One of the most complicated issues in terms of assets recovery is a situation which arose when the self-proclaimed Crimean authorities decided to carry out massive nationalisation and illegally expropriated state- and private-owned businesses in the peninsula.
On 30 April 2014 the State Council issued the Resolution "On the management of the property of the Republic of Crimea" and a few hundreds of business units were lost. Other businesses encounter serious obstacles in carrying out regular activity due to the pressure made upon them by the local authorities. The analysis of the Assets Schedule attached thereto shows that the nationalisation which occurred had both the commercial and political motive behind. In any event, from then and on the owners are seeking for the way to recover the assets which were unlawfully distributed among the Russian Federation, the Republic of Crimea and local communities.
The most effective tool available for Ukrainian businessmen appears to be the investment arbitration pursuant to the Bilateral Investment Treaty (the “BIT”), namely Agreement between the Government of the Russian Federation and the Cabinet of Ministers of Ukraine on the Encouragement and Mutual Protection of Investments dated 27 November 1998.
Pursuant to the said BIT, both Ukraine and Russia shall provide on its respective territory the investment regime which shall be no less favorable than the one granted to its own investors or investors of any third state, precluding the use of discriminatory measures, which could interfere with the management and disposal of those investments. Further, the investments of Ukrainian and Russian investors, carried out on the territory of the other state, shall not be subject to expropriation, nationalization or other measures, equated by its consequences to expropriation, with the exception of cases, when such measures are not of a discriminatory nature and entail prompt, adequate and effective compensation. What in fact took place in the Crimean peninsula is a plain example of the nationalisation with no compensation thereafter which includes the unequivocal features of discriminatory nature.
Any BIT inevitably operates with three main definitions: the investment, the investor and the territory. In the Crimean case there are some questions with respect to the term the “territory”. If that issue is successfully sorted out, then the terms the “investor” and the “investment” will be equated with terms the “businessman” and the “business”, respectively. This is a thin ice zone as in case the Ukrainian investor claims damages for its investments in the Crimea treating it as a Russian territory (because otherwise he cannot be deemed to be a foreign investor under the BIT) with no initial reservations made, there is a serious risk of dangerous international precedent. The said reservation raises a question of the BIT interpretation.
The position of the Ukrainian investors in this case is pretty clear: they fully appreciate that the Crimea is an essential part of Ukraine, they do not recognise it being part of Russia, still what happens now is that the Russian Federation temporarily carries out effective control over this territory as a result of its illegal occupation. Therefore, as the Crimea cannot be practically regarded as the territory under the control of Kyiv for the above reasons, unfortunately Ukrainian businessman shall be regarded as the Ukrainian investors.
The question of BIT interpretation is the one to be solved by the state of Ukraine, according to the BIT, in the course of state-to-state arbitration. The formal procedure requires negotiations through the diplomatic channels with subsequent arbitration in case the contracting parties fail to reach a consensus. As this is a considerably time-consuming process, the state of Ukraine has already decided to enter into each of the investment arbitration proceedings on the side of the Ukrainian investors and request the Tribunal to be heard in order to plead the temporary effective control doctrine.
As for now there are not that many cases currently filed with the arbitral tribunals by the Ukrainian investors. The BIT provides for the two options of the tribunals: Stockholm Chamber of Commerce or the ad hoc arbitration under the UNCITRAL rules. The vast majority of cases are heard at the Hague Permanent Court of Arbitration. These are the cases of deprivation of the rights to operate a passenger terminal at the Belbek airport (Aeroport Belbek LLC and Mr Kolomoisky), expropriation of the real estate (Lugzor LLC, Libset and others), interference with operation of oil and gas investments with their subsequent expropriation (PJSC Ukrnafta, Stabil LLC et al.), taking measures that prevented from operating the banking business in Crimea (PJSC CB Privatbank and Finance Company Finilon LLC). The case of the state owned bank Oshchadbank is heard in Stockholm. The cases are also at different stages the Hague Permanent Court of Arbitration announced that the statements of claim in cases of Ukrnafta, Aeroport Belbek LLC, PJSC CB Privatbank and Stabil were filed and the issues of jurisdiction are due to be heard now, whereas in case of Naftogaz the dispute is at the stage of respective consultations with no arbitration notice filed yet.
The said announcements of the Arbitral Tribunal made in the form of the press-releases are quite a rare tool the tribunals refer to. Primarily, they serve for the public interest, they prove the transparency of the asset recovery in case of full ignoring by the respondent, they may indirectly reinforce the fact that the tribunal indeed has a jurisdiction to hear the case and they help to avoid the basis for subsequent challenge of the arbitral award on the ground that the respondent was not properly informed about the proceedings.
The number of cases is explained by the fact that the situation is absolutely unprecedented and it is the above mentioned pioneers which will cut through the long and exhausting procedural jungles in order to reach a successful arbitral award on the asset recovery which hopefully will be regarded as a guidance for the following cases. As of now Russia denies any jurisdiction of the tribunals, it does not submit any defense and claims the BIT cannot serve as a basis for composing an arbitral tribunal to settle claims on the asset recovery. This may, however, be regarded as a positive fact as such position of the respondent may speed up the long process and hopefully we will see the first positive decisions in a year of two.