DTEK (claimant) - Ukraine’s “largest private power and coal producer”–alleges that Russia expropriated their assets following the 2014 annexation. The case was brought on February 16, 2018 and the tribunal rendered a final decision in favor of the investor on November 1, 2023.
Factual background
As of January 2015, Krymenergo operated the power distribution grid system and distributed electricity on the Crimean Peninsula. It serviced a territory of approximately 27,000 square kilometers, providing electricity to more than 780,000 consumers. Its operations in Crimea were organized into 23 district electric networks and two municipal electric networks. These operations were supported by a number of assets in Crimea, including real property, equipment and movable property, intangible assets.
Between 2006 and 2012, the “DTEK Energy Group”, a group of companies beneficially owned by Mr. Rinat Akhmetov, purchased a total of 57.6% of the capital of Krymenergo.
On 27 February 2014, Russian military forces occupied the building of the State Council of Crimea in Simferopol.
On 16 March 2014, an independence referendum was held, and the next day the State Council of Crimea enactсed a Resolution declaring the Republic of Crimea an independent state[5].
On 18 March 2014, the Russian Federation entered into the Treaty Between the Russian Federation and the Republic of Crimea on the Admission to the Russian Federation of the Republic of Crimea and the Formation of New Constituent Entities Within the Russian Federation [“Annexation Treaty”]. This incorporated Crimea and the Federal City of Sevastopol into the Russian Federation as two new subjects and extended the application of Russian law to the region.
On 21 March 2014, the Russian Federation adopted a Federal Constitutional Law “on the Admission of the Republic of Crimea to the Russian Federation, and the Formation of the New Constituent Entities with the Russian Federation – the Republic of the Crimea and the Federal City of Sevastopol”
The claimant brought the claim arguing that as a result of the Russian Federation’s breaches of the Treaty, DTEK Krymenergo has been completely deprived of its investment without payment of any compensation. DTEK Krymenergo requests that this Tribunal (adjudge, declare, award, accord) :
- the Tribunal has jurisdiction to hear and adjudicate DTEK Krymenergo’s claims against the Russian Federation;
- the Russian Federation has breached Articles 2, 3, and 5 of the BIT;
- DTEK Krymenergo damages in the amount of not less than US$ 421,198,000, plus a gross-up for Ukrainian taxes on the award and pre- and post-award interest compounded at Russia’s sovereign borrowing rate;
- DTEK Krymenergo its costs and legal fees in accordance with Article 40 of the UNCITRAL Rules;
- DTEK Krymenergo such other relief as it deems appropriate”.
The Respondent raised 6 preliminary objections
- the BIT is not applicable to Crimea since there is a territorial dispute between the Russian Federation and Ukraine regarding the status of Crimea (the investment was not made in the territory of the Russian Federation);
- Claimant’s alleged investments were (at least in a substantive portion) made before 1 January 1992 and, as such, they are not protected under Article 12 of the BIT, with the consequence that the Tribunal should “decline jurisdiction in its entirety, or, in the alternative, in part (investment did not meet temporal requirements);
- the plain language of Article 1(1) of the BIT defining investments requires an active cross-border investment at its inception in conformity with the host State’s legislation. The requirements of Article 1(1) (activity, cross-border and legality) must be met cumulatively and concurrently at the inception of the investment ( It is not investment in the sense of the BIT);
- Claimant does not meet the definition of an investor under Article 1(2)(b) of the BIT
Case geography
Key provisions of the BIT
The bilateral investment treaty (BIT) between the Russian Federation and Ukraine, 1998.
The Ukraine-Russia BIT defines “territory” for the purposes of jurisdiction through the two provisions: articles 1(4) and 12. Article 1(4) defines “territory” as the territory of Ukraine or of the Russian Federation, together with their respective exclusive economic zone and continental shelf, as determined in conformity with international law.
Article 12 provides that BIT protection is restricted to those investments made “by the investors of one Contracting Party in the territory of the other Contracting Party. The Ukraine-Russia BIT’s territorial scope of protection is limited to those investments made in the “territory” defined under article 1(4) of the respondent-state.
Others provisions Article 1(1) defines “investments” broadly as all kinds of assets and intellectual values invested by an investor of one Contracting Party in the territory of the other in conformity with its laws.
Article 2(2) guarantees full and unconditional legal protection to investments. Article 3(1) guarantees non-discriminatory and most-favoured-nation treatment. Article 4 guarantees transparency of legislation. Article 5(1) prohibits expropriation, nationalisation or measures tantamount thereto, save where adopted in the public interest, under due process of law, on a non-discriminatory basis and accompanied by prompt, adequate and effective compensation; Article 5(2) prescribes that such compensation correspond to market value immediately before expropriation, plus interest at LIBOR plus 1%. Article 7 guarantees the free transfer of funds. Articles 9 and 12 provide, respectively, for dispute settlement (including by UNCITRAL arbitration) and govern other procedural matters.
Preliminary matters
Bilateral investment treaty remains in full force and effect
Tribunal held that, notwithstanding the existence of an armed conflict between Ukraine and the Russian Federation BIT between Ukraine and the Russian Federation remains in full force and effect: the Treaty has not been declared invalid, it has not been terminated, nor has its operation been suspended
The Position of Respondent’s: the BIT is not applicable to Crimea since there is a territorial dispute between the Russian Federation and Ukraine regarding the status of Crimea.
It denied that the term “territory” as used in the BIT has essentially a geographic meaning encompassing areas over which a State exercises effective control; in Russia’s submission, the term is limited to “sovereign territory”. The Tribunal could only decide that Crimea is Russian territory on the basis that Russia enjoys there all sovereign rights, powers and functions. If Crimea is Russian territory, it is not Ukrainian territory, and the BIT only contemplates that a place lies in the territory of Russia or in the territory of Ukraine. It follows that if Russia has sovereignty, Ukraine does not, and if Russia has sovereign rights, Ukraine does not.
