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Russia challenges Crimea awards and changes strategy

Sebastian Perry

06 June 2019

Russia challenges Crimea awards and changes strategy

Coastal town of Sudak in Crimea (Credit: istockphoto)

Russia has applied to the Swiss courts to annul a pair of investment treaty awards in favour of Ukrainian investors who had their assets seized in Crimea – as the state announces it has reversed its policy of not participating in arbitrations arising from its annexation of the territory five years ago.

Russia’s ministry of justice announced on 4 June that it had lodged applications with the Federal Supreme Court of Switzerland to set aside a pair of UNCITRAL awards worth a combined US$80 million in favour of Ukrainian oil and gas companies – Ukrnafta, in one case; and Stabil and other parties in the other case.

The state argues that the arbitrators erred in failing to determine that the Crimean peninsula is a sovereign territory of Russia despite upholding liability under the treaty.

It also alleges that the claimants’ investments were acquired illegally, including through corporate takeovers and illegal privatisations, making the award unenforceable.

A Geneva-seated tribunal chaired by Swiss arbitrator Gabrielle Kaufmann-Kohler and administered by the Permanent Court of Arbitration (PCA) issued the awards in April under the Ukraine-Russia bilateral investment treaty after finding that the state had unlawfully expropriated the claimants’ petrol stations and related assets in Crimea following its occupation of the peninsula in 2014.

Ukrnafta is majority owned by Ukraine’s national gas company Naftogaz, with a minority stake held indirectly by Ukrainian-Cypriot-Israeli businessman Igor Kolomoisky – who also owns interests in the Stabil claimants.

The tribunal, which included Daniel Price of the US and Brigitte Stern of France as co-arbitrators, already upheld its jurisdiction over the cases in 2017, concluding that Russia had assumed responsibility under the BIT to protect Ukrainian investments made prior to the annexation. This was notwithstanding the fact that the claimants were domestic investors at the time the investments were made and would not have qualified for treaty protection at that time.

The Swiss court last year rejected Russia’s application to set aside the jurisdictional decisions, after the judges took the rare step of holding a public deliberation.

Schellenberg Wittmer is representing Russia in the latest set-aside actions, the same firm having advised in the challenge to the jurisdictional decisions.

Ukrnafta and the Stabil claimants are once again using Lalive in the Swiss courts, having relied on Hughes Hubbard & Reed in the arbitration.

A change of strategy

In a break with its policy of the past four years, Russia has also recently announced it will take part in international arbitrations brought by Ukrainian parties even where it does not recognise the tribunal’s jurisdiction.

According to Russian newspaper Vedemosti, the country’s minister of justice Alexander Konovalov announced the change on 17 May, suggesting Ukraine was involved in a full-scale legal war against Russia that required a tougher approach in the early stages of a dispute.

Since the first BIT claims relating to Crimea were launched in 2015, Russia has chosen not to participate in such arbitrations. The state wrote to the PCA in that year to say it did not recognise the jurisdiction of the tribunals to hear such disputes under the BIT. Despite being invited to do so, it has not attended hearings in those arbitrations.    

That policy has not prevented tribunals from issuing adverse awards against Russia. Notably, Ukrainian state-owned bank Oschadbank was awarded US$1.1 billion last November in a BIT claim concerning the seizure of its Crimean banking operations. Everest Estate and other claimants linked to Kolomoisky also won a US$159 million award last year over the loss of Crimean real estate holdings.  

Other cases have also cleared the liability stage without Russia’s participation – including a billion-dollar claim by Privatbank (formerly co-owned by Kolomoisky but now under Ukrainian state control) and a claim by Aeroport Belbek and Kolomoisky himself relating to an airport terminal. Both cases are being heard by the same tribunal chaired by France’s Pierre-Marie Dupuy.

Konovalov’s comments are not the first indication that Russia was considering a change of approach. The CEO of Ukraine’s largest energy company, DTEK – which is pursuing its own BIT claim against Russia over seized assets in Crimea – told reporters in April that Russia had decided to take part in the proceeding.

GAR understands that Russia has also recently written to the Privatbank tribunal expressing its intention to participate in the proceedings, though it has not yet identified external counsel.

Firms that have represented Russia in recent investor-state cases include White & Case and Debevoise & Plimpton.

Privatbank has recently changed its counsel for the quantum phase of its case – replacing Hughes Hubbard with a team from Quinn Emanuel Urquhart & Sullivan in London and Geneva. Quinn was the firm that helped Oschadbank secure its US$1.1 billion award.

Hughes Hubbard continues to represent Aeroport Belbek and Kolomoisky in the quantum phase of their case, which is now proceeding on a different track before the same tribunal.

It is unclear whether Russia’s change of approach extends to state-to-state arbitrations with Ukraine. Russia recently declined to attend hearings before the International Tribunal for the Law of the Sea (ITLOS) in Hamburg, which last month ordered the immediate release of three Ukrainian vessels and 24 servicemen detained last year by Russian authorities in waters adjacent to Crimea.

ITLOS granted the measures in support of an arbitration Ukraine is pursuing under the United Nations Convention on the Law of the Sea. Russia wrote to ITLOS to say it had decided not to participate in the provisional measures hearing without prejudice to the question of its participation in the subsequent arbitration – citing the “obvious lack of jurisdiction” of an arbitral tribunal over the matter.  

