Arbitrating against Russia - what's next?

The $270 million award obtained by JSC DTEK Krymenergo against the Russian Federation is a powerful reminder of the constraints imposed on Russia by its network of bilateral investment treaties. The award was handed down on 1 November 2023 by a tribunal operating under the 1976 UNCITRAL Rules, chaired by Juan Fernando Armesto. It was brought into the public domain by DTEK Krymenergo’s initiation of enforcement proceedings in the United States barely a week later.

The award is the latest in a series of decisions by tribunals empanelled under the bilateral investment treaty (BIT) between Ukraine and Russia granting damages for property expropriated from Ukrainian businesses after the 2014 annexation of Crimea. DTEK Krymenergo was the owner of the largest electricity distribution and supply business in Crimea until the illegal expropriation of its investment by the new Russian-backed authorities. In the largest such award to date, in April 2023, Naftogaz, Ukraine’s state-owned oil and gas company, obtained compensation in excess of $5 billion for oil and gas assets taken from it by Russia in the weeks following its unlawful occupation of the peninsula. Both Naftogaz and DTEK Krymenergo are represented by Covington & Burling LLP.

Prior to the illegal annexation of Crimea, DTEK owned DTEK Krymenergo, an energy distribution and supply company.

As Russia continues and expands its aggression against Ukraine, the Ukraine-Russia BIT promises to play an ever more important role as an avenue of recourse for the vast number of Ukrainian businesses whose assets have been expropriated or otherwise harmed by Russia and its proxies. Like every other arbitration panel hearing claims arising from the annexation of Crimea, the DTEK Krymenergo tribunal ruled that Russia assumed obligations towards Ukrainian investors in the peninsula under the BIT when it exercised effective control over the territory starting in early 2014. The same principle is potentially applicable in other parts of Ukraine where Russia and its proxies have established effective control over the last ten years. These include large swathes of the Donbas region of eastern Ukraine wrested from Kyiv’s control in 2014 by Russian forces under the guise of supposedly spontaneous separatist uprisings.

The SCM group of which DTEK Krymenergo forms part was one of the main victims as Russia used its control over territory in the Donbas to take possession of important industrial assets in the region. Between 2014 and 2017, it was stripped of assets worth billions of US dollars in the coal, steel, electricity generation and distribution, and other sectors. Upon receiving the news of the DTEK Krymenergo award, Rinat Akhmetov, the sole shareholder of SCM, declared his determination to continue working until '[R]ussia is held accountable to all Ukrainians for the evil and destruction it has caused.'

The Ukraine-Russia BIT could also become a significant instrument in securing justice for the countless Ukrainian businesses stolen or damaged by Russia in the course of its ongoing full-scale invasion of Ukraine launched in February 2022. During the course of that invasion, Russia has exercised control over important additional segments of Ukrainian territory, even purporting to formally annex four Ukrainian oblasts in September 2022. There is no reason why the legal reasoning underpinning the DTEK Krymenergo and other Crimean awards should not, at a minimum, also operate to render Russia responsible for the harm it has inflicted on Ukrainian investors in those territories.

Again, SCM is a major potential claimant, as critical infrastructure owned by the group has been repeatedly targeted by the Russian armed forces, including the Azovstal steel complex in Mariupol obliterated in the opening months of the invasion and the DTEK-owned electricity grids and power plants that Russian missiles have repeatedly sought to destroy in an attempt to freeze the Ukrainian population into submission.

Ukraine’s decision in August 2023 to terminate the Ukraine-Russia BIT does not diminish the treaty’s relevance to these events. Under the BIT’s sunset provision, Ukrainian investors will remain able to bring claims against Russia until 27 January 2035 with respect to investments made prior to 27 January 2025.

Investors in Russia from countries other than Ukraine can also benefit from the obligations imposed on Russia by its network of BITs. Many foreign investors have had no choice but to exit the Russian market since February 2014, often on terms that the Russian authorities have rendered deliberately disadvantageous. Others that remained have seen their investments expropriated, as recently was the case for the French yoghurt-maker, Danone. Yet still others remain at risk of further Russian retaliation, including in the event that the G7 and EU ultimately decide to confiscate the approximately $300 billion Russian state assets currently immobilised on those jurisdictions so that it can be used to compensate the Ukrainian victims of Russian expropriation instead. It is not too late for foreign investors with exposure in Russia to be considering how best to optimise such BIT protections, including by restructuring the ownership of Russia-located investments to bring them within the scope of treaties with the most generous substantive provisions and the broadest jurisdictional clauses.

Jonathan Gimblett is a partner at Covington