Dual national fails in a multi billion claim against Russia

On 22 June 2020 the Russian Ministry of Justice announced that the UNCITRAL tribunal hearing Mr Serghei Pugachev’s US$14.5 billion claim against the Russian Federation under France-USSR 1989 BIT (the “BIT”) lacked jurisdiction over the claimant’s claim.

The tribunal found that the claimant was not a French national at the time he made his investments in the Russian Federation. According to the same announcement:

the Russian Federation managed to achieve complete victory in the dispute with S. Pugachev and the rejection of claims in the amount of more than $ 14.5 billion already at the stage of considering the issue of jurisdiction.

In addition, Mr Pugachev was ordered to pay Russia $ 5.8 million in compensation for the costs of arbitration.

Mr Pugachev started the Madrid-seated arbitration in 2015, alleging that the Russian Federation expropriated his assets in various industries, and commencing proceedings against him following the bankruptcy of one of the Russia’s private banks „Mezhprombank”.

In 2015, a Russian court ordered Mr Pugachev to pay US$1 billion to the bank’s creditors after finding that he had caused its insolvency through fictitious lending to companies under his control. The bank’s liquidator, the Deposit Insurance Agency of Russia (“DIA”), pursued enforcement of that judgment in various jurisdictions and obtained a worldwide freezing order from the English courts against his assets.

This article briefly examines the background of the dispute and the initiation of the arbitration by Mr Pugachev against the Russian Federation.

Initiation of the arbitration

As previously discussed on the blog, Mr Pugachev filed his Notice of Arbitration on 21 September 2015 against the Russian Federation seeking compensation under the BIT. Mr Pugachev claimed that he was an investor under the BIT because he had been a national of France since 2009 and had resided permanently in France from 2011 onwards. Even though Mr Pugachev is also a national of Russia, neither the BIT nor the UNCITRAL Arbitration Rules preclude dual nationals from bringing claims against the Russian Federation.

In 2017, the arbitral tribunal ordered Russia to suspend its efforts to extradite Pugachev from France while the arbitration was pending. However, it dismissed the banker’s request for other interim relief, including the suspension of civil and criminal proceedings against him in Russia, the UK, the Cayman Islands, France, Switzerland and Luxembourg. The tribunal also refused to order Russia to post US$6 billion in security for the claim, or to make him post security for costs.

Alleged investments in the Russian Federation

According to the Notice of Arbitration, Mr Pugachev’s investments were: the Red Square real estate development regarding a project to redevelop certain historic buildings adjoining the Red Square in Moscow; the Severnaya Verf shipyard and Baltiyskiy Zavod shipyard in St. Petersburg, as well as an associated construction bureau known as the Central Design Bureau Iceberg; Enisey Production Company and its license to develop and mine the coking coal deposit in the Elegest Plateau at the Ulug Khemsky coal basin in Tuva; and 167 plots of land in the Krasnogorsky District of the Moscow Region through his company ZAO Optik Trade. Consulting an Estate Planning Law Firm is a good idea in such cases.

Jurisdictional objections advanced by the Russian Federation

The tribunal rejected the objections advanced by Russia that: (1) Mr Pugachev had acquired his French nationality fraudulently; (2) the BIT did not allow claims by dual nationals. The tribunal found that Mr Pugachev was a French national under international law and that there is a high threshold to override a state’s decision to confer its nationality to a natural person. The tribunal was unconvinced that Mr Pugachev had attained French nationality by providing false information to the French authorities, or through some material error. The tribunal also found that the BIT contained no express exclusion of claims by dual nationals and that it could not add a condition not provided for in the treaty.

However, the tribunal upheld Russia’s objection that it lacked jurisdiction because of the timing of his investments, which occurred before Mr Pugachev acquired his French nationality in 2009. Nevertheless, Prof. Thomas Clay dissented on this point, arguing that the majority’s interpretation was inconsistent with the BIT and the case law.

It is worth noting that in a 2014 Decision on Jurisdiction, a majority UNCITRAL tribunal allowed claims by two dual Spanish-Venezuelan nationals against Venezuela to proceed on merits. The tribunal found that the BIT in question did not exclude claims by dual nationals and that the only relevant considerations were whether they were Spanish nationals at the time they filed for arbitration and at the time the alleged wrongful state actions occurred. Ultimately, in its final award, the tribunal found Venezuela liable on merits. However, the Paris Court of Appeal annulled that award in its entirety in June 2020 on the basis that the claimants were not Spanish nationals at the time they made their initial investments. However, this case involves different factual patterns comparing to Mr Pugachev’s case.

The Claimant’s legal issues in the Russian Federation

Mr Pugachev was a member of the Federation Council (the upper chamber of the Russian Parliament) from 2001 to 2011 and was included in the “Golden Hundred” of Russian Forbes. In 2010, Mezhprombank, founded by him, was deprived of its license. Shortly thereafter, at the request of the Deposit Insurance Agency of Russia which became the bankruptcy trustee of the bank, an investigation was launched into the bankruptcy case.

In 2011, Mr Pugachev left Russia and settled in London. In 2013, Russian authorities initiated a criminal investigation against Mr Pugachev in his homeland and put him on the wanted list. Also, in December 2013, the Deposit Insurance Agency filed a lawsuit with the Arbitration Court of the city of Moscow to bring to subsidiary liability for the debts of Mezhprombank of the bank’s managers Alexander Didenko, Alexey Zlobin, Marina Illarionova and Sergei Pugachev. Also, in Russia, Mr Pugachev was charged in absentia under Art. 160 (“Misappropriation or embezzlement”) and 201 (“Abuse of authority”) of the Criminal Code. 

Conclusion

The tribunal majority found that Mr Pugachev made all his investments before he acquired French nationality. The award reflects the general aim of international investment agreements, which is the protection of foreign investments, rather than domestic investments.

Although this case is factually specific, the jurisdictional award will likely contribute to the debate in the investment arbitration community over whether dual nationals can pursue treaty claims against one of their countries of nationality. 

It seems that the award does not put the end on the case. According to Mr Pugachev’s press release, the claimant will likely challenge the award before Spanish courts.