Investment claim against Ukraine follows an antimonopoly fine imposed on Gazprom

On 25 October 2018, Gazprom filed an EUR 6.4 billion investment treaty claim against Ukraine in accordance with UNCITRAL Arbitration Rules, under the Russia – Ukraine Bilateral Investment Treaty of 1998 (BIT).

The claim concerns a fine imposed by a state authority. Although analysing the merits of the claim at this stage is premature, the case involves the debate about to what extent the host state may exercise the regulatory power with respect to foreign investors. Also, it involves an assessment of the margin of discretion of regulatory sanctions following a breach of antimonopoly legislation.
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The dispute relates to the decision of the Antimonopoly Committee of Ukraine in 2016, which fined Gazprom EUR 3.2 billion for allegedly abusing its monopoly on the Ukrainian gas transit market. This sum was later doubled by a Kiev Economic Court to reflect late payment penalties. According to Gazprom, it initiated the BIT claim because the antimonopoly fine is “baseless and unfair” and it violates the Gazprom’s rights under the BIT.

This article analyses the background of this case, the implication of this arbitration on future relationship in terms of gas transit, and briefly illustrates other disputes with the implication of the parties or their instrumentalities.

Background of the case

Gazprom filed its claim in accordance with the UNCITRAL Arbitration Rules against Ukraine in order to safeguard its investments on the Ukrainian territory. The claim is filed following the decision of the Antimonopoly Committee of Ukraine to impose an “unjustified and unfair” fine in excess of USD 6 billion (including penalties).

The Antimonopoly Committee fined Gazprom app. UAH 86 billion on 22 January 2016 for abusing its monopoly on the market of transit of natural gas through Ukraine during the period of 2009 – 2015. The Committee invoked that Gazprom hold a monopoly position in the Ukrainian market for the transit of natural gas through Ukraine.
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At the same, according to the Committee, during 2009 – 2015 period, Gazprom constantly violated the terms of the gas transit agreement with Naftogaz and ignored any requests for change of the conditions of cooperation.

Following the application of the fine Gazprom challenged the decision in the State courts. In September 2017, the Supreme Court of Ukraine rejected Gazprom’s appeal against the lower court decisions which imposed the fines, and therefore the Supreme Court decision remained final and binding. In October 2017, the Kyiv Economic Court authorised collection of UAH 172 billion in fines and penalties that the Antimonopoly Committee imposed on Gazprom.

As a part of efforts to collect the fine, Ukraine’s Ministry of Justice seized the control of 40 % of the Gazprom’s shares in Gaztransit, which is a venture jointly owned by Gazprom, the Ukraine’s national gas company Naftogaz and other two Turkish companies.

The arbitration claim

On 30 June 2017 Gazprom sent a notice of dispute to Ukrainian Government under the Russia – Ukraine BIT, mentioning that it does not recognise the legitimacy of the fine imposed by the Antimonopoly Committee, and considers Ukraine’s measures as a violation of its rights protected by BIT. Following a failed attempt to amicably settle the dispute, in October 2018 Gazprom filed the request for arbitration.

Although the potential outcome of the dispute cannot be assumed at this stage, the investment arbitration practice is familiar with the situation when the State authorities impose certain measures that materialise in pecuniary punishments and penalties to foreign investors.

Even if the arbitral tribunal cannot “scrutinise” the State authority’s decision by which the fine was applied to Gazprom, the tribunal will analyse whether such conduct breaches international law. Beyond that, the tribunal will likely examine whether the fine and 100% penalty (which doubled the total sum payable by Gazprom) was applied with the sole purpose of protecting the local competition market, or it was driven by political reasons.

The outcomes of a number of investor-State disputes demonstrate that when politics interfere with business, it ends unfavourably for the host State (see e.g. Inmaris Perestroika Sailing Maritime Services GmbH and others v Ukraine; Eureko B.V. v Republic of Poland; Mr. Franck Charles Arif v Republic of Moldova, etc).

Other disputes involving Gazprom and Ukraine State-owned company Naftogaz

As we understand, currently Naftogaz and Gazprom are involved in three ongoing disputes.

In the first case, Naftogaz is pursuing the enforcement of US$ 2.5 billion award that it won against Gazprom and in February 2018 in an arbitration brought under the Gas Transit Agreement (GTA) at the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). In that case the tribunal found that Gazprom had breached its obligations to deliver sufficient gas for transit through Ukraine.

Interestingly, the tribunal dismissed Naftogaz’s claims for revision of the tariff as the company’s request for revision did not fulfil procedural requirements. It further declined Naftogaz’s request to amend the agreement based on European and Ukrainian energy and competition law. The tribunal observed that the responsibility of implementing such regulatory reform belonged to the Ukrainian authorities and fell outside the scope of its powers.
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The second case was started at SCC by Naftogaz in 2014 under the Gas Supply Agreement (GSA). It claimed that Gazprom cancelled all discounts previously granted of the price of gas exports to Ukraine. At the same time, Gazprom filed an counterclaim alleging that it did not receive certain payments for delivered gas. The tribunal issued its final award in January 2018 upholding Naftogaz’s claim for a downward price revision but ruled this would only apply from April 2014, rather than 2011 as sought by Naftogaz

In the third SCC case started in June 2018 under GTA, Naftogaz sought the revision of tariff charges for transporting the Russian gas. Under GTA, Gazprom pays Naftogaz to transport Russian gas across Ulkraine for delivery to customers in Europe. Naftogaz invokes that GTA allows the parties to seek a revision of the tariff in the event of significant changes in the European gas market and where the tariff no longer corresponds to the level of tariffs in Europe.

Conclusions

This dispute presents an important sign that the gas struggle in Eastern Europe goes beyond purely commercial and legal matters. It may affect future relations between the investors in gas industry and the host States in the region, particularly in the light of parallel arbitrations over the gas price and gas transit agreements between Gazprom and Naftogaz.

The investment claims following state measures applied to foreign investments are not unusual in investment arbitration. However, the exercise of regulatory and coercive powers by the host state is assessed under international law rather than within the internal legal framework. That is why the host state in our case will likely have to justify its measures against Gazprom under international standards of protection of investments envisaged in the BIT.