by Ahmad Maher El-Rewieny and Megha Chaturvedi

In February 2024, Russia's invasion of Ukraine intensified the ongoing Russo-Ukrainian War which began in 2014 with ‘Crimean Crisis’. This escalation had widespread impacts on both countries and significant repercussions on the global economy. The conflict has disrupted numerous agreements across various sectors, making it burdensome and fully or partially impossible for parties to fulfill their contractual obligations. As a result, many disputes have arisen, leading to a surge in cases being adjudicated by national courts and arbitral tribunals.

The below figures show the effect of the war on Ukraine’s GDP, the global economy and inflation.[1]

Illustrative Cases 

PJSC Ukrnafta v. Russia:[2] PJSC Ukrnafta, one of Ukraine's largest oil and gas companies, initiated arbitration proceedings against Russia under the Russia-Ukraine BIT 1998. Ukrnafta claimed that the Crimean annexation led to expropriation of its assets, particularly petrol stations and related properties in Crimea. In its defence, Russia challenged the jurisdiction of the arbitral tribunal contending that the claimant being private companies has no right to bring dispute under BIT since it was entered between two countries on whom arbitration was binding and subsequent border shifts would have required a further agreement or amendment between the State Parties in accordance with Art. 13 of the 1998 BIT, therefore, fell outside the scope of the BIT.

In 2019, a PCA tribunal (seated in Switzerland) ruled in favor of Ukrnafta, awarding the company approximately $44.5 million compensation for the expropriated assets. The tribunal found that Russia had violated its obligations under the BIT by failing to provide fair and equitable treatment, and by expropriating Ukrnafta's investments without proper compensation. 

Naftogaz v. Gazprom:[3]The dispute involved a series of arbitrations between Naftogaz, Ukraine, and Gazprom, Russia, primarily related to natural gas supply and transit contracts. It followed from Gazprom's decision to terminate gas supplies to Ukraine. Naftogaz argued that the gas pricing mechanism was unfair, and that Gazprom had failed to meet its contractual obligations, including paying for gas transit through Ukraine. Russia, through Gazprom, advanced defenses inter alia resulting from the force majeure situation created by the ongoing political and military conflict between Russia and Ukraine. 

In 2018, an SCC tribunal issued an award directing Gazprom to pay Naftogaz $2.56 billion for failing to deliver agreed-upon volumes of gas for transit. 

Legal and Regulatory Challenges posed by war or geopolitical tensions 

The following categorical legal and regulatory challenges can arise in inter se arbitrations during war or geopolitical conflict situations between two countries:

Impact of war, sanctions, on Procedural Aspects : War affects procedural aspects of an arbitration where nationals of the warring countries are involved,  including the choice of arbitrators, legal representation, and the conduct of hearings. A prime example is the case of Rimat Akhmetov v. Russia, where the appointing authority, on 31 July 2024, upheld Russia’s challenge to a US arbitrator (Andrea Bjorklund) over a LinkedIn post in which the latter promoted a fundraising for Ukrainian soldiers.[4] The occupying country in a war may also be sanctioned by other countries and international organizations. In such cases, restrictions on travel and financial transactions may the limit the ability of parties, institutions and arbitrators to participate fully in the arbitration process.

Arbitrability and Jurisdiction: Significant questions arise on the arbitrability of disputes and jurisdictional issues in investment arbitrations that arise from actions taken in the context of a war. For example, in PJSC Ukrnafta v. Russia, the respondent challenged the arbitral award in appeal contending that the matter underlying the dispute was the question of change of status of Crimea – an issue that was outside the strict scope of the 1998 BIT. Such defenses seek to limit the scope of disputes in the context of an on-going conflict, effectively setting the rationale and benefits of investment arbitration to naught.

Recognition and Enforcement of Awards:  National courts may refuse to enforce awards rendered in an enemy / warring / unfriendly state on grounds such as public policy or national interest. In the case of Russian national courts, this seems to have become a very real hurdle to the enforcement of awards, as the next section details. 

Public Policy in the way of enforcement

Russian Courts, since the beginning of the Russo-Ukrainian War, have rejected recognition and enforcement of foreign awards on multiple grounds that, in the Courts’ view, relate to public order. To highlight just a few examples:

1. In 2022, the Russian Court of Appeal[5] overturned the judgement of a lower court which recognized and enforced an arbitral award in favor of a company incorporated in the UK on the grounds of the ‘unfriendly’ nature of the nationality of the Claimant in the arbitration.

2. In 2023, the Russian Cassation Court[6] upheld the decision of the Court of First Instance[7] refusing recognition and enforcement of an arbitral award issued in favor of a Swiss Company on the basis that it violated public policy in Russia and the principles of equality and good faith.

