Russian Arbitration Sagas

Due to their size, complexity and importance, international disputes can be extremely complex to resolve. The history of foreign arbitration involving Russia provides a perfect example of this and the coming arbitration based on the annexation of Crimea seems certain to be no different.

15 September 2016

Arbitration is often hailed as offering a cheaper, quicker and more effective approach to dispute resolution.  And that often proves to be the case. However observers may be forgiven for forgetting these advantages when it comes to Russia’s history in arbitration. 

Russia will no doubt once more put the arbitration system through its paces in the coming proceedings concerning Crimea. While arbitration concerning the Russian annexation is only just beginning, already these new proceedings look likely to become part of a long drawn out series of investor-state disputes involving Russia.

Early Disputes Involving the Russian State
An early arbitration claim brought against Russia was Franz Sedelmayer v Russian Federation. Much time was taken up with Russia’s attempt to deny the tribunal’s jurisdiction on various grounds (that were later echoed in the Yukos case mentioned below) before the merits of the matter were even considered. After three years, Mr Sedelmayer eventually obtained an award in his favour. However Russia has refused to pay the damages awarded against it, and attempts to enforce the award have been strongly resisted, resulting in a series of further court battles in multiple jurisdictions that continue as of today.

Similar enforcement issues where experienced in Noga v Russia. The original award was made in 1997. Enforcement of this US$110 million award is still outstanding despite Noga’s widespread and often controversial efforts to enforce payment against assets ranging from bank accounts and paintings to research ships and President Putin’s private jet.

The Yukos Arbitration
Both Sedelmayer and Noga were large drawn out arbitrations but are dwarfed by the arbitrations created by Russia’s dealings with the Yukos Oil Company. Between 2003 and 2007, Russia pursued various actions that culminated in the assets of Yukos being transferred to Rosneft. This has resulted in:

  • Claims before the European Court of Human Rights – in 2011 the former head of Yukos, Mikhail Khodorkovsky was awarded a modest US$35,000 in damages for human rights violations relating to his arrest and detention, and in 2014 a group of some 55,000 Former Yukos shareholders were awarded US$2.6 billion in “just satisfaction” – both awards remain unpaid;
  • Four arbitration awards obtained against Rosneft by minority shareholders – these 2006 awards were settled in 2015 but only after enforcement battles in England, Ireland and America; and
  • Three arbitration claims by majority shareholders – these claims were brought in 2005 and a US$50bn award made in 2014 against the Russian state, only for this to be quashed by the Dutch court in 2016. 

The quashing of this final award is far from the end of these proceedings as it will undoubtedly be appealed, and the claimants are currently attempting enforcement against Russian assets in various jurisdictions around the world based on the quashed award.

The Coming Crimea Claims
In light of the above, we can only expect the coming claims over Russia’s annexation of Crimea to be similarly long and complex given their great value and Russia’s hardening stance on foreign arbitration. Many of these Crimean claims involve the bilateral investment treaty between Russia and Ukraine but Russia has mainly responded so far by disputing the jurisdiction and relevance of this treaty in a manner similar to its stance in the Yukos and Sedelmayer arbitrations.

For example, PJSC Ukrnafta and Stabil LLC have begun arbitration in the Permanent Court of Arbitration regarding the expropriation of assets based in the Crimea. While the claimants have already submitted their arguments to the tribunal, Russia has simply refused to file a defence, respond to questions or even to attend hearings. Compared to previous claims where Russia at least engaged in the process, this total lack of engagement represents a hardening of Russia’s stance to international arbitration proceedings and will make resolving these complex disputes even more difficult.

In addition to the proceedings brought by investors, Ukraine itself may start arbitration against Russia under the UN Convention on the Law of the Sea in regards to the natural resources off the coast of the Crimea. While the recent China/Philippines dispute over the South China Sea was speedily resolved compared to the claims above, Russia may follow the  example that China set in those proceedings by again simply refusing to engage with the tribunal and ignoring its decision.

Due to their size, complexity and importance, international disputes with a complex geo-political backdrop are rarely resolved quickly and easily. The coming arbitrations based on the annexation of Crimea seem certain to be no different. The Crimea arbitration proceedings will be keenly watched around the world.