On 26 November 2018, the Arbitral Tribunal constituted under the UNCITRAL Arbitration Rules, 1976 (the “UNCITRAL Rules”), pursuant to the Agreement between the Government of the Russian Federation and the Cabinet of Ministers of Ukraine on the Encouragement and Mutual Protection of Investments dated 27 November 1998 (the “Treaty”), rendered its Award (“the Award”) in the arbitration brought by Public Joint Stock Company “State Savings Bank of Ukraine” (also known as JSC Oschadbank, “the Claimant”) against the Russian Federation (“the Respondent”).
The arbitration concerns the Claimant’s allegation that the Respondent violated its obligations under Articles 2, 3, 4, 5 and 7 of the Treaty in respect of the Claimant’s investments in a banking business in the Crimean Peninsula, which the Claimant lost as a result of measures taken by the Respondent following the Crimean events of February-March 2014. The Respondent did not participate in the proceedings beyond limited correspondence challenging jurisdiction, and the Award was rendered on a non-appearance basis pursuant to Article 28 of the UNCITRAL Rules.
Procedural background
By letter dated 8 July 2015 and served on the Respondent on 10 July 2015, the Claimant notified the Respondent pursuant to Article 9(1) of the Treaty of the existence of a dispute between the Parties.
By letter dated 24 December 2015, the Respondent replied that, in its view, the Treaty cannot apply to the facts set out in the Claimant’s letter of 8 July 2015.
On 20 January 2016, the Claimant commenced these arbitration proceedings by serving a Notice of Arbitration dated 18 January 2016 on the Respondent pursuant to Article 9(2)(c) of the Treaty and the UNCITRAL Rules.
On 23 June 2016, the PCA received from H.E. Mr. Alexander Shulgin, Ambassador of the Respondent to the Kingdom of the Netherlands, a letter dated 21 June 2016, enclosing another letter dated 13 May 2016, in which Respondent rejected the jurisdiction of the Tribunal.
By e-mail dated 18 July 2016, the Claimant submitted that the Tribunal should not hear on a preliminary basis the issues raised in the Respondent’s correspondence, given that these issues: (i) did not constitute a properly lodged jurisdictional objection that would trigger the application of Article 21(4) of the UNCITRAL Rules; and (ii) bifurcation would not promote efficiency in these proceedings, given that the Claimant had already undertaken most of the work required for the preparation of its case.
On 26 July 2016, the Tribunal held a first procedural teleconference, in which the Parties were invited to participate.
Subsequent to the procedural teleconference, on 19 August 2016, the Tribunal issued its Procedural Order No. 1.
On 26 August 2016, the Claimant submitted its Statement of Claim.
- (i) a Note Verbale from the Embassy to the PCA;
- (ii) a letter from the Ministry of Foreign Affairs of Ukraine to the Tribunal, requesting the Tribunal’s permission to make a non-disputing party submission in these proceedings;
- (iii) a copy of the proposed submission (the “Submission of Ukraine”).
By letter from the PCA dated 22 December 2016, the Tribunal admitted the Submission of Ukraine into the record of these proceedings.
On 27 February 2017, the Tribunal issued its Procedural Order No. 2, confirming that the hearing in this matter would be held at the ICC Hearing Center in Paris.
A hearing on jurisdiction and merits was held from 27 to 29 March 2017 in Paris, France.
On 11 April 2017, the Claimant submitted its proposed corrections to the transcript of the hearing and filed a post-hearing submission on the Wikipedia entry “Activ Solar” (the “Post-Hearing Submission”).
On 5 May 2017, the Claimant filed its submission on costs (the “Submission on Costs”).
