International investment arbitration as one of the compensation mechanisms

26.09.2022

International investment arbitration as one of the compensation mechanisms

What are the chances of Ukrainian business to be compensated for losses caused by Russia in investment arbitration?

As it recently became known, Ukrainian billionaire Rinat Akhmetov filed a lawsuit to the European Court of Human Rights for compensation for damages caused by Russia in Ukraine. It is about the destroyed metallurgical plant "Azovstal" in Mariupol. The lawyers of the System Capital Management (SCM) group are trying to draw attention through the court first of all to the violation of property rights, and only then to the damages. It is about looting, looting and destruction by the Russian military of grain and steel manufactured by SCM enterprises. In fact, this is an attempt to create a precedent for violating the rights of the holding's shareholder due to the destruction of his assets.

A difficult and unpredictable path

The world has already developed a tool for consideration of investment disputes, and Ukraine has a positive experience of participating in the so-called Crimean affairs. It is about international investment arbitration. In 1998, the Cabinet of Ministers of Ukraine and the Government of the Russian Federation signed an agreement on the promotion and mutual protection of investments. According to it, each of the parties excludes measures of a discriminatory nature that could hinder the management and disposal of investments.

In addition, official Kyiv and Moscow agreed that investments will not be expropriated (forcefully deprived of ownership), nationalized or subjected to measures equal in consequences to forced free deprivation of property — except for public necessity, which explains Ukraine's violation of its obligations under such an agreement due to unprovoked and unjustified armed aggression by the Russian Federation. The States also agreed that if a dispute cannot be settled by negotiation, after six months from the date of written notification, such dispute may be referred to a competent court or arbitration of the party in whose territory the investment is made, the Arbitration Institute of the Stockholm Chamber of Commerce, or an arbitral tribunal ad hoc in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).

Of all the above, what is important is not that Russia has violated the postulates of the mentioned investment protection agreement, but that this agreement gives the parties consent to consider the case in arbitration. Why is this important? The arbitration regulations of the UN commission UNCITRAL indicate that for consideration of a case in arbitration, written consent to such consideration is required.

Of course, under the existing conditions, expecting such an agreement from the Russian Federation is the same as waiting for semolina from the sky, but this is not so necessary, considering the agreement of 1998.

Why is arbitration effective?

The party that filed a claim may amend or supplement its claims. Let's go back to the 1998 agreement. This is stated – if one of the parties violates the terms, the compensation will be the market value of the expropriated investment, with interest, the rate will be calculated from the date of expropriation until the time of payment, as well as interest – LIBOR USD 3M (the average interest rate for interbank loans provided by banks to each other ) plus 1%.

Within the scope of hearing cases, the arbitration court may resort to protective measures, for example, freezing of assets. The absence of the defendant in the case is not an obstacle to its consideration based on the available materials.

The decision of the arbitration court is final and binding, and its execution must be immediate. Article 9 of the 1998 agreement also provides for the finality and binding nature of arbitration decisions for the Russian Federation in relation to Ukraine. In addition, the Russian Federation ratified the 1958 Convention, a document recognizing the legality of foreign arbitral awards. However, this Convention contains room for manipulation for the terrorist country in terms of the execution of the arbitration award.

Yes, the recognition or enforcement of an arbitral award may be refused if the party proves with adequate evidence that:

• the parties were incapacitated when signing the agreement on binding arbitration decisions, or this agreement is invalid according to the law;

• lack of proper notification of the defendant about the consideration of the case by the arbitration court;

• the decision was made regarding a dispute that is not subject to the arbitration agreement;

• the composition of the arbitration body or the arbitration process does not correspond to the agreement of the parties;

• the decision has not become final for the parties, has been annulled or suspended by the competent authority of the country where such decision was made, or of the country under whose laws the case was tried.

As for the country in whose territory the arbitral award can be enforced (if it is not the respondent country), the enforcement of the award can be refused. Reasons – according to the laws of this country, such a dispute cannot be subject to arbitration, or the implementation of this decision is contrary to the public order of this country.

That is, from the main point of this Convention: in the situation of compensation of money by Ukraine at the expense of the Russian Federation, it is obvious that the aggressor country will not voluntarily comply with the decision of the arbitration court. However, such execution is possible at the expense of Russian property on the territory of other states that have also ratified the 1958 Convention. This will significantly facilitate the legal grounds for the forced seizure of property of the Russian Federation for allied countries, as it does not require the adoption of additional laws. In addition, there are already known cases in history when European countries tried to implement the decision of the Hague Court by imposing arrests on the Russian vodka brands Stolichnaya and Moskovskaya, owned by the Russian Federation through the state enterprise Soyuzplodoimport.

At the same time, Russia has always manipulated its international obligations, as in the case of the Swiss brand Noga. On the other hand, the world does not know the cases of such destructive and defiant actions of the Russian Federation against other sovereign states.

It is necessary to understand that the implementation of international arbitration decisions is not an obligation of allied countries in relation to Ukraine. This is their duty to themselves and to humanity as a whole: by turning a blind eye and allowing the norms of international law to be ignored, they may very well become the next countries to suffer from the actions of the aggressor country, without a real compensation mechanism. That is why the whole world must unite on the economic and military fronts to stop the spread of the 21st century plague called Russian imperialism.

Source: Legal Bulletin of Ukraine

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