Katariina Kuum: How to rebuild Ukraine with Russia’s billions

In an opinion piece published in Äripäev, our associate Katariina Kuum wrote about decisions made in arbitration proceedings between Ukrainian companies and Russia and how an additional legal framework could help Ukrainian companies recover the huge damages awarded in international arbitration.

While we have heard about sanctions against Russia as well as the freezing of oligarchs’ assets for several years now, one important lever that has proven effective notably during the last year has remained in the background. Indeed, Ukrainian companies that have incurred losses due to the war can bring claims against Russia before international arbitration tribunals if Russia’s aggression has damaged investments made by Ukrainian companies.

International arbitration tribunals have made record-breaking and precedent-setting rulings over the past year, requiring Russia to pay colossal damages to Ukrainian companies, with awards amounting to millions or even billions of US dollars. These decisions have been based on the bilateral investment treaty (BIT) between Russia and Ukraine. According to the United Nations Conference on Trade and Development (UNCTAD), more than 2,000 such treaties are currently in force between different countries.

Arbitration rulings show the way

By now, Ukrainian investors have successfully litigated a number of such investment arbitration disputes against Russia. As an example, the long-awaited conclusion of arbitration case of JSC DTEK Krymenergo v. Russian Federation was reached on 1 November 2023 as an international tribunal in The Hague ordered Russia to pay almost 270 million US dollars in damages. Russia must pay the award to the Ukrainian energy company JSC DTEK Krymenergo, which was the main operator of the Crimean Peninsula’s electricity grid until 2015, when the Russian authorities, having annexed Crimea, expropriated the company’s business and assets without compensation.

Just a few months earlier, on 12 April 2023, another tribunal in The Hague ordered Russia to pay more than 5 billion US dollars in compensation in the case of Naftogaz and others v. Russian Federation. On this occasion, compensation was awarded to Ukrainian state-owned Naftogaz and five other fuel and gas companies which also operated in Crimea and had their assets and property rights seized by the Russian authorities following the annexation of Crimea.

Although these and other other previous arbitral awards have been rendered in disputes focusing on the 2014 annexation of the Crimean Peninsula, they certainly pave the way to many future disputes related to Russia’s subsequent military action in Ukraine.

What to do if the losing party fails to comply?

In most cases, the countries losing in investment arbitrage voluntarily comply with the financial obligations set out in the decision so as to avoid a diplomatic crisis, the accrual of interest and further disputes. Russia, however, has so far refused to comply with the arbitration rulings.

Fortunately, the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, to which Estonia and some 170 other countries are parties, renders BIT-based arbitral awards enforceable almost everywhere in the world. Thus, the party who is the beneficiary of an award can request the courts of the Contracting States to the Convention to recognise the arbitral award and declare it enforceable. If a court grants the request, the award can be enforced like any other judgment, i.e. against the debtor’s assets in the country that declared the award enforceable. In the abovementioned Naftogaz case, for example, the arbitration award has already been declared enforceable in the United Kingdom and proceedings have been initiated in the United States as well.

This means that Ukrainian companies that have succeeded in arbitration might seek out Russian assets in Estonia and enforce the award there. Estonia has already developed a law on the confiscation of assets of internationally sanctioned persons, which could open another way for enforcing arbitral awards against Russia after the necessary legal framework is established.

In any case, such legislative developments are encouraging and give hope that it will be possible the enforce rulings against an aggressor state, if not at the expense of the state’s own assets, then at the expense of the assets of persons supporting its ruling elite.