Russia is, however, participating in a separate UNCLOS arbitration initiated by Ukraine concerning coastal rights in the Black Sea, the Sea of Azov and the Kerch Strait that links the two. That case is scheduled to hold a hearing on Russia’s preliminary objections next week at the Peace Palace, home of the PCA, in The Hague. Russia is using a team including Alain Pellet, Samuel Wordsworth QC and lawyers from Curtis Mallet-Prevost Colt & Mosle in Milan in those proceedings.  

The International Court of Justice has also been holding hearings this week on Russia’s preliminary objections to a claim brought by Ukraine. That case concerns Russia’s alleged breach of international conventions on terrorism financing and racial discrimination through its actions in eastern Ukraine.  

Russia is represented before the ICJ by a team including Pellet, Wordsworth and Andreas Zimmerman of the University of Potsdam, Sean Aughey of 11KBW, Michael Swainston QC of Brick Court Chambers and lawyers from Russian law firms Ivanyan & Partners and Double Bridge Law.   

Covington & Burling – which represents Ukraine in the two UNCLOS proceedings – is also acting for it before the ICJ, along with former US State Department head Harold Koh and Paris-based academic Jean Marc Thouvenin.

Ukrnafta v Russia

Stabil et al v Russia

Before the Swiss Federal Tribunal

Counsel to Russia

Schellenberg Wittmer

Counsel to Ukrnafta and the Stabil claimants

Lalive

In the challenge to the jurisdictional decisions

Swiss Federal Tribunal Bench

  • Christina Kiss (Presiding Justice)
  • Kathrin Klett (dissented)
  • Martha Niquille
  • Marie-Chantal May Canellas
  • Fabienne Hohl

Counsel to Russia

  • Schellenberg Wittmer

Partners Elliott Geisinger in Geneva and Christopher Boog in Zurich and Singapore; senior associate Anna Kozmenko and associate Annabelle Möckesch in Zurich

Counsel to Ukrnafta/Stabil

  • Lalive

Partners Michael Schneider in Geneva and Marc Veit in London and associates Dominik Elmiger in Zurich and Laura Halonen and Clàudia Baró Huelmo in Geneva

 

In the UNCITRAL arbitrations

PJSC Ukrnafta (Ukraine) v The Russian Federation (PCA case no. 2015-34)

Stabil LLC et al (Ukraine) v The Russian Federation (PCA case no. 2015-35)

Tribunal

  • Gabrielle Kaufmann-Kohler (Switzerland) (President)
  • Daniel Price (US) (appointed by claimants)
  • Brigitte Stern (France) (appointed by appointing authority Michael Hwang SC)

Counsel to the claimants

  • Hughes Hubbard & Reed

Partners John Townsend and James Boykin, counsel Vitaly Morozov and associates Alexander Bedrosyan and Eleanor Erney in Washington, DC; and counsel Leon Ioannou in Paris

Counsel to Russia

Russia did not participate in the proceedings

Counsel to Ukraine (non-disputing party)

  • Covington & Burling

Partners Marney Cheek and Jonathan Gimblett in Washington, DC

Expert witness for the claimants

  • Peter Maggs of the University of Illinois (on Russian law)
  • Brent Kaczmarek of IAV Advisors

Tribunal-appointed quantum expert

  • Thierry Sénéchal, Finance for Impact

 

 

Aeroport Belbek and Igor Valerievich Kolomoisky v Russian Federation (PCA case no. 2015-07)

PJSC CB PrivatBank and Finance Company Finilon v Russian Federation  (PCA case no. 2015-21)

Tribunal

  • Pierre-Marie Dupuy (France) (President)
  • Daniel Bethlehem QC (UK) (appointed by claimants)
  • Vaclav Mikulka (Czech Republic) (appointed by appointing authority Bruno Simma, in the Belbek case, and Michael Hwang SC in the Privatbank case)

Counsel to Privatbank

  • Quinn Emanuel Urquhart & Sullivan (damages phase only)

Partners Alex Gerbi and Epaminontas E Triantafilou in London and Philippe Pinsolle in Paris; and associates Anna Tkachova, Hafsa Zayyan and Neza Hren in London and Marc Reifsnyder in London

  • Hughes Hubbard & Reed (jurisdiction and liability phase only)

Partners John Townsend, James Boykin and counsel Vitaly Morozov and associate Eleanor Erney in Washington DC; counsel Leon Ioannou in Paris

  • Kaj Hobér of 3 Verulam Buildings in London (until mid-2018)

Counsel to Aeroport Belbek and Kolomoisky

  • Hughes Hubbard & Reed

Partners John Townsend, James Boykin and counsel Vitaly Morozov and associate Eleanor Erney in Washington DC; counsel Leon Ioannou in Paris

  • Kaj Hobér of 3 Verulam Buildings in London (until mid-2018)

Counsel to Russia

Russia did not participate in the jurisdiction and liability phase of either case but has expressed its intention to appear in the damages phase of the Privatbank arbitration. It has yet to do the same in the Aeroport Belbek case.

 

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