Factual background
The Crimean Events of February-March 2014, established by the Arbitral Tribunal
The Tribunal found that, starting from the last week of February 2014, Russian military forces were present in the Crimean Peninsula. On 27 February 2014, an unidentified group was reported to have seized and raised a Russian flag over the building of the Crimean parliament in Simferopol. On the same day, the Crimean parliament held an emergency session in which it elected the leader of the pro-Russian Crimean parliamentary party, Mr. Sergei Aksyonov, as the new regional Prime Minister, and decided to hold a referendum on the status of Crimea. On 1 March 2014, the Federation Council of the Russian Federation authorised the use of Russian armed forces on the territory of Ukraine. On 6 March 2014, the Crimean parliament resolved to join the Russian Federation and scheduled a referendum for 16 March 2014, which was reported to have produced a vote of approximately 96% in favour of joining Russia. On 17 March 2014, the Crimean parliament declared Crimea an independent State and applied for accession to the Russian Federation. On 18 March 2014, the authorities of the Republic of Crimea and the city of Sevastopol signed the Accession Treaty with the Russian Federation; the Russian Constitutional Court found the Accession Treaty constitutional on 19 March 2014; and on 21 March 2014 the Russian Parliament adopted, and the President signed, the federal laws ratifying the Accession Treaty and admitting Crimea and Sevastopol as new constituent entities of the Russian Federation (together, “the Accession”), with a Transitional Period running until 1 January 2015 for the integration of Crimea into the Russian economic, financial, credit and legal system.
The Claimant and its Business in the Crimean Peninsula
Oschadbank is a Ukrainian public joint stock company wholly owned by the State of Ukraine. Prior to the Accession, it operated in the Crimean Peninsula through a branch headquartered in Simferopol with a network of 294 outlets (“the Crimean Branch”), which under Ukrainian law was not a separate legal entity but held the property of Oschadbank. At the end of 2013, the Crimean Branch held the second-largest market share for retail deposits (16.5%) and the largest market share for lending (45%) in Crimea, including 16 loan facilities totalling over USD 500 million to the ActivSolar Group for the development of solar power plants. The Tribunal finds that, prior to the Accession, Oschadbank conducted regular banking activities, operated normally, and there is no evidence that it faced any problems that would prompt the intervention of banking or other financial authorities through their supervisory powers.
Loss of Control over the Crimean Business
The Tribunal found that the Claimant lost control over its Crimean business as a consequence of the Respondent’s actions, which were part of a “deliberate campaign to replace the Ukrainian banks in Crimea with Russian banks”, in the following sequence.
Regulatory framework for Ukrainian banks introduced by the Respondent in the Crimean Peninsula
Pursuant to the Accession Law, Ukrainian banks licensed by the National Bank of Ukraine (“NBU”) as of 16 March 2014 were permitted to continue operating in Crimea during the Transitional Period, subject to obtaining licences from the Central Bank of the Russian Federation (“Bank of Russia”). On 2 April 2014, the Respondent enacted Federal Law No. 37 (the “Crimean Financial System Law”), requiring Ukrainian banks to provide services in rubles, submit a register of obligations to creditors and depositors to the Bank of Russia within 15 days, and provide financial and ownership information, on pain of the Bank of Russia terminating the bank’s operations. The same day, the Respondent enacted Federal Law No. 39 (the “Depositor Protection Law”), creating the Depositor Protection Fund (“DPF”), empowered to compensate individual depositors of Ukrainian banks whose Crimean operations were terminated, to acquire by subrogation the rights of those depositors, and to administer the assets of the terminated banks.
Practical difficulties encountered by the Crimean Branch (March 2014)
As of March 2014, the Crimean Branch faced mass cash withdrawals by depositors and an inability to transport excess cash out of Crimea owing to the closed border.
Measures taken against employees and assets (April-May 2014)
The Claimant’s CEO was placed on a list of persons whose presence in Crimea was “undesirable”; the Head of the Crimean Branch was threatened with criminal prosecution if assets were moved to mainland Ukraine; Russian state security agents sought access to the Crimean Branch’s information systems; 85 of the Claimant’s lease agreements for banking outlets were prematurely terminated on the stated ground of integrating the Crimean banking system into that of the Russian Federation, with over 80 outlets subsequently occupied by the Russian National Commercial Bank (“RNCB”); and on 16 and 21 May 2014, representatives of the Crimean authorities and the so-called Crimean Self-Defense Forces seized over UAH 32 million in cash and valuables (including gold, jewellery and precious stones) worth more than RUB 605 million from the Crimean Branch’s head office in Simferopol. The Simferopol courts later convicted one perpetrator (the Adviser to the Prime Minister of the Republic of Crimea as of the date of these events) of fraud in relation to these seizures. At the same time, the Claimant noted that the seized money and valuables were never returned to Oschadbank and that the convicted individuals “served no time”, being “released on conditional sentences”.
