A Decade of Investment Treaty Claims Arising from Russia’s Invasion of Ukraine: Lessons and Expectations (Part I)

11 Апр

The landscape of investment treaty claims against Russia may be reaching an inflection point. The first wave of arbitrations – brought by Ukrainian investors in relation to assets that were destroyed or expropriated in Crimea following Russia’s annexation of the peninsula in March 2014 – are now coming to an end. While these arbitrations may not have been straightforward, the strategy of pursuing ISDS claims against Russia has produced a number of favourable awards and created a sizeable body of case law.

At the same time, the expected second wave of arbitrations against Russia – by investors from “unfriendly States” subject to onerous exit restrictions and, in some cases, direct or indirect take-overs by the Russian government – shows some signs of picking up steam.  In the past weeks, large companies such as the Finnish Fortum, the Danish Carlsberg and the German Uniper have announced that they have launched or intend to pursue treaty claims against Russia for the expropriation of their investments.

As such, the Crimea arbitrations will serve as helpful precedents and shape expectations for this next phase of cases. We thus look back to summarise the concrete lessons that may be drawn and look forward to considering how these lessons may be applied going forward. In Part I, we will focus on the conduct and conclusion of the arbitration proceedings themselves; and in Part II, we will look at efforts to enforce awards and obtain financial compensation from Russia.

Russia’s procedural delay and obstruction tactics have been widely unsuccessful

Russia’s attempts to derail the arbitrations instituted against it have thus far proven ineffective. Russia has resorted to range of tactics. In some cases, Russia refused to participate at all in the arbitration proceedings. Russia changed its strategy in 2019 and began undertaking a broad array of so-called procedural measures, including submitting requests for bifurcation and security for costs, as well as raising challenges to the seat of arbitration, the appointment of specific arbitrators and even appointing authorities.

None of these efforts have prevented – or even significantly delayed – the progress of arbitral proceedings against Russia. Arbitral tribunals have continued to assess claims and issue awards (where they find jurisdiction to do so) regardless of Russia’s participation. In fact, the publicly-known Crimea arbitrations have averaged 4.8 years (with a median duration of 3.8 years) – which is in line with the duration of ad hoc UNCITRAL proceedings (4.2 years average, 3.9 years median) and ICSID proceedings (4.6 years average, 3.8 years median) according to data from the British Institute of International and Comparative Law.

Tribunals have unanimously found Russia liable in Crimea-related arbitrations

From a substantive perspective, several arbitration victories by Ukrainian investors have surfaced or have been reported, confirming that arbitration tribunals have found Russia liable for the expropriation of assets in Crimea in at least nine occasions.

Indeed, investors in the energy, banking, real estate, and aviation sectors have received favourable awards against Russia:

  • In the energy sector, Ukraine’s largest private energy company (DTEK) was awarded USD 267 million, whereas Ukrainian state-owned oil and gas company (Naftogaz) was awarded USD 5 billion. Numerous investors in petrol stations were also part of two different arbitrations in which arbitral tribunals awarded them USD 34.5 million (Stabil v Russia) and USD 55 million (Ukrnafta v Russia), collectively.
  • In the banking sector, an arbitral tribunal awarded USD 1.1 billion to Ukrainian state-owned bank Oschadbank. In an arbitration concerning Crimea’s largest retail banking network (Privatbank v Russia), the investors obtained a favourable liability award and the quantum phase is ongoing.
  • In the real estate sector, in Everest v Russia the investor was awarded USD 150 million, whereas the amount awarded to investors in Lugzor v Russia remains unknown.
  • In the aviation sector, a quantum award is pending after an arbitral tribunal found Russia liable in a dispute concerning investments in the Belbek Airport, near Sevastopol (Belbek v Russia).

Russia’s efforts to set-aside these awards have also thus far proved unsuccessful, with Dutch and Swiss courts having upheld awards in question.

Next up: Impacted investors from “unfriendly states” 

Following international sanctions taken in response to Russia’s 2022 invasion of Ukraine, Russia has also adopted and escalated measures that damage investors from so-called “unfriendly” States. This list includes many States with active bilateral investment treaties: Albania, Austria, Belgium, Bulgaria, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Japan, Lithuania, Luxembourg, the Netherlands, North Macedonia, Norway, Portugal, Romania, Singapore, Slovakia, South Korea, Spain, Sweden, Switzerland, Türkiye and the United Kingdom. Depending on the date of their investment, investors in Russia’s energy sector from several of these States may also have the option to initiate arbitration claims under the Energy Charter Treaty.

In this context, Russia has increasingly limited investors’ freedom of transfers, freedom to divest, and, in certain cases, the freedom to exercise control over local subsidiaries, with certain investments even facing direct expropriation.

These new measures are different from the fact patterns which gave rise to Crimea claims and pose new challenges for would-be claimants. In contrast with the sudden taking of territory and property, Russia slowly, step-by-step chipped away at the rights of investors and the value of their investments via regulation. Furthermore, at least in some respects, Russian regulation avoids blatantly wrongful terms, leaving the bulk of its damaging effects to its application. For instance, certain transfers or divestments are not subject to strict prohibitions or discounts outright, but their approval is highly discretionary (in many cases subject to Presidential approval).

However, the success of Ukrainian investors in the Crimea suggests that arbitration can offer a path forward. Not only have investors obtained favourable awards, but several have already started seeking recognition and enforcement. For example, the investors from the DTEK, NaftogazOschadbank, and Stabil cases have initiated enforcement proceedings before US courts, whereas English courts have already recognised the Naftogaz award. In our next post, we will analyse these ongoing enforcement efforts, where – as it has happened from a liability perspective – the path forged by the Crimean claimants should be watched closely by other impacted foreign investors considering arbitration claims against the Russian Federation.

Sourсe – https://riskandcompliance.freshfields.com/post/102j57i/a-decade-of-investment-treaty-claims-arising-from-russias-invasion-of-ukraine-l#page=1