Legal position of the Tribunal on the first jurisdictional objection: The Tribunal, by majority concludes that the proper interpretation of "territory of the Russian Federation" refers to the geographical area which, at the relevant date was under the control of the Russian Federation;
The tribunal held that there is no dispute that Crimea was a territory under the control of the Russian Federation at the moment of dispute. There is a dispute between Ukraine and the Russian Federation regarding which of the two powers held (and still holds) sovereignty over Crimea – but this dispute does not taint the conclusion that, for purposes of the BIT, Crimea forms part of the territory which is entitled to receive protection.
Moreover, the Russian Federation has run afoul of the principle of good faith.
Respondent has publicly and repeatedly declared, including in this arbitration, that its firmly held position is that Crimea forms part of its sovereign territory. At the same time, Respondent denies that Crimea is its sovereign territory for the purposes of the BIT. For a treaty to be performed in good faith, a State has to maintain towards a given factual or legal situation an attitude consistent with its prior public proclamations and statements. Respondent is thus estopped from arguing that the territory it unambiguously declares to be part of its sovereign territory, should not be regarded as protected territory under the BIT, when an investor claims protection for its investments in that very territory.
Respondent alleges that the DTEK Energy Group corruptly acquired its additional 45% stake in (and thus also control over) Krymenergo. Russia submits that international public policy requires the Tribunal to declare that Claimant’s claim is inadmissible because of the illegal acts of Claimant’s controlling shareholders. Alternatively, Respondent says that the Tribunal lacks jurisdiction because the alleged corruption has stained Claimant’s investment, which therefore was not carried out in accordance with the BIT.
Respondent submits that Claimant’s alleged investments were (at least in a substantive portion) made before 1 January 1992 and, as such, they are not protected under Article 12 of the BIT, with the consequence that the Tribunal should “decline jurisdiction in its entirety, or, in the alternative, in part.
When Russia adopted the impugned measures in 2015, Krymenergo owned certain assets in Crimea, for the distribution of electricity within that territory; a significant portion of these assets had been built, constructed or acquired during Soviet times, i.e., before 1 January 1992. Claimant has provided a detailed breakdown as of 2013 (i.e., three years before the alleged impairment) of assets which had come into operation before 1992 [“Soviet Assets”]. 325. Against this factual background.
Russia says that, at least with regard to these Soviet Assets, the Tribunal lacks jurisdiction, because these investments do not meet the requirement under Article 12 of the BIT: the investment was not made (or carried out, in the translation preferred by Respondent) on or after 1 January 1992.
The Tribunal has unanimously concluded that the proper interpretation of Article 12 of the BIT implies that investments, to be protected, must have been “made” or “carried out” by the investor post-1992; and investments are “made” or “carried out” when the investor acquires ownership (or some other ius in rem over such assets). This conclusion has led to the dismissal of Claimant’s primary argument that it made (or carried out) the investment in 2014, when the Russian Federation incorporated Crimea to the territory under its control.
In the Tribunal’s unanimous opinion, to benefit from Treaty protection, Krymenergo must have acquired its Crimean assets, including the Soviet Assets, after 1 January 1992. There is no dispute that Krymenergo meets this test. Claimant says that it acquired ownership over the Soviet Assets (and other Crimean assets) in 1995, while Russia acknowledges that this happened in 2012. In any case, both Parties agree that the acquisition occurred after 1 January 1992; the requirement of Article 12 of the Treaty is thus satisfied.
MERITS
Claimant’s fundamental claim is that Russia unlawfully expropriated Krymenergo’s investments, in breach of Article 5 of the BIT. It submitted that Russia directly expropriated Krymenergo’s investment in Crimea by way of overt administrative and legislative measures that were enforced through local courts and physical force.
Respondent, in turn, submitted that the taking of Claimant’s assets satisfied the requirements for a lawful expropriation under Article 5 of the BIT.
The Tribunal held that DTEK Krymenergo was unlawfully expropriated of its investments by Respondent, in violation of Article 5 of the BIT.
The Tribunal found that Respondent’s taking of Claimant’s assets failed to meet each of the four cumulative requirements set forth in Article 5 of the BIT, as it was:
- Not accompanied by “prompt, adequate and effective compensation”,
- Not taken in the public interest,
- Not taken in accordance with due process,
- Discriminatory.
COSTS
Tribunal determines that Respondent should reimburse Claimant the amounts of USD 1,362,422.88 paid as Administrative Costs and USD 9,401,644.76 incurred as Legal Costs
Legal consequences (dispositif)
Respondent is the unsuccessful party. Indeed, Claimant has prevailed:
- In all its defenses to Respondent’s multiple jurisdictional objections;
- In the merits of the case; and
- In the quantification of damages, although the Tribunal has decided on a lower amount than the one claimed by Claimant
For the foregoing reasons, the Tribunal DECLARED, AWARDED and ORDERED:
Tribunal has jurisdiction to hear and adjudicate JSC DTEK Krymenergo’s claims against the Russian Federation;
Russian Federation has breached Articles 2, 3, and 5 of the BIT;
by majority the Russian Federation to pay to JSC DTEK Krymenergo damages in the amount of USD 207,800,000, plus interest over this amount at LIBOR rate applicable to three-month deposits denominated in USD (or the equivalent SOFR rate), plus a margin of 1%, compounded annually, from 22 January 2015 until the date of payment;
the Russian Federation to reimburse JSC DTEK Krymenergo in the amount of USD 1,362,422.88 paid as Administrative Costs and USD 9,401,644.76 incurred as Legal Costs; and