Steps taken by the Claimant to protect its Crimean assets (April-May 2014)
The Claimant performed inventories of its Crimean assets and liabilities and adopted regulations restricting Crimean Branch operations, but most attempts to transfer cash, valuables and customer information to mainland Ukraine failed owing to fortified checkpoints and threats from the so-called Crimean Self-Defense Forces.
Closure of the Crimean Branch and decisions of the NBU and the Bank of Russia prohibiting the Claimant’s Crimean activities (May–June 2014)
On 6 May 2014, the NBU issued Resolution No. 260, which prohibited Ukrainian banks from conducting banking activities in the Crimean Peninsula as of 6 June 2014, citing its inability to regulate banking activity following the occupation. On 19 May 2014, the Claimant notified the NBU of the de facto termination of its Crimean operations as of 26 May 2014. On 26 May 2014, the Bank of Russia issued a decision prohibiting the Crimean Branch’s banking activities for “non-fulfillment of obligations towards creditors (depositors)” and appointed a plenipotentiary representative to the Branch. The Crimean Branch was struck from the Ukrainian State Register of Banks on 27 May 2014 and from the Unified State Register of Legal Entities on 11 June 2014.
Administration of the Claimant’s assets by the DPF (from end May 2014).
On 29 May 2014, the Crimean Prosecutor’s Office obtained an order from the Simferopol court appointing the DPF as administrator of all of the Claimant’s Crimean assets. The DPF began compensating the Claimant’s depositors the same day, engaging RNCB as its processing agent. According to the DPF’s own reporting, by the end of 2014 it had compensated 53,399 depositors in the aggregate amount of approximately RUB 4.6 billion, and by 31 December 2015 it claimed a debt of approximately RUB 4.7 billion against the Claimant, while continuing to administer thousands of the Claimant’s loans, 73 real estate properties, and substantial movable property and valuables. The DPF also initiated proceedings against 12 ActivSolar Group companies under the Claimant’s loan agreements and filed 634 lawsuits on behalf of creditors holding powers of attorney.
Case geography
Legal issues
Non-Participation of the Respondent
The Respondent did not appear in the proceedings. Aside from a letter of 24 December 2015 proposing an out-of-court settlement and a letter of 13 May 2016 (transmitted under cover of the Russian Ambassador to the Netherlands) disputing jurisdiction without reservation of rights to participate, the Respondent took no further part. The Tribunal proceeded under Article 28(2) and (3) of the UNCITRAL Rules, which permit an arbitral tribunal to proceed with the arbitration and to render an award on the evidence before it where a duly notified party fails to appear or to produce evidence without sufficient cause.
Key Provisions of the Treaty
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 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 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.
The Claimant’s Position
Jurisdiction
UpheldThe Claimant submitted that the Tribunal has jurisdiction over its claims. Specifically, the Claimant submitted that: (a) the Treaty applies to the Claimant’s investments in the Crimean Peninsula; (b) the Claimant is a qualifying investor that held protected investments in the Crimean Peninsula; and (c) the Tribunal has temporal jurisdiction over the entirety of the Respondent’s conduct that affected the Claimant’s investments.
Attribution
UpheldInvoking the customary rules of attribution codified in the International Law Commission’s Draft ILC Articles, the Claimant submitted that the Respondent was responsible for the acts and omissions of the following persons and entities: (i) the Russian military; (ii) the Russian Parliament; (ii) the Bank of Russia; (iii) the DPF; (iv) the Crimean authorities, including the Crimean state officials, the Crimean courts, the Crimean Parliament and Sevastopol’s Assembly; and (v) the Crimean Self-Defense Forces.
