Russian Investors Turning More Frequently to Investment Arbitration

On 26 October 2016, two subsidiaries of the Russian aluminium producer Rusal, Emergofin BV and Velbay Holdings, incorporated in the Netherlands and Cyprus respectively, filed a request for ICSID arbitration against Ukraine under article 9 of the Netherlands-Ukraine BIT. The acting Secretary-General registered the request on 9 November 2016.

The dispute relates to the transfer to Ukrainian national ownership of the controlling stake (68.01%) of Zaporozhye Aluminum Complex (“ZALK“) effected by the Ukrainian Supreme Court in March 2015.

The claimants attempted an amicable settlement of their disagreements in December 2015, which triggered a three-month cooling-off period, but the negotiations ended without a positive result in August this year. Further, on 18 October 2016, Rusal and its affiliated companies became the subject of sanctions that Ukraine imposed, freezing the companies’ assets and limiting trade operations in Ukraine under the pretext of the threat to national security.

The governmental body of one of the Russian regions, the Republic of Tatarstan (“Tatarstan“), initiated another arbitration against Ukraine. It was reported in May 2016 that earlier this year the Tatarstan Ministry of Land and Property filed a claim amounting to $300m pursuant to article 9 of the 1998 Russia-Ukraine BIT under the UNCITRAL Arbitration Rules. The listing prospectus, submitted by Ukraine in relation to the issue of debt securities, stated that, as of 25 February, the claimant had appointed its arbitrator and respondent had not.

The dispute concerns the Ukrainian oil company PJSC “Ukrtatnafta” (owner of the Kremenchug oil refinery located in the Poltava region). Tatarstan owned 28.78% of the shares in the company, but as a result of several allegedly illegal and discriminatory actions of the Ukrainian judiciary in 2007, which, it is claimed, were carried out in concert with a group of Ukrainian businessmen (reportedly close to Ukrainian businessman Mr Igor Kolomoyskiy), it was almost deprived of its shareholding. Tatarstan rejected the settlement proposal Ukraine sent via diplomatic channels in November 2015. No further details of the arbitration proceeding are known to the public so far.

Another Ukrtatnafta-related arbitration against Ukraine, initiated by Russian energy company Tatneft (of which major ownership is held by the Republic of Tatarstan), ended with a USD$2.4bn award in favour of the claimant. The decision is under judicial review by the French courts. A hearing on the merits was scheduled for 18 October 2016.

Tatneft also tried to pursue a claim against Mr Igor Kolomoyskiy and several other Ukrainian businessmen in an action at the High Court in London and in April 2016 obtained a worldwide freezing order. However, the court summarily dismissed it on 8 November 2016 (PJSC Tatneft v Bogolyubov).

On 21 October 2016, Roscosmos (the Russian state space agency) notified the Prime Minister of France of a dispute arising out of alleged violations of the 1989 USSR-France BIT, which triggered a six-month cooling-off period pursuant to Article 7, before proceeding to arbitration under the UNCITRAL Rules. The notice refers to the Yukos enforcement proceedings initiated by its former shareholders Hulley Enterprises and Veteran Petroleum.

Roscosmos and its Russian partners provided services relating to the launch of a satellite from the space centre in an overseas department in French Guiana. The project is realised jointly with the European Commission and European Space Agency.

The alleged investment comprises the receivables of approximately EUR 300 million that Arianespace owes to Roscosmos under two contracts concluded jointly with several Russian cosmos enterprises (RKTs Progress, KBOM, TsPO named after S.A. Lavochkin, TsENKI, jointly referred as Investors in the notice of dispute) in 2006 and 2010.

The actions of the French judiciary that allegedly violated the fair and equitable treatment standard of the BIT concern several arrests of the receivables ordered in 2015. Despite the Tribunal d’Instance d’Evry subsequently cancelling the arrests at the request of Roscosmos and Arianespace, the liftings of the arrest have not come into effect due to the provisional stay of execution ordered by the Paris Cour d’Appel on 5 October 2016.

The chairperson of the Paris Cour d’Appel noted in his decision to stay that Russia might own the investors’ receivables and Roscosmos might allegedly have acted as the agent of Russia upon the conclusion of contracts with Arianespace.

It referred to the regulation describing Roscosmos’ functions and to a report of the independent auditor confirming the transfer of the contractual payments received from Arianespace to the accounts of the Russian State Treasury, and concluding that they may have become a part of the Russian budget. Roscosmos also cites one of the phrases from the court decision: “The Attorney General orally confirmed that the request to stay the execution is well grounded“, hinting at potential irregularity in the proceedings.

Another notice of dispute triggered a six-month cooling-off period before proceeding to arbitration under the UNCITRAL Rules. The notice emanated from Russian national Ms Olga Ovchinnikova on 23 May 2016, pursuant to Article 8 of the 1995 Sweden-Russian BIT, and targeted the government of Sweden. It refers to several forest estates that Ms Ovchinnikova purchased from her then husband and business partner in 2001.

The actions of the Swedish authorities that allegedly violate the BIT concern the forced sale of the forest estates as a result of the investigation of illegal business practices against her ex-husband, who was accused of tax evasion.

During 2006 and 2007 Ms Ovchinnikova herself also became subject to that investigation: the Swedish authorities searched her property, arrested her, incarcerated her for two months, found her to be an accomplice of her husband and sentenced her to eight months’ imprisonment. She attempted to appeal the decision but without success.

Ms Ovchinnikova claims that the forced sale of her assets amounts to unlawful expropriation and breach of the fair and equitable treatment standard of the BIT. She also states that Sweden failed to provide full protection and security to her investment by impairment of its management, maintenance, use and enjoyment, while she remained incarcerated. The damages preliminarily amount to $26.5m, including a claim for moral damages.

The mentioned investor-state disputes initiated by Russian investors have some features in common. They all concern breaches of the FET standard through the actions of host states’ judiciary systems, allegedly leading to the expropriation of investment.

Most of them have some political dimensions: two of them concern the relationship between Russia and Ukraine and relate either to the sanctions imposed by Ukraine towards Russian entities or long-standing controversy between Tatarstan and Ukraine. The dispute involving France may have political underpinnings as well, for it concerns the freezing of the state corporation’s assets. The claim by a Russian national against Sweden stands out in this regard, at least based on the information revealed so far.

The claimants initiated most of these disputes pursuant to the UNCITRAL Arbitration Rules, obviously due to the non-ratification of the ICSID Convention by Russia, with the only claim filed with ICSID being by subsidiaries of the Russian corporation.

The ratio between all investor-state disputes involving Russia still remains in favour of Russia being on the respondent’s side. However, the traditional angle may likely alter in the near future.