Chasing the Russian Federation

Franz Sedelmeyer. Photo: Pravda.ru

On 1 July 2011 the Supreme Court of Sweden refused sovereign immunity protection to the trade mission of the Russian Federation. The decision opens a new page in a long battle between the Russian Federation and a German investor Franz Sedelmayer who won in arbitration against Russia in 1998.

In early 1990s, Franz Sedelmayer, a German national, organized a joint venture with the Leningrad (Saint Petersburg) Police Department. In particular, he worked with the Deputy-Mayor of Saint Petersburg Vladimir Putin who later became Russian President. Mr. Sedelmayer built up, trained, equipped and fully financed the FSB (formerly known as KGB) Counter Terrorist Team “GRAD” for the 1994 Goodwill Games.

The success of the joint venture was short-lived. In 1995 and 1996, Russian President Boris Yeltsin decreed to nationalize all of Mr Sedelmayer’s Russian holdings. The real property which belonged to him was to be used in entertaining foreign delegations visiting Russia as guests of the Russian President. Thereafter, the Russian Federation categorically refused to pay Mr. Sedelmayer compensation for the assets seized and for the value of the business lost. Mr Sedelmeyer was unable to get compensation in Russia.

Sedelmayer initiated arbitration at the Arbitration Institute of the Stockholm Chamber of Commerce. He relied on arbitration clause in Article 10 of the 1989 BIT concluded between the Soviet Union and the Federal Republic of Germany. One of Russia’s main arguments in those arbitral proceedings was that it was not a proper party because it was the police department which signed the contract with Mr Sedelmayer. Despite Russia’s opposition, in 1998 Sedelmayer obtained a favourable arbitral award. According to this award, the tribunal ordered to pay the investor US$2,350,000. Russia failed pay it voluntarily.

Mr Sedelmayer moved to enforce the award against various Russia’s assets abroad. Through German courts he tried to enforce the award against Russia’s rights to obtain payments from German airlines for their use of airspace. A German court ruled that these activities of the Russian Federation were immune. The value-added tax reimbursement claims payable to the Embassy of the Russian Federation. Another German court reached that these activities of the Russian Federation were immune.

Recently he succeeded to overcome Russia’s opposition to enforcement against a building of the former Soviet Trade Office in Cologne. A German court ruled that although the building belonged to the Russian Federation, it was not used for any official business and was not immune from enforcement.

The July Stockholm court decision represents the first ever case when a part of the building currently used by Russia as a trade mission was declared not immune. The Russian Federation rented flats to individuals and companies which were not working for the trade mission. The occupiers included ten Swedish nationals and two Swedish companies which had the mission’s address as their official business address.

The Russian Ministry of Foreign Affairs refused to recognize validity of the Swedish judgement. It argued that the Swedish court violated the Vienna Convention on Diplomatic Relations because the property was immune and Swedish authorities failed to explain the court Sweden’s international obligations. The Swedish Ministry of Foreign affairs responded that the courts of Sweden were independent in their decision.

Today the sum which Russia allegedly owes to Sedelmayer exceeds 5 mln $US including the interest. The Sedelmayer enforcement saga lasts over twelve years and demonstrates that while the system of investor-state arbitration helps to overcome sovereign immunity from resolving merits of the dispute, it does little to empower investors to actually enforce the arbitral awards. The enforcement procedures remain in the domain of national courts and reluctant states successfully use sovereign immunity to oppose unfavorable arbitral awards.

Yaraslau Kryvoi

About the Author:

Prof Yarik Kryvoi, MCIArb is the founder and co-editor of the CIS Arbitration Forum. He is the Senior Research Fellow in International Economic Law and Director of the Investment Treaty Forum at the British Institute of International and Comparative Law (BIICL). He holds law degrees from Harvard, Moscow and St Petersburg. He has been teaching and practicing international arbitration in Russia, the United States and England for over ten years and is listed as arbitrator by several arbitration institutions. Prof Kryvoi also served as a Co-Chair of the International Courts Committee of the American Bar Association's Section of International Law. He also serves a tutor at the Chartered Institute of Arbitrators in London. See full profile at kryvoi.net.

3 Comments on "Chasing the Russian Federation"

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  1. I do disagree with the author’s concluson as international law always develops. Investment treaty arbitration, as has the ecexution against foreign sovereigns, is still developing. That is why the recent ruling of the Swedish Supreme Court will now help to limit sovereign debtors from mixing sovereign use of their respective overseas assets with commercial activities, thus hoping immunity from enforcment can be upheld. The UN Law of the Sea stood model for the UN convention on the jurisdiction and the immunities from execution of foreign sovereigns; in particular the ILA disucussed that the impossibility of the mixed use of vessels serves as a measure for the definition of the use of foreign soverign overseas assets in executon cases. But more strikingly, Russia, Georgia and some other CIS members really seem to see BITs as pure window dressing to attract foreign investors without ever intending to abide by the rules of the BIT they signed and ratified. In particular Russia has such a bad reputation that an investor either speculates with other people’s money, but rarely would invest his own. We shall see what happens in the nearest future!

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