Liability under the Treaty
Violation establishedThe Claimant submitted that the Respondent breached several provisions of the Treaty, including (a) Article 2(2) guaranteeing unconditional legal protection; (b) Article 3(1) guaranteeing non- discriminatory treatment; (c) Article 3(1) guaranteeing most favored nation treatment; (d) Article 4 ensuring transparency and accessibility of legislation; (e) Article 5(1) preventing unlawful expropriation; (f) Article 7 ensuring free transferability of funds; and (g) protection against denial of justice.
Damages
UpheldThe Claimant submitted that, in view of the Respondent’s violations of the Treaty, it was entitled to restitutio in integrum in the form of monetary compensation, as it is impossible strictly to restore the status quo ante. First, the Claimant claims compensation for lost assets comprising corporate and private loans, real property including buildings and ATMs, cash, and other valuables such as gold deposits and securities. Second, the Claimant claimed compensation for the loss of the Crimean Branch as a going concern, calculating a capitalized value of the Crimean Branch’s future income streams using a Discounted Cash Flow (“DCF”) model. Third, the Claimant claimed compensation for other losses not reflected in its records, but nevertheless “connected to the Russian Federation’s unlawful conduct.”
Costs
UpheldRelying on Article 40(1) of the UNCITRAL Rules, the Claimant submitted that the Respondent should bear the costs of this arbitration if the Claimant prevails on the merits.
The non-disputing party submission of Ukraine
Ukraine stated that the Crimean Peninsula continues to form “an inseparable part” of Ukraine. Consequently, “any treaty right or obligation pertaining to [Ukraine’s] sovereignty” over the Crimean Peninsula remains in effect. At the same time, Ukraine acknowledges that, as a matter of practical reality, the Respondent today exercises jurisdiction and effective control over the Crimean Peninsula. On this basis, Ukraine submitted that the Respondent “has by its conduct assumed international obligations in its administration of [the Crimean Peninsula] particularly with respect to treaties benefiting individual rights or other innocent third parties”, including the Treaty invoked in these proceedings.
According to Ukraine, the Treaty creates obligations for the Respondent in the territory of the Crimean Peninsula, since (i) under international law the term “territory” encompasses areas under a State’s effective control and (ii) the good faith interpretation of the Treaty itself in its context, in view of its object and purpose, supports this view.
Legal position of the Tribunal on jurisdiction
The Meaning of “Territory”
The Tribunal observed that, since the Treaty’s entry into force on 27 January 2000, the Crimean Peninsula has at all times fallen within the territory of one of the two Contracting Parties, and that the question for the Tribunal was which Party owed Treaty obligations to foreign investors there from February/March 2014 onward - a question the Tribunal expressly distinguished from the question of de jure sovereignty over Crimea, on which it found it unnecessary to comment…
Applying Articles 31 and 29 of the Vienna Convention on the Law of Treaties (“VCLT”), the Tribunal construed “territory” in its ordinary meaning, in context, and in light of the Treaty’s object and purpose, noting that throughout the Treaty the term is used in conjunction with a Contracting Party’s legislative and administrative control (e.g., the obligations in Articles 2, 4 and 7 to admit investments “subject to its laws” and to guarantee protection “in conformity with its laws”). The Tribunal found that the Treaty applies to each Contracting Party’s entire territory under Article 29 VCLT, and that the Crimean Peninsula fell within the Respondent’s territory for Treaty purposes, given that the Respondent had “taken all steps under its own law to annex” Crimea - including the Crimean parliament’s declaration of independence, the referendum, the Accession Treaty, the Constitutional Court’s decision and the Accession Law - and maintained, against the international community, a sovereign claim coupled with effective control. The Tribunal accordingly held that it was the Respondent, and not Ukraine, that owed Treaty obligations to Ukrainian investors in Crimea from the date of the Accession. The Tribunal found it unnecessary to decide the Claimant’s alternative arguments on the broader public international law meaning of “territory” or on estoppel.
