Investment disputes related to Crimea: overview
The battlefield of the Russia-Ukraine conflict, which erupted in 2014, has long since expanded to various international tribunals. In addition to a number of interstate proceedings (before the International Court of Justice, the European Court of Human Rights, the International Tribunal for the Law of the Sea and the World Trade Organization Dispute Settlement Body), a quite unique branch of investment arbitration jurisprudence has emerged.
Based on information in the public domain, as of August 2018, there are 9 pending arbitral proceedings regarding investments allegedly thwarted by the Russian Federation in Crimea since 2014:
(i) Aeroport Belbek LLC and Mr. Igor Valerievich Kolomoisky v. the Russian Federation (Belbek arbitration);
(ii) PJSC CB PrivatBank and Finance Company Finilon LLC v. the Russian Federation (Privatbank arbitration);
(iii) PJSC Ukrnafta v. the Russian Federation (Ukrnafta arbitration);
(iv) Stabil LLC et al. v. the Russian Federation (Stabil arbitration);
(v) Everest Estate LLC et al. v. the Russian Federation (Everest Arbitration);
(vi) Lugzor LLC et al. v. the Russian Federation (Lugzor arbitration)
(vii) PJSC Oschadbank v. the Russian Federation (Oschadbank arbitration)
(viii) NJSC Naftogaz of Ukraine et al. v. the Russian Federation (Naftogaz arbitration)
(ix) PJSC DTEK Krymenergo v. the Russian Federation (DTEK arbitration).
It is believed that one more case will be commenced soon. In April 2018, the Ukrainian state-owned operator of the electricity grid, SE NPC Ukrenergo, served the respective notice of dispute upon the Russian Federation(Ukrenergo arbitration). For ease of reference, all the cases listed above will be referred together as the Crimean arbitrations.
These proceedings include the claims of 50 Ukrainian companies and individuals. The aggregate value of the Crimean arbitrations is believed to exceed USD 10 billion.
Not surprisingly, their major distinctive feature is that at the moment when they were made, the investments in question were made on the territory of Ukraine. All the claimants are Ukrainian companies and nationals. Before 2014, their respective investments could not be viewed as foreign or cross-border investments. However, at least as the claimants assert, once Russia asserted jurisdiction over the Crimean peninsula, their investments fell within the international investment protection regime.
This article aims to briefly review the pending arbitration proceedings and to provide a very high-level overview of the key legal issues with which the arbitral tribunals in the Crimean arbitrations have to deal.
Overview of the proceedings
So far, all the Crimean arbitrations have been running under the Agreement between the Cabinet of Ministers of Ukraine and the Government of the Russian Federation on the Promotion and Reciprocal Protection of Investments (the “BIT”). No investors from third states have yet to file claims with respect to their investments lost in Crimea since 2014.
Though the BIT envisages two arbitration options for resolving investment disputes – the Arbitration Institute of the Stockholm Chamber of Commerce and UNCITRAL Arbitration Rules 1976, all the claimants have chosen the UNCITRAL Rules. Reportedly, all proceedings are administered by the PCA. The legal seat of arbitration varies significantly and includes The Hague (5 cases), Geneva (2 cases), and Stockholm (1 case). In yet one more pending case (the DTEK arbitration) the information on the seat has not been published.
The Crimean proceedings can roughly be divided into two large categories depending on the claimants’ identity. The first one encompasses the claims brought by Mr. Igor Kolomoisky, a Ukrainian businessman and former Governor of the Dnipropetrovsk Region, who strongly opposed the Russian intervention into Crimea and Donbas along with the companies affiliated with him (the Belbek, Privatbank, Ukrnafta, Stabil, Lugzor and Everest arbitrations). The second one includes claims brought by Ukrainian state-owned companies – the Oshchadbank, Naftogaz and Ukrenergo arbitrations. The only arbitration brought so far by a privately-owned company that is not associated with Mr. Kolomoisky is the DTEK case.
The Russian Federation has not participated in any of the proceedings, reportedly confining itself to a short objection to jurisdiction. In a number of letters, it argued that “[the BIT] cannot serve as the basis for composing an arbitral tribunal to settle [the Claimants’ claims]” and that it “does not recognize the jurisdiction of the international arbitral tribunal …”.
The Crimean arbitrations provided work to an array of law firms. Hughes Hubbard & Reed LLP (teams from Washington DC and Paris offices) have been engaged in five cases – the Belbek, Privatbank, Ukrnafta, Stabil and Everest arbitrations. Covington & Burling LLP (teams from the New York, Washington DC and London offices) are currently dealing with three cases – the Naftogaz, DTEK and Ukrenergo arbitrations. Fieldfisher LLP has received one instruction in the Lugzor case, where it acts alongside Professor Zachary Douglas QC and Mr. Luis González García from Matrix Chambers, as well as Mr. Richard Boulton QC from One Essex Court. Finally, Oschadbank has engaged Quinn Emanuel Urquhart Sullivan for their arbitration.
