Bancario e Finanziario

The applicability of Russia-Ukraine BIT treaty to investments in Crimea: current status and future developments

During the last two years, a number of investment arbitration claims have been filed against Russia as regards to the consequences of its actions in the Autonomous Republic of Crimea and the city of Sevastopol (“Crimea”).
The various claims include claims for the seizure of banking operations, airport, gas stations, and real estate following the seizure of Crimea and its “accession” to Russia in May, 2014.
All of the above cases have been filed under the UNCITRAL Arbitration Rules 1976 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 “Russia-Ukraine BIT” or “BIT”) which provides protection for the investments made by the investors of one party in the territory of the other.
On the one hand, Ukrainian entities had to demonstrate that the Russia–Ukraine BIT applies to the territory of Crimea, or else the tribunals would not have had the jurisdiction to hear the case. On the other hand, certain submissions made by the Ukrainian investors and/or decisions made by the tribunals might undermine Ukraine’s position as regards the territorial dispute with Russia over the Crimean peninsular.

The Russia-Ukraine BIT
Article 1 of the Russian-Ukraine BIT provides the following definitions:

“Investments” shall denote all kinds of property and intellectual values, which are put in by the investor of one Contracting Party on the territory of the other Contracting Party in conformity with the latter’s legislation […]”;

“Territory” shall denote the territory of the Russian Federation or the territory of the Ukraine and also their respective exclusive economic zone and the continental shelf as defined in conformity with the international law.

Article 12 of the BIT also provides for its ratione temporis:
This Agreement shall apply to all investments carried out by the investors of one Contracting Party on the territory of the other Contracting Party, as of January 1, 1992.
Considering the above articles of the BIT in light of the events in Crimea that brought about the arbitration claims against Russia, arbitral tribunals had to deal with several complicated jurisdictional issues. In particular, in order to establish the jurisdiction, the tribunal had to establish that the investments were made / are within the respondent contracting party’s territory.
One problem with it is that the purported investments have been made prior to February 2014, when Russia initiated its “reunification with Crimea”. Therefore, one might argue that the investments were made in the territory of Ukraine by domestic investors in accordance with Ukraine’s domestic legislation; thus, not in “territory of the other Contracting Party [Russia] in conformity with [Russian] legislation[1].

Notwithstanding, even if the tribunal were to establish that the above consideration is not persuasive and the BIT was meant to also cover the investments which were initially made in the territory of one contracting party and then found themselves in the territory of the other following the change of borders, the other problem would have arisen. That is, by admitting that Crimea was within the territory of Russia, the tribunal would have opined on a matter which would have been outside the subject matter of the dispute and would have gone far beyond its competence. Besides, it would have undermined Ukraine’s territorial claim against the annexation of Crimea, which, in turn, would be at odds with the UN General Assembly Resolution 68/262 (Territorial integrity of Ukraine) adopted on 27 March 2014 and thus, allegedly, would have breached international law, a direct reference to which is also made in Article 1 of the BIT cited above.
Finally, had Russia been completely mute, the PCA could have relied on the consensual character of the arbitration and might have assumed that both the claimant and the respondent acquiesce to the jurisdiction of the tribunal. However, in two cases brought before the tribunal, the PCA Press Release of 06 January 2016 and 30 March 2016[2] clarifies that Russia “indicated, inter alia, that the ‘[Ukraine-Russia BIT] cannot serve as a basis for composing an arbitral tribunal to settle [the Claimants’ claim]” and that it “does not recognize the jurisdiction of an international arbitral tribunal at the [PCA] in settlement of the [Claimants’ claims].’ It also stated that nothing in its correspondence ‘should be considered as consent of the Russian Federation to constitution of an arbitral tribunal, participating in arbitral proceedings, or as procedural actions taken in the framework of the proceedings.’” 

Considering Russia’s position, the arbitral tribunal has understandably decided to bifurcate the proceedings to “address issues of jurisdiction and admissibility in a preliminary procedure.”