The Meaning of “Investment”
In its sole substantive communication, the Respondent contended that the Claimant’s assets did not constitute “investments” under Article 1(1) of the Treaty, since they were not invested in the territory of the Russian Federation, and, even if they occurred, they were made before accession of the Republic of Crimea and the city of Sevastopol to the Russian Federation and not in conformity with the legislation of the Russian Federation. These assets have not been earlier subject to taxation under the legislation of the Russian Federation and have not contributed to the development of the economy of the Russian Federation.
The Tribunal found that the establishment of a Ukrainian bank branch in Crimea satisfied the broad definition of “investments” in Article 1(1), comprising both tangible assets (including leasehold rights) and intangible rights and economic interests arising from loans, deposits and other banking instruments.
The Tribunal rejected each of the Respondent’s objections in turn: (i) there is no temporal requirement in the Treaty text limiting investments to those made after Russian obligations became effective in Crimea; (ii) the Claimant’s operations conformed with the Respondent’s own legislation, which expressly permitted Ukrainian banks licensed as of 16 March 2014 to continue operating until 1 January 2015; (iii) non-payment of Russian taxes did not preclude jurisdiction, since under the Respondent’s own legislation no Russian taxes were payable in Crimea before 1 January 2015 and the investment was terminated before any tax could fall due; and (iv) the limited economic benefit the Respondent derived from the investment was itself a product of the Respondent’s Treaty breaches, and the Tribunal was satisfied that, absent those breaches, the Respondent would have received a pronounced economic benefit from the Crimean Branch, one of the Claimant’s most successful branches.
The Meaning of “Investor”
Having found a qualifying investment and that the Treaty applied to Crimea at the relevant time, the Tribunal found no credible objection to the Claimant’s status as a duly incorporated Ukrainian legal entity competent to invest abroad, and accordingly that the Claimant was an “investor” within the meaning of the Treaty.
The Tribunal concluded that it had jurisdiction to determine the dispute.
Attribution
In the absence of express Treaty wording on attribution, the Tribunal applied customary international law as codified in the International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts (“ILC Articles”), addressing Article 4 (State organs), Article 5 (entities exercising delegated governmental authority) and Article 8 (conduct directed or controlled by the State). On this basis, the Tribunal found:
The Respondent’s military and Parliament are State organs under Article 4 of the ILC Articles, and their conduct is attributable to the Respondent;
The Bank of Russia is structurally an organ of the Respondent under Article 4, on the basis of its characteristics and functions, consistent with the approach taken in Invesmart, B.V. v. Czech Republic;
The DPF’s conduct is attributable to the Respondent under Article 8, the DPF having been formed to implement the Depositor Protection Law and the Crimean Financial System Law under the direction and control of the Respondent’s Government, and having played a key role in facilitating the Respondent’s control over the Crimean banking system;
The Crimean authorities (State officials, courts, parliament and the Sevastopol Assembly) effectively became organs of the Respondent under Article 4 from 18 March 2014, given the combined effect of the Accession Treaty and the Accession Law; and
The Crimean Self-Defense Forces were under the instruction, direction or control of the Crimean authorities at all material times after 11 March 2014, and their conduct is therefore attributable to the Respondent under Article 8, rendering it unnecessary to consider the Claimant’s alternative argument based on a failure to prevent.
Decision on liability: expropriation
Whether an Expropriation Occurred
- a taking by a government-type authority of an investment, which may be tangible or intangible;
- resulting in a substantially complete and permanent deprivation of the economic use and enjoyment of the investment;
- that the effects of the State’s measures, rather than the underlying intent, are dispositive;
- that the taking may be de jure or de facto, direct or indirect, and may consist of a single measure or a series of measures over time (“creeping expropriation”);
- that the investor’s reasonable investment-backed expectations may be relevant.
The Tribunal recalled that, under Article 15(1) of the ILC Articles, a composite breach occurs once the cumulative effect of a series of actions or omissions is sufficient to constitute the wrongful act, and that it could therefore assess the Respondent’s conduct cumulatively.