The industries covered by these proceedings also vary. Five cases are related to the energy sector (the Narftogaz, DTEK, Ukrenergo, Ukrnafta and Stabil arbitrations), and two cases relate to investments in the banking and financial services sector (the Privatbank and Oschadbank arbitrations). Two more cases (the Lugzor and Everest arbitrations) relate to investments in real estate. Finally, the Belbek arbitration revolves around the alleged expropriation of the rights to operate a passenger terminal for commercial flights at the Belbek International Airport.
Further below, we will briefly outline the procedural history and current status of each of the Crimean arbitrations.
PCA Case No. 2015-36 Everest Estate LLC et al. v. the Russian Federation
Though this arbitration was not the first to commence, it turned out to be the first one where the arbitral tribunal rendered an award on the merits.
The Claimants brought the proceedings on 19 June 2015. The arbitral tribunal consisted of Professor W. Michael Reisman (appointed by the Claimants), Professor Dr. Rolf Knieper (appointed by the appointing authority Mr. Michael Hwang, on behalf of the Respondent) and Dr. Andrés Rigo Sureda (Presiding Arbitrator).
The tribunal bifurcated the proceedings between the jurisdiction/admissibility phase and the merits phase. The hearing on jurisdiction and admissibility was held on 15 December 2016 in New York. In its decision of 20 March 2017, the tribunal reportedly upheld its jurisdiction to hear the Claimant’s claims.
The hearing on the merits was held on 5-6 October 2017. On 2 May 2018, the Tribunal issued its historic award on the merits, unanimously finding the Russian Federation liable of a breach of the BIT and awarding over USD 159 mln as compensation to the Claimants.
It has not yet been reported whether the Russian Federation has challenged this award in the Dutch courts. However, such a development is expected.
PCA Case No. 2015-07 Aeroport Belbek LLC and Mr. Igor Valerievich Kolomoisky v. the Russian Federation and PCA Case No. 2015-21 PJSC CB PrivatBank and Finance Company Finilon LLC v. the Russian Federation
The Claimants in the Belbek and Privatbank arbitrations commenced the proceedings on 9 January 2015 and 1 April 2015 respectively. Reportedly, the claims in the Belbek case amount to approximately USD 15 mln. Privatbank is reportedly claiming around USD 1 billion as compensation for the loss of its banking business in Crimea.
Identical tribunals were constituted in both proceedings comprising of Sir Daniel Bethlehem, KCMG, QC (appointed by the Claimants), Dr. Václav Mikulka (appointed by the appointing authority on behalf of the Respondent) and Professor Pierre Marie-Dupuy (Presiding Arbitrator). The cases were considered concurrently and their procedural history is similar.
It is notable that although these proceedings were among the very first Crimean arbitrations commenced, they are still quite far from the final award on the merits. This is because the Tribunal in these cases trifurcated the proceedings into (i) certain issues of jurisdiction and admissibility (ii) the remaining issues of jurisdiction and admissibility, as well as liability, and (iii) quantum phases.
A concurrent hearing on jurisdiction and admissibility in both cases was held on 12-14 July 2016 in Geneva. On 24 February 2017, the Tribunal issued its unanimous Interim Awards in both cases, addressing certain issues of jurisdiction and admissibility. It is believed that the respective questions were resolved in the Claimants’ favour.
The hearing on the remaining questions of jurisdiction and admissibility, as well as on the questions of liability was held on 1-7 November 2017. The Tribunal has not yet issued its award on the second phase of the proceedings.
PCA Case No. 2015-34 PJSC Ukrnafta v. the Russian Federation and PCA Case No. 2015-35 Stabil LLC et al. v. the Russian Federation
The claimants in the Ukrnafta and Stabil arbitrations commenced the proceedings on 3 June 2015, claiming that the Russian Federation had breached its obligations under the BIT by interfering with and ultimately expropriating their investments in petrol stations located in Crimea. The amount of claims has not been reported.
Identical tribunals were constituted in both cases comprising of Mr. Daniel M. Price (appointed by the claimants), Professor Brigitte Stern (appointed by the appointing authority on behalf of the Russian Federation) and Professor Gabrielle Kaufmann-Kohler (Presiding Arbitrator). Taking into account this, as well as the commonalities of facts and law, the cases were considered concurrently and their procedure was similar.