The PCA interim Award and Possible Consequences
On 24 February 2017, identical arbitral tribunals in a pair of Crimea-related investment arbitrations, after a hearing on jurisdiction and admissibility in July 2016, issued their unanimous Interim Award, as disclosed in a PCA Press Release dated 9 March 2017[3]. While the Press Release itself does not address the conclusions of the tribunals, according to the Claimants’ counsel[4] and several arbitration online services[5], the arbitrators concluded that “an occupying power may be held responsible under a BIT for its conduct in the occupied territory”.
While the text of the award is not yet available and one may only imagine which legal considerations have been put in its reasoning, one can still find certain grounds for such an award in the contemporary international law. In particular, one may refer to the “law of occupation”. While the concept of occupation is an integral part of war, it is as such governed by the sources of international armed conflict. These sources are made up by various conventions on international armed conflict together with customary law and law on state responsibility. The rules of international armed conflict are found in The Hague Convention of 1899 and 1907 Hague Regulations (Hague Regulations), the Fourth Geneva Convention of 1949 and the Additional Protocol I to the Geneva Convention. The aforementioned sources may at first have been seen as “innovative” but have received a declaratory status as a reflection of customary law and as such they also apply for states that are not parties to the conventions. These sources move away from the territorial dispute between states and focus on protection for the population on the disputed territory. As such, the law of occupation imposes certain obligations on the “occupant” vis-à-vis private parties in the occupied territory, which also include honoring the property and other “acquired rights” of such private parties. It may have been that with this consideration in mind the PCA has extended to the protection of the BIT to the property of the Ukrainian entities situated in the occupied Crimea.
Another important source of international law which may be relevant to the matter in question is the famous ICJ Advisory Opinion on Legal Consequences for States of the Continued Presence of South Africa in Namibia notwithstanding Security Council Resolution 276 (1970) (Advisory Opinion) issued in 1971. The Advisory Opinion, in particular, held that there was an obligation for all member states of UN to not recognize South Africa’s occupation of Namibia and to refrain from any dealings with the government of South Africa that implied recognition of the legality of the South African presence in Namibia. The Advisory Opinion is still regarded as the most authoritative legal source governing relations with illegal regimes. From the Advisory Opinion comes an obligation, now regarded as customary, of non-recognition of illegal regimes and an obligation “not to enter into treaty relations with the illegal regime when the latter purports to act on behalf of the territory”. Also, the Advisory Opinion holds that states are prohibited of applying previous treaties concluded with the illegal

regime in respect to the occupied territory. Basically, all acts that would imply that South Africa had competence to act on behalf of the territory were prohibited. The obligation of non-recognition, however, came with an exception in that it “should not result in depriving the people of Namibia of any advantages derived from international agreements”. Thus, when it is of benefit for the local population, application of treaties, including bilateral ones, that otherwise would be regarded as recognizing the illegal regime, shall be acceptable.[7]

The arbitration claims brought Ukrainian legal entities against Russia, on the basis of the BIT, feature a politically and legally complicated factual situation that required arbitral tribunals to examine their jurisdiction with a careful eye on the wider implication of whatever decision they take.
It might be even argued that the current investment claims, under the Russia-Ukraine BIT, effectively contradict the last paragraph of the UN Resolution on Territorial integrity of Ukraine, whereas Ukraine itself engages in actions that might at a future stage be interpreted as recognising Crimea’s altered status.
Perhaps, a better way of resolving present investment disputes under the Russia-Ukraine BIT would have been first to answer several complex legal and political questions, allowing for a thorough examination of wider questions of public international law, through the dispute resolution mechanism in Article 10 of the BIT (Resolution of Disputes between the Contracting Parties).
This conclusion of the PCA tribunals to make a BIT applicable as regards investments made prior to the change of the legal status of the territory, is novel and unprecedented, however, it may become “model” for other pending Crimea-related arbitral proceedings and may set a precedent for future cases regarding the protection of the investments by BITs in occupied territories. The cases will now proceed to the merits stage, where the Russian Federation will face claims ranging from USD 15 million to USD 1 billion, with the date of the hearing not yet known.
Notably, if the PCA rules in favor of these claimants despite Russia’s boycott of the proceedings, it would not be the first time. Last July, a PCA tribunal ruled unanimously in favor of the Philippines in a dispute with China over the role of historic rights and the source of maritime entitlements in the South China Sea, despite China’s continued, vehement opposition to the tribunal’s jurisdiction. It, too, had refused to participate in the proceeding.







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