Applying these principles, the Tribunal found that the Crimean Financial System Law and the Depositor Protection Law together formed the platform that permitted the Bank of Russia to terminate the Claimant’s Crimean activities. It found that the conditions these laws imposed - servicing customers in rubles, disclosing depositor and creditor registers in breach of Ukrainian banking-secrecy law, and meeting onerous and unrealistic deadlines - were “unduly onerous” and could not realistically be complied with, irrespective of the Respondent’s underlying regulatory intent. The Tribunal found that the Bank of Russia’s 26 May 2014 termination decision triggered, in turn, the Simferopol court’s appointment of the DPF as administrator of the Claimant’s assets (notwithstanding that the court did not explain how the Claimant could perform banking operations that the Bank of Russia had simultaneously prohibited) and the DPF’s subsequent compensation of depositors and assertion of recourse claims against the Claimant for approximately RUB 4.7 billion. The Tribunal further found two raids in May 2014 in which cash and valuables were seized from the Crimean Branch’s head office, the premature termination of 85 lease agreements followed by their assumption by RNCB, and the involuntary transfer of the Claimant’s movable property and staff to RNCB. Considering these measures cumulatively, the Tribunal was satisfied that the Claimant had established that the Respondent’s measures had an effect tantamount to expropriation of the totality of the Claimant’s investment in Crimea.
Lawfulness of the Expropriation
Because the four conditions of lawful expropriation under Article 5(1) (public interest, due process, non-discrimination, and prompt, adequate and effective compensation) are cumulative, the Tribunal addressed compensation first, noting that a lack of payment is, in itself, sufficient to render an expropriation unlawful. The Tribunal found that no compensation whatsoever had been paid to the Claimant, rendering the expropriation wrongful on that ground alone. The Tribunal nonetheless went on, for completeness, to find that due process had also not been afforded - the legal framework for the Bank of Russia’s termination decision provided no opportunity for the Claimant to be heard, no appeal procedure, and no mechanism to test the basis for alleged non-compliance - and that the Crimean Financial System Law was discriminatory, since Russian-licensed banks were afforded materially more favourable timeframes, procedural safeguards and discretion in the event of non-compliance than were imposed on Ukrainian banks such as the Claimant.
The Tribunal accordingly concluded that the Respondent had engaged in unlawful expropriation in breach of Article 5(1) of the Treaty, and that the Respondent’s liability under international law for breach of the Treaty had been established.
Other Claims
Having found a breach of Article 5(1), and on grounds of judicial economy consistent with the approach of other tribunals, the Tribunal found it unnecessary to determine the Claimant’s alternative claims under Articles 2(2), 3(1), 4 and 7 of the Treaty or its claim of denial of justice, since the resulting damages would not have varied from those flowing from the finding of unlawful expropriation.
Damages
The Tribunal accepted the evidence of the Claimant’s damages expert, Mr. Jeffrey Davidson of Honeycomb Forensic Accounting, whom it found to be an experienced and appropriately qualified expert. Given the Respondent’s non-participation, the Tribunal noted that it felt “a heavier than usual obligation to ensure that its Award be soundly based in all respects,” and accordingly subjected Mr. Davidson’s evidence to extensive questioning at the hearing, including by reference to a published article on the valuation of financial-services firms by Professor Aswath Damodaran that the Tribunal put to the witness for comparison. The Tribunal accepted Mr. Davidson’s explanation that the valuation approach in that article, premised on dividend streams of complex financial conglomerates, was not apt for a “straight-forward and somewhat vanilla bank” such as the Claimant’s Crimean Branch, and found Mr. Davidson’s methodology - capitalising projected maintainable profits using a cost-of-capital rate derived from the Weighted Average Cost of Capital and Capital Asset Pricing Model - to be soundly based and appropriate.