The Tribunal split both proceedings into jurisdiction and merits phases. The hearing on jurisdiction was held on 11 July 2016. On 26 June 2017, the Tribunal issued the Awards on Jurisdiction, where it reportedly found that it had jurisdiction to consider the claimants’ claims. The hearing on the merits was held from 5-6 February 2018. No decision on the merits has been issued to date.
It appears that the Russian Federation has already challenged the Awards on Jurisdiction, dated 26 June 2017, before the Swiss courts. On 7 December 2017, the Swiss Federal Tribunal dismissed the investors’ security for cost application and allowed the case to move forward. In the Swiss setting aside proceedings, the investors have retained Lalive. Schellenberg Wittmer represent the Russian Federation. No further details of these proceedings are available.
PCA Case No. 2015-29 Lugzor LLC et al. v. the Russian Federation
The Claimants in the Lugzor case commenced arbitral proceedings on 27 May 2015. The Arbitral tribunal is comprised of Judge Bruno Simma (appointed by the Claimants), Dr. Eduardo Zuleta Jaramillo (appointed by the appointing authority, Dr. Andrés Rigo Sureda, for the Respondent) and Professor Donald M. McRae (Presiding Arbitrator).
Similar to the other cases already described above, the tribunal ordered bifurcation of the proceedings between a phase on jurisdiction and admissibility, and a phase on responsibility and damages. The hearing on jurisdiction and admissibility took place from 16-17 July 2017 in London. The tribunal has not issued an interim award on jurisdiction, however, it informed the parties that it intended to render a final award in due course, in which it would uphold its jurisdiction over the dispute submitted to it in this arbitration and would find that all of the claims made by the Claimants were admissible. The hearing on the merits was reportedly scheduled for 25-29 June 2018.
There is no information in the public domain as to the quantum of the Claimant’s claims in these proceedings.
PJSC Oschadbank v. the Russian Federation
Oschadbank commenced arbitration on 18 January 2016, claiming around USD 680 mln as compensation for the expropriation of its banking business in Crimea. The claimant appointed Charles N. Brower as arbitrator. Hugo Perezcano Díaz was appointed by the appointing authority, on behalf of the Russian Federation. The two co-arbitrators selected David A.R. Williams QC as presiding arbitrator.
Unlike the other cases previously reviewed, the PCA does not issue regular press releases on the status of these proceedings. Therefore, the information on this case in the public domain is much more limited.
It is understood that the Oschadbank case is the first one among the Crimean arbitrations in which the tribunal did not split the proceedings into jurisdiction and merits phases. The hearing addressing all questions of jurisdiction, liability and quantum was reportedly held in March 2017. No developments in this case have been reported since then.
PCA Case No. 2017-16 NJSC Naftogaz of Ukraine et al. v. the Russian Federation
The claimants in the Naftogaz arbitration commenced the proceedings on 17 October 2016, alleging expropriation of their oil and gas assets in Crimea by the Russian Federation and the transfer of these assets to a Russian state-owned company.
The tribunal is comprised of Dr. Charles Poncet (appointed by the claimants), Professor Maja Stanivuković (appointed by the appointing authority on behalf of the Russian Federation) and Judge Ian Binnie, C.C., Q.C. (Presiding Arbitrator).
The tribunal in this case did not bifurcate the proceedings, and the hearing was held in May 2018.
In its press release published upon filing of the notice of arbitration, Naftogaz preliminarily estimated the group’s damages at USD 2.6 billion. In later statements to the press, the amount of the damages claimed increased to USD 8 billion.
PJSC DTEK Krymenergo v. the Russian Federation
Almost no information on this case is available in the public domain. It is understood that DTEK Krymenergo commenced arbitration in late 2017. The amount of compensation sought is estimated at USD 500 mln.
SE NPC Ukrenergo v. the Russian Federation
This case is at a very early stage, and the notice of dispute was just filed in April 2018. In its press statement, Ukrenergo argued that the value of the property it lost in Crimea exceeds USD 1 billion.
Key legal issues
As mentioned above, the Russian Federation does not participate in any of the Crimean arbitrations. Its objections filed before the tribunals are basically limited to a plain denial of the tribunals’ jurisdiction and of the applicability of the BIT to the respective investments. There is little doubt that it developed much more detailed and sophisticated arguments in the setting aside motions pending before the Swiss courts. However, the respective pleadings are not yet in the public domain. Neither are the jurisdictional awards rendered in the Everest, Ukrnafta, Stabil, Belbek, Privatbank and Lugzor arbitrations. Therefore, we cannot but guess what questions the tribunals considered, how they resolved them and what reasoning they used.
