[Sejong=E-Daily Reporter Song Ju-Oh ] The T-80U tanks and BMP-3 armored vehicles operated by the South Korean Army, as well as the Air Force’s Ka-32 helicopters, have one thing in common: they were not purchased with money, but were provided by Russia in lieu of debt. An analysis of the fiscal year 2025 settlement released last month by the National Assembly Budget Office details the final chapter of that debt. The debt, which had been outstanding for 34 years, eventually passed its maturity date and was recorded on the books as 0 won.

It all began with the establishment of diplomatic relations between South Korea and the Soviet Union in September 1990. This diplomatic achievement during the end of the Cold War came at a price. From the following year through 1992, South Korea lent $1.47 billion to the former Soviet Union—comprising a $1 billion cash loan from a syndicate of banks and a $470 million consumer goods loan from the Korea Export-Import Bank. The government, with the approval of the National Assembly, guaranteed 90 percent of the principal and interest on the syndicate loan.

The problem arose when the Soviet system collapsed shortly thereafter. Although the Russian Federation inherited the debt, it was unable to repay it. The solution that emerged was weapons. The so-called “Brown Bear Project” began in July 1995 with an agreement between the two governments. Under this arrangement, Russian-made weapons were accepted in lieu of cash to offset the debt, resulting in the delivery of T-80U tanks and Metis-M anti-tank missiles. In November 1997, this approach was formalized with the signing of an agreement on military-technical, defense industry, and military supply cooperation in Moscow.

However, the first phase of the Bear Project came to a halt when Russia declared a moratorium in August of the following year. By that point, only about $210 million had been recovered—roughly one-seventh of the amount lent.

As of June 2003, the outstanding principal and interest had ballooned to $2.24 billion. After some 20 rounds of ministerial and working-level talks, a final agreement was reached in Seoul on June 20 of that year. Under the agreement, $660 million in overdue interest was waived, and the remaining $1.58 billion was to be repaid in installments over 22 years, through 2025.

The problem was the syndicated bank loan that had matured in the meantime. In March 2004, the government issued $1.66 billion in government bonds to repay the debt on behalf of a consortium of nine creditor banks, including the Korea Development Bank. It then took over the Russian debt securities held by the banks. The money the government is currently claiming from Russia is precisely this indemnity payment. It is money that was first paid using government bonds—that is, with taxpayers’ money—and for which the government has been waiting to recover for 34 years.

From 2003 to 2006, as part of the second phase of the “Brown Bear” project, the government received another $250 million worth of military equipment, including Ka-32 search-and-rescue helicopters, and starting in 2007, cash payments were received twice a year, in June and December. The recovery process appeared to be back on track.

In March 2014, Russia’s annexation of the Crimean Peninsula brought negotiations for the third phase of the “Brown Bear” project to a standstill. The option to repay with weapons was the first to be blocked. Nevertheless, cash repayments continued. The decisive blow came in February 2022 with the war in Ukraine. Major Russian banks were excluded from the SWIFT international payment network, and Russia designated South Korea as an “unfriendly nation” before notifying the government that it would repay in rubles. The South Korean government adhered to the principle of repayment in U.S. dollars, the currency in which the loan was originally granted. To date, the two sides have not even reached an agreement on the payment method.

Recovery of funds has been completely halted since the June 2023 repayment installment. To date, six installments remain unpaid, totaling $178 million in principal (approximately 228.9 billion won) and $18.8 million in interest. Last December—the final repayment date stipulated in the 2003 agreement—also passed without payment.

In the financial statements for fiscal year 2025, this bond was recorded at a book value of zero, with a receivable amount of 255.3 billion won, a bad debt provision of 253.5 billion won, and a present value discount of 1.8 billion won. This reflects the view that, from an accounting perspective, the likelihood of recovery is virtually nil. The Ministry of Finance and Economy did not include the recovery amount in the 2026 main budget at all.

However, the debt cannot simply be written off. The Budget and Policy Office viewed a write-off as posing significant diplomatic and financial burdens, as it could be perceived as an abandonment of the government’s intent to recover the funds. The special license granted by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) for the repayment of the loan to Russia remains valid until June 15, 2027, but the prospects for further renewal are uncertain.

The Budget and Policy Office advised that invoices be sent periodically to prevent the statute of limitations from expiring, and that measures to toll the statute of limitations and efforts toward renegotiation be attached to the financial statements as separate documentation so that the National Assembly can review them.

Of the $1.47 billion provided in exchange for the establishment of diplomatic relations, a portion was returned in the form of tanks, armored vehicles, and helicopters. These pieces of equipment have made a significant contribution to the accumulation of technology in South Korea’s defense industry. However, the remaining 228.9 billion won has remained merely an outstanding debt for 34 years, with all payment routes, currencies, and negotiation channels blocked.