By: Cecilia Li; Junior Staffer

In June 2015, Everest Estate LLC and several other Ukrainian companies (“Claimants”) commenced United Nations Commission on International Trade Law (“UNCITRAL”) arbitration proceedings with the Permanent Court of Arbitration (“PCA”) in The Hague against Russia pursuant to the 1998 Ukraine-Russia bilateral investment treaty (“Ukraine-Russia BIT”). The Claimants contended that Russia, during its 2014 invasion of Crimea, breached its obligations under the Ukraine-Russia BIT by interfering with and expropriating its investments in real estate located in Crimea without providing proper compensation to the Claimants.

In response, Russia contended in two letters that the Ukraine-Russia BIT cannot be a basis for creating an arbitral tribunal to settle the Claimants’ claims, as Russia does not recognize the jurisdiction of an international arbitral tribunal at the PCA in this case. Nonetheless, on March 20, 2017, the PCA ruled that it had jurisdiction over the matter. Russia did not participate in the arbitration. On May 2, 2018, the PCA upheld the Claimants’ claims and issued its unanimous Award on the Merits, which is the final, binding decision of the tribunal following the proceedings. The PCA awarded a total of $159 million to the Claimants. Russia filed applications to suspend enforcement of the final award, and in July 2022, the Court of Appeals of The Hague rejected Russia’s request, thus reinforcing the award.

Despite Russia opting for international arbitration as a dispute resolution method in the Ukraine-Russia BIT, Russia today looks to protect its companies subject to international arbitration proceedings by limiting jurisdiction over such matters to its courts. In 2020, the Russian Duma adopted legislation titled “On Introducing Changes to the Arbitration Procedure Code of the Russian Federation” (Law No: 171-FZ). The law established the exclusive competence of arbitration courts in Russia for cases: 1) “in disputes with the participation of persons in respect of which restrictive measures are applied by a foreign state [or foreign state entities];” and 2) “on disputes of one Russian or foreign person with another Russian or foreign person, if the basis for such disputes is restrictive measures introduced by a foreign state [or foreign state entities].”

The law runs counter to the 1958 New York Arbitration Convention, to which Russia has been a party since 1960, and established a mechanism to enforce international arbitration awards. The law essentially makes arbitration clauses in corporate contracts between Russian and foreign companies unenforceable. Russia’s judicial system and the Kremlin have close ties, and the Kremlin is able to pursue its political goals through the courts with little restraint. Accordingly, it appears unlikely for Russian courts to uphold claims by foreign companies against domestic companies, even if the claims have merit, making accountability for Russian companies through dispute resolution difficult. A 2021 Russian Supreme Court ruling upheld the constitutionality of the law, supporting Russia’s argument that it needs this shielding legislation because international arbitration courts cannot give Russian companies a fair hearing due to Western sanctions against Russia since the 2014 invasion of Crimea.

The remaining questions are: will the Claimants ever collect their full award, and if not, what are Russia’s potential consequences for refusing to honor the award? Historically, Russia is known to have refused to comply with adverse arbitral awards. Even so, the 2020 law cannot provide complete protection for Russian companies with global assets because tribunals can enforce arbitration awards in any jurisdiction where Russia has assets through judicial proceedings. When diplomatic pressure and lobbying efforts are unsuccessful, investors or award creditors can initiate these proceedings to engage in the help of the courts where Russia has assets to secure payment of the award.

In this case, there is limited public source information confirming whether Russia has paid the full award. However, as of September 2022, PCA award creditors successfully sought to enforce the award through the shares of PJSC “Prominvestbank” (“the Bank”), which was owned by the State Development Corporation “VEB RF” (“the Applicant”), which was in turn wholly owned by Russia. Ukrainian bailiffs issued a public sale of the Applicant’s shares in the Bank to contribute to the PCA award. The Applicant challenged the results of the sale, but the Supreme Court of Ukraine held that state-owned companies, under certain conditions, can be considered state bodies that the award creditors may hold liable for the actions and debts of the state. As a result, the Applicant’s property may be used to collect Russia’s debts, namely the arbitral award owed to the Claimants.

Further, in today’s highly interdependent global economy, there are strong consequences for noncompliance with international law. For example, sanctions by the United States and its partners and allies, in response to Russia’s 2022 invasion of Ukraine, immobilized about $300 billion worth of Russian Central Bank assets, which ultimately limits Russia’s ability to aid the war effort and mitigate the impact from sanctions. In addition, sanctions have forced Russian oligarchs and financial institutions to divest from long-held assets outside of Russia, global companies have had to withdraw business from Russia, and banks have had to curtail ties with the Russian financial sector. These constraints on Russia’s economy will hinder Russia’s growth prospects for years to come.

“In addition, sanctions have forced Russian oligarchs and financial institutions to divest from long-held assets outside of Russia, global companies have had to withdraw business from Russia, and banks have had to curtail ties with the Russian financial sector. These constraints on Russia’s economy will hinder Russia’s growth prospects for years to come.”

Cecilia Li

A primary consequence of refusing to honor an arbitral award is exacerbating an already struggling economy. While Russia continues its war in Ukraine, and therefore maintains an economy isolated from the West, Russia may have little incentive to honor such awards, as these Russian companies have limited opportunity to store assets in places that do not recognize the shielding law. Furthermore, there will be limited consequences for Russia’s international trade reputation with the West, as the 2022 invasion has already left relations at a record low point. However, when the current war ends and Russia inevitably reconnects its economy with that of the West, it will likely look to reinstate its companies’ global assets and collect arbitral awards owed to them. Reengagement with the broader international community may better motivate Russia to comply with the enforcement of arbitral awards. Until then, it is unlikely that the Claimants will collect their full award.