the extent of the debts in question. But whatever may be the facts in this respect, it is submitted that the application of the principle of set-off is not authorised by the received doctrines of international law in circumstances such as those of the present claim, or at all. The application of set-off seems more particularly inadmissible as respects that part of the present claim which relates to the ships which were lost, since on no view can this claim be regarded as liquidated. (our emphasis, here at pp 8–9, para 35)

Our research so far shows sparse and inconsistent practice in this regard.

International courts have also said very little about the permissibility of set-off. Set-off arose in two disputes, but it was addressed obiter and inconclusively. The Permanent Court of International Justice (PCIJ) confronted this subject indirectly in its 1928 Chorzów Factory case. Germany claimed damages after Poland expropriated a factory, disputing Poland’s attempt to offset this claim against a debt Poland had against Germany for social insurance in Upper Silesia. The Court avoided directly deciding on the legality of a set-off. It found that it lacked jurisdiction, and the parties ultimately resolved their dispute. Yet, in an obiter dictum (see p. 62 of the judgment), the PCIJ noted that international law typically allows for the set-off of liquidated and undisputed monetary debts—although whether the PCIJ referred to set-off by agreement only, or also unilateral set-off, is unclear. On the point of principle, the parties disagreed as to whether international law recognised a right to unilateral set-off (cf Poland, oral pleadings 22 June 1927, at 56, arguing that extrajudicial set-off was a general principle of law, and Germany, Reply of 17 February 1928, at 358-360, arguing that the conditions of extrajudicial set-off in domestic law are not transposable to international law).

Nearly 70 years later, the International Court of Justice (ICJ) addressed the issue of set-off in an obiter dictum in its 1997 Gabcikovo-Nagymaros Judgment. While the parties had not raised this during the proceedings, the Court noted that set-off could be a valuable mechanism for the parties—both of which had committed internationally wrongful acts—to offset their financial claims. Specifically, it found that given the

intersecting wrongs by both Parties, the Court wishes to observe that the issue of compensation could satisfactorily be resolved in the framework of an overall settlement if each of the Parties were to renounce or cancel all financial claims and counter-claims. (para. 153)

Unlike the PCIJ in Chorzów Factory, the ICJ’s observations seem clearly limited to negotiated set-off. This is further evidenced by the dispositif in which the Court found that ‘unless the Parties otherwise agree’ each of Hungary and Slovakia owed compensation to the other (para 155(D)).

As these few instances show, unilateral set-off has minimal and inconclusive support.

4. Does international law recognise a right to unilateral set-off?

As noted earlier, unilateral set-off in domestic law requires express authorization. Arguably, the same should hold in international law, for a State’s unilateral disposal of another State’s claim without the latter’s consent would be inconsistent with sovereign equality. This raises the central question: is there any legal basis in international law for a right of unilateral set-off?

Few international law commentators have directly addressed this question. Aside from the authors of the Ukrainian reparations proposals, only a handful of authors have discussed unilateral set-off. Verzijl has seemingly endorsed set-off without qualification, including what we call ‘unilateral’ set-off. As he explained,

[a]n international, in particular pecuniary, obligation may be automatically reduced by the fact that the creditor becomes himself a debtor of his opposite number up to part of the amount of his claim. (at p 778)

Martha, relying on Verzijl, reaches a similar conclusion. Neither of them, however, identifies the source of this entitlement nor provides persuasive support for their conclusion.

Based on our survey, practice and opinio juris appear insufficient to support the recognition in customary law of a right to a unilateral set-off. As our review shows, and as Verzijl himself acknowledged (at p 780), the existing practice is limited and far from uniform. Furthermore, evidence of opinio juris is equally scant. There are few direct statements by States recognising this possibility.

General principles of law may offer a more promising avenue to ground the right to unilateral set-off. The principle of set-off is often regarded as a general principle of private law (see e.g., Zimmermann at p 19, the UNIDROIT Principles 2010). Whether and to what extent this general principle can be transposed to the international inter-State legal system is however unclear. As Special Rapporteur Vázquez-Bermúdez stated in his First report on general principles of law,

[t]he sole existence of principles common to a majority of national legal systems appears to be regarded by many authors as fulfilling the requirement of recognition under that provision’ (para 190) (see also draft conclusions 4 and 5 on General Principles of Law adopted by the ILC on first reading).

Additionally, the PCIJ and ICJ decisions mentioned above confirm the theoretical possibility of transposing national set-off practice to the interstate level.

Still, it remains unclear which requirements and conditions would apply. In his Second report on general principles, Vázquez-Bermúdez outlined the two steps of transposition of a domestic principle into international law: a) the principle must be compatible with fundamental principles of international law, and b) the conditions within the international legal system must allow for an adequate application of the principle (para 74) (see also draft conclusion 6 on General Principles of Law adopted on first reading). In the present case, the fulfilment of the first is already complicated, as allowing States to set off debts unilaterally is, among other reasons, at odds with the principle of sovereignty (the arbitral Tribunal in the North Atlantic Coast Fisheries case rejected a purported principle of international servitude on that ground, see para 76 of the Second report). Moreover, difficulties also arise when examining the conditions necessary for set-off to fulfil its function. For example, the common domestic law requirements for a debt to be considered due and payable would require further elaboration in international law. In this vein, the German Federal Constitutional Court rejected Argentina’s invocation of ‘domestically recognised principles of insolvency law’ as constituting a general principle because it ‘presupposes the existence of a comprehensive set of rules governing State bankruptcy at the level of international law’.

In our assessment, it does not appear that there is currently sufficient support for the recognition of a right to unilateral set-off in international law. The practice is undoubtedly limited, especially given that States regularly have mutual claims against each other. As for general principles of law, the best that can be said is that the matter would require further elaboration: to put it in the terms of the German Federal Constitutional Court, extra-judicial set-off in domestic law relies on a ‘comprehensive set of rules’ and institutions capable of ascertaining the existence of debts between private parties. The international legal system does not contain a similar set of rules and institutions, such that transposition of this general principle requires further study and, indeed, utmost care.

We thank the participants of the MOCOMILA bi-yearly conference at the University of Toronto and the Bank of Canada in September 2025 for feedback and Maria Huber for research assistance.