In this guessing exercise, one of the most widely discussed questions was the notion of the territory referred to in the BIT. This question is important from the political standpoint, since neither Ukraine, nor the international community recognize the legality of the Crimean annexation by the Russian Federation from the perspective of international law. However, the importance of this question for the Crimean arbitrations, is probably exaggerated. This is because no one denies the reality that Russia has actually asserted jurisdiction and exercises full control over the territory of Crimea (without admitting the legality of such control). Furthermore, and most importantly, the ultimate position of both Ukraine and Russia is that Russia’s international treaties, including investment protection treaties, do apply to the territory of Crimea (although their respective reasonings are different). It is difficult to imagine that the Russian Federation would argue that Crimea is not its territory for any purposes, including for the purpose of application of the BIT.
Rather, the position of the Russian Federation seems to be that it assumed its obligations to protect only those investments that were made after the Russian Federation asserted jurisdiction over Crimea. To decide whether this is so, one needs to refer to the definition of an investment set forth in Article 1(1) of the BIT. It defines an investment as “all kinds of property and intellectual values which an investor from one Contracting Party investson the territoryof the other Contracting Party in accordance with its legislation… [все виды имущественных и интеллектуальных ценностей, которые вкладываютсяинвестором одной Договаривающейся Стороны на территориидругой Договаривающейся Стороны в соответствии с ее законодательством …]”
In my view, the firstimportant question that needs to be resolved by the tribunals in the Crimean arbitrations and by the courts considering the setting aside motions is whether the definition in article 1(1) has any temporal dimension, and particularly whether it imposes – explicitly or implicitly – any requirements regarding the moment when the investment is made (i.e. that it must be initially made on the territory of the other contracting state), or to the contrary, that it simply requires that the respective investment exists on the territory of the contracting state.
The secondimportant question is the particular moment, from which Russia assumed obligations under the BIT with respect to the Ukrainian investments in Crimea. This is important, since Russian troops already landed in Crimea in February 2014. The formalities under the Russian law necessary for annexing the Crimean peninsula to the Russian Federation were completed on 22 March 2014. The tribunals and courts would need to determine if the investments were protected under the BIT during the “interregnum” period and accordingly, whether the state can be held liable for the actions affecting the investments during this period.
The thirdcrucial question that the Tribunals and courts would need to decide is whether the respective investments were made in accordance with the legislation of the Russian Federation.
Given that six arbitral tribunals have already confirmed their jurisdiction in the Crimean arbitrations, they have apparently answered the above questions in a manner that is favourable to investors. These decisions will now be tested by the state courts at the seat of arbitration. We hope that more information on the parties’ positions and the tribunals’ findings will soon appear in the public domain. The author’s more detailed views on them will follow in separate publications.
11 co-claimants in Stabil arbitration are Stabil LLC, Rubenor LLC, Rustel LLC, Novel-Estate LLC, PII Kirovograd-Nafta LLC, Crimea-Petrol LLC; Pirsan LLC, Trade-Trust LLC, Elefteria LLC, VKF Satek LLC and Stemv Group LLC. See also: https://pca-cpa.org/en/cases/122/.
19 co-claimants in Everest arbitration are Everest Estate LLC, Edelveis-2000 PE, Fortuna CJSC, Ubk-Invest CJSC, Niva-Tour LLC, IMME LLC, Planeta PE, Krim Development LLC, Aerobud PJSC, Privatoffice LLC, Dayris LLC, Diline Ltd LLC, Broadcasting Company Zhisa LLC, Privatland LLC, Dan-Panorama LLC, Sanatorium Energetic LLC, AMC Finansovyy Kapital LLC, AMC Financial Vector LLC and Mr. Alexander Valerievich Dubilet. See also: https://pca-cpa.org/en/cases/133/.
Five co-claimants in Lugzor arbitration are Limited Liability Company Lugzor, Limited Liability Company Libset, Limited Liability Company Ukrinterinvest, Public Joint Stock Company DniproAzot, Limited Liability Company Aberon Ltd. See also: https://pca-cpa.org/en/cases/124/.
Seven co-claimants in Naftogaz arbitration are NJSC Naftogaz of Ukraine, PJSC State Joint Stock Company Chornomornaftogaz, PJSC Ukrtransgaz, Subsidiary Company Likvo, PJSC Ukrgasvydobuvannya, PJSC Ukrtransnafta, Subsidiary Company Gaz Ukraiiny. See also: https://pca-cpa.org/en/cases/151/.
Interestingly, Ukrnafta, where Naftogaz is a majority shareholder, and Privatbank, which was nationalized at the end of 2016, may now fall within both categories.