Valuation Date
The Claimant proposed two alternative valuation dates: 1 March 2014 (the date the Federation Council authorised military intervention, with 28 February 2014 as the accounting date) or, alternatively, 21 March 2014 (the date on which, under the Respondent’s own legislation, the Treaty became applicable to the Claimant’s investment, with 31 March 2014 as the accounting date). The Tribunal rejected the earlier date, reasoning that the Claimant did not become an investor in the Respondent’s territory for Treaty purposes until the Accession, and adopted the Claimant’s alternative valuation date of 31 March 2014, notwithstanding that by then the asset position had already been impaired to a limited extent (in particular, by a partial outflow of depositor cash following the 16 March 2014 referendum).
Heads of Loss
- loss of assets (corporate and retail loans - principally the Solar Loans to the ActivSolar Group, which the DPF was separately pursuing for recovery of over RUB 28 billion - together with real property, cash and other physical and financial assets) of USD 597,771,793;
- loss of future profits (“goodwill”), calculated by capitalising projected maintainable profits at a rate of 14%, of USD 484,616,757;
- other heads of loss - comprising third-party valuables (gold, jewellery, precious stones and cash) seized in the May 2014 raids, and unenforceable arbitral awards for commissions and reimbursement owed by a counterparty under stand-by letters of credit, the underlying security for which (petrol and diesel) was located in Crimea - of USD 28,912,179.
In total, the Tribunal found that the Claimant was entitled to recover, and the Respondent was obliged to pay, USD 1,111,300,729 in compensation.
Interest
The Tribunal found that, a fortiori in the case of an unlawful (as opposed to a lawful) expropriation, the Claimant was entitled to interest to ensure full reparation. Departing from the Claimant’s proposed Ukrainian commercial lending rate (8.27–8.81%) on the basis that it was inappropriate to apply an interest rate tied to a currency (Ukrainian hryvnia, which had depreciated by roughly 50% against the US dollar between 2014 and 2016) different from the currency of the damages award, the Tribunal instead adopted the Six-Month USD LIBOR rate plus a 2% premium - a rate it considered more objective, market-oriented and consistent with investment-treaty practice - averaged over the period from the valuation date (31 March 2014) to the date of the Award, compounded annually, for both pre-Award and post-Award interest, the latter continuing until payment in full. The Tribunal also awarded post-Award interest, at the same rate, on its award of costs.
Costs
Applying Articles 38 to 40 of the UNCITRAL Rules, the Tribunal found that, as a general rule, the costs of arbitration follow the event and are borne by the unsuccessful party, and that the Claimant was the successful party while the Respondent, having declined to participate other than to challenge jurisdiction (a challenge the Tribunal rejected), was the unsuccessful party. The Tribunal found no exceptional circumstances warranting departure from that rule and found the Claimant’s costs - totalling USD 3,635,734.33, comprising legal fees of USD 2,278,171.22, expert fees of USD 492,196.94, and arbitration-related expenses of USD 865,366.17 - to be reasonable in all respects and fully recoverable, including the Respondent’s share of the deposits with the PCA, which the Claimant had been compelled to advance owing to the Respondent’s non-participation.
Legal consequences (dispositif)
For the foregoing reasons, the Tribunal DECLARED, AWARDED and ORDERED:
That the Tribunal has jurisdiction to determine the dispute;
That the Respondent breached the Treaty, and in particular Article 5(1) (Expropriation), by engaging in the unlawful expropriation of the Claimant’s investments in the Crimean Peninsula;
That the Respondent shall pay forthwith damages to the Claimant in the total sum of USD 1,111,300,729 (comprising USD 597,771,793 for loss of assets, USD 484,616,757 for loss of future profits, and USD 28,912,179 for other heads of loss);
That the Respondent shall pay forthwith to the Claimant USD 731,400.00 in costs of the arbitration proceedings, including the PCA’s administrative costs and the fees and expenses of the Members of the Tribunal;
That the Respondent shall pay forthwith to the Claimant USD 3,134,907.34 for legal fees, expert witness fees and related expenses;
That the Respondent shall pay pre-Award interest on the damages awarded, from 31 March 2014 until the date of the Award, at the average Six-Month USD LIBOR rate plus 2%, compounded annually; and
That the Respondent shall pay post-Award interest on the damages, costs and legal fees awarded, from the date of the Award until payment in full, at the same rate, compounded annually.