Arbitration Claims by Ukrainian Investors under the Russia-Ukraine BIT: between Crimea and a Hard Place?
- On February 16, 2016
In the last two years, multiple investment arbitration claims have been registered against Russia in regards to the consequences of its actions in the Autonomous Republic of Crimea and the city of Sevastopol (“Crimea”). The following cases are of particular interest:
- Stabil LLC and others v The Russian Federation
- LLC Lugzor and others v The Russian Federation
- Privatbank and Finance Company Finilion LLC v The Russian Federation
- Everest Estate LLC and others v The Russian Federation
- Aeroport Belbek LLC and Mr Kolomoisky v The Russian Federation
- PJSC Ukrnafta v The Russian Federation
- JSC Oschadbank v The Russian Federation
All of the abovementioned cases have been filed under the UNCITRAL Arbitration Rules 1976 pursuant to the Agreement between the Government of the Russian Federation and the Cabinet of Ministers of Ukraine on the Encouragement and Mutual Protection of Investments dated 27 November 1998 (the “Russia-Ukraine BIT” or “BIT”). This note will touch upon the nature of the jurisdictional questions an arbitral tribunal seized under the BIT is likely to face. The note will also highlight possible long-term consequences of actions currently taken by the Government of Ukraine.
THE RUSSIA-UKRAINE BIT
Perhaps one likely claim in the abovementioned cases will be that of an alleged expropriation by Russia of investments made by investors of Ukraine in Crimea.
In this regard, the Russia-Ukraine BIT contains the following relevant provisions.
Article 9(1) of the Russia-Ukraine BIT provides for resolution of “any dispute between either Contracting Party and the investor of the other Contracting party, which may arise in connection with the investments, including disputes […]”.
Article 1 of the Russian-Ukraine BIT includes the following definitions:
- “Investments” shall denote all kinds of property and intellectual values, which are put in by the investor of one Contracting Party on the territory of the other Contracting Party in conformity with the latter’s legislation […]”;
- “Territory” shall denote the territory of the Russian Federation or the territory of the Ukraine and also their respective exclusive economic zone and the continental shelf as defined in conformity with the international law.
Article 5(1) of the BIT is of particular relevance: “[t]he investments of investors of either Contracting Party, carried out on the territory of the other Contracting Party, shall not be subject to expropriation, nationalization or other measures, equated by its consequences to expropriation (hereinafter referred to as expropriation), with the exception of cases, when such measures are not of a discriminatory nature and entail prompt, adequate and effective compensation.”
Considering the abovementioned articles of the BIT in light of the events in Crimea that brought about the arbitration claims against Russia, arbitral tribunals will have to deal with several complicated jurisdictional issues, in particular consent to the authority of the arbitral tribunals. Thus, the issues a tribunal will have to examine include:
- whether the dispute in question relates to covered investments;
- whether such investments were made / are within the respondent contracting party’s territory; and
- whether the dispute in question concerns a breach by the respondent contracting party of an obligation it has assumed under the BIT.
Issues (1) and (2) need to be considered simultaneously due to the wording of definitions of “Investments” and “Territory” in Article 1 of the BIT. On one hand, the purported investments may be considered as covered by the BIT by the very nature of the wide scope of “all kinds of property and intellectual values”. On the other hand, the purported investments have been made pre-February 2014, when Russia initiated its “return of Crimea”. Therefore, the investments were made in the territory of Ukraine by domestic investors in accordance with Ukraine’s domestic legislation; thus, not in “territory of the other Contracting Party [Russia] in conformity with [Russia’s] legislation”.
Based on the outcome of the arbitral tribunals’ decisions on issues (1) and (2), issue (3) will be considered against Russia’s obligations under the BIT, e.g. Article 5(1) (Expropriation) provided above.
Tellingly, in Aeroport Belbek LLC and Mr Kolomoisky v The Russian Federation, the PCA Press Release of 06 January 2016 clarifies that Russia “indicated, inter alia, that the ‘[Ukraine-Russia BIT] cannot serve as a basis for composing an arbitral tribunal to settle [the Claimants’ claim]” and that it “does not recognize the jurisdiction of an international arbitral tribunal at the [PCA] in settlement of the [Claimants’ claims].’ It also stated that nothing in its correspondence ‘should be considered as consent of the Russian Federation to constitution of an arbitral tribunal, participating in arbitral proceedings, or as procedural actions taken in the framework of the proceedings.’”
Considering Russia’s position, the arbitral tribunal has understandably decided to bifurcate the proceedings to “address issues of jurisdiction and admissibility in a preliminary procedure.”
BIT CASES AND POSSIBLE CONSEQUENCES
After the mid-March 2014 referendum in Crimea, the UN General Assembly adopted Resolution 68/262 (Territorial integrity of Ukraine), on 27 March 2014, which contains the following extract:
The General Assembly, […]
Noting that the referendum held in the Autonomous Republic of Crimea and the city of Sevastopol on 16 March 2014 was not authorized by Ukraine, […]
6. Calls upon all States, international organizations and specialized agencies not to recognize any alteration of the status of the Autonomous Republic of Crimea and the city of Sevastopol on the basis of the above-mentioned referendum and to refrain from any action or dealing that might be interpreted as recognizing any such altered status.
Ukrnafta and Oschadbank have initiated investment arbitration proceedings against Russia on 15 June 2015 and 18 January 2016, respectively. Ukrnafta, an oil and gas company, is majority owned (50% + 1 share) and controlled by “Naftogaz of Ukraine”, a public joint stock company which is itself 100% owned and controlled by Ukraine. Oschadbank is a bank 100% owned and controlled by Ukraine. One may argue that Ukrnafta and Oschadbank are separate legal entities acting on their own behalf, however, the ultimate control over the entities is with Ukraine.
Accordingly, Ukrnafta and Oschadbank have brought actions against Russia on the basis of the Russia-Ukraine BIT, which would require Ukrnafta and Oschadbank (companies owned and controlled by the Ukrainian state) to claim that they have invested in the territory of Russia in accordance with Russia’s legislation. Consequently, should the tribunals agree with such a position, their awards may be considered as recognising the altered status of Crimea.
Moreover, in case of a favourable outcome for Ukrnafta and Oschadbank and Russia’s refusal to, for example, pay compensation, the two legal entities may attempt to enforce their awards utilising the New York Convention on the Recognition and Enforcement of Foreign Arbitral Award 1958 (the “NY Convention”) against Russia’s assets in other jurisdictions. Said attempts may or may not be met with Russia’s efforts, pursuant to Article V(1)(c) of the NY Convention, to challenge recognition and enforcement:
- Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: […]
(c) The award deals with a different not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration […].
In case of successful outcome for recognition and enforcement of the potential awards, the state where recognition and enforcement is sought could be indirectly recognising Crimea’s status as altered. In case of an unsuccessful outcome, Ukrnafta and Oschadbank may continue to attempt recognition and enforcement in more jurisdictions, consequently increasing the potential for eventual recognition by other states of an altered status of Crimea.
Whatever the outcome for the two BIT claims, one may suggest that Ukraine, through Ukrnafta and Oschadbank, is itself engaging in actions that might be interpreted as recognising an altered status of Crimea, in contradiction to the UN Resolution.
The arbitration claims brought by Mr Kolomoisky and Ukrainian legal entities against Russia, on the basis of the BIT, feature a politically and legally complicated factual situation that will require arbitral tribunals to examine their jurisdiction with a careful eye on the wider implication of whatever decision they take.
It might be even argued that the current investment claims, under the the Russia-Ukraine BIT, effectively contradict the last paragraph of the UN Resolution on Territorial integrity of Ukraine, whereas Ukraine itself engages in actions that might at a future stage be interpreted as recognising Crimea’s altered status.
Perhaps, a better way of resolving present investment disputes under the Russia-Ukraine BIT would have been first to answer several complex legal and political questions, allowing for a thorough examination of wider questions of public international law, through the dispute resolution mechanism in Article 10 of the BIT (Resolution of Disputes between the Contracting Parties).
The views expressed in this note are of the author’s and do not necessarily represent the views of Mena Chambers or any of its members. The author takes full responsibility for any errors or omissions.
 See also Крымские активы поищут в Гааге, Kommersant.ru, 12 January 2016.
 Minority shareholders of Ukrnafta have initiated arbitral proceedings against Naftogaz and Ukrnafta at the London Court of International Arbitration (LCIA) in 2015. The dispute concerns amendments to the Articles of Association of Ukrnafta affecting the control by minority shareholders over the Supervisory and Executive Boards of Ukrnafta.