3. In 2024, the Supreme Court of Russia,[8] overturned the First and Second Instance judgements awarding recognition and enforcement of an arbitral award (rendered in favor of a German against a Russian Counterpart) on the basis that it violated public order as the nationality of the members of the arbitral tribunal was of an ‘unfriendly’ nature.The Supreme Court found that the Arbitral Tribunal (which comprised nationals of Ukraine, United Kingdom and Denmark) lacked independence and impartiality as it comprised of nationals of ‘unfriendly’ states which were partial to the German party.

    

The above judgments, among others, have relied on four main decrees issued by the Russian President, aimed at regulation of the ‘dealings’ with ‘unfriendly’ states:  Decrees no. 81, 95, 252, 254 of 2022. The stated rationale behind these decrees is that the Russian government is trying to ‘ensure the financial stability of the Russian Federation’ ‘in connection with the unfriendly actions of the United States of America and associated foreign states and international organizations, being contrary to international law and involving imposition of restrictive measures against citizens of the Russian Federation and Russian legal entities.’[9] The ‘unfriendly’ nature of a state has been the subject of debate amongst scholars. The decrees did not, explicitly, provide a definition for what is an ‘unfriendly’ state. However, they are understood to be those states that conducted unfriendly actions against Russia; namely the United States and associated foreign states and international organizations. This is confirmed by Article 1 of the Federal law of the Russian Federation no. 281-FZ, where it states that: 

“Special economic measures are applied in cases of emergence of set of the circumstances requiring immediate reaction to international and illegal act or unfriendly action of foreign state or its bodies and officials, the posing threats to interests and safety of the Russian Federation and (or) the violating rights and freedoms of her citizens.”[10] 

Accordingly, it can be interpreted that Russian decrees consider any state or international organization imposing sanctions on Russia as an ‘unfriendly’ state or organization, as the case maybe.

The Courts interpreted these Decrees as part of Russian public policy,[11] thereby seeking to identify a legitimate basis for not recognizing the arbitral awards in question by reference to Article V(2.b) of the New York Convention.[12] Article V(2.b) of the New York Convention provides that  recognition and enforcement of an arbitral award may be refused if it would be “contrary to the public policy of that country”.

Concerns and conclusion

As the above analysis shows, the enforcement of international arbitral awards  becomes particularly suspect in the context of a conflict between countries to which the contesting parties belong. An arbitral tribunal may render a comprehensive decision in any such dispute, but obstacles exist, for example, around procedural aspects of the conduct of proceedings, an arbitral tribunal’s jurisdiction to entertain the dispute, as also the eventual enforceability of an arbitral award. In this sense, it becomes difficult to divorce the political context of a dispute from the conduct of arbitration and its outcome, thereby presenting a reality much at odds with the established benefits of arbitration as an apolitical means of dispute resolution. 

In particular, the obstacles created by nationality of the arbitrators in past cases are concerning. The Russian Supreme courts’ approach,[13] to refuse enforcement on the basis that the arbitrators were of ‘unfriendly’ nationality strikes at the very core of international arbitration. Although some arbitration rules prohibit appointing arbitrators of the same nationality as the parties to ensure independence and impartiality,[14] it is the authors’ view that extending this practice to disqualify arbitrators from ‘unfriendly’ states altogether would result in unnecessary politicization of the process. “In an ideal world, the nationality of a sole arbitrator, or of the presiding arbitrator, should be irrelevant”, in the words of Redfern and Hunter.[15]

Moreover, such an approach may also contradict Russia’s own arbitration law, which does nationality as a hurdle to enforcement. Russian Arbitration Law states that, “no person shall be precluded by reason of his nationality from acting as an arbitrator …” [16], mirroring Article 11(1) of the UNCITRAL Model Law.[17]

It remains uncertain whether Russian courts will change their stance or if political factors will continue to influence their decisions. In the meantime, parties seeking arbitration have a decision to make: either pursue arbitration and face the unpredictability of Russian courts, or continue fulfilling their contractual obligations no matter how burdensome those obligations become.

[1]              Michelle Kilfoyle, 'Ukraine: What’s the Global Economic Impact of Russia’s Invasion?' (Economics Observatory, 24 October 2023) <https://www.economicsobservatory.com> accessed 26 August 2024.

[2]              PJSC Ukrnafta v. The Russian Federation (PCA Case No. 2015-34). Decision of the Tribunal dated 12 April 2019].

[3]              National Joint Stock Company Naftogaz of Ukraine v. Public Joint Stock Company Gazprom (II), SCC Case No. V2014/129. Decision of the Tribunal dated 28 February 2018.

[5]              The Commercial Court of the Central Circuit, 27 February 2023, Case No. А14-13590/2022 (Russia).

[6]              The Commercial Court of the North Caucasus Circuit (Cassation Court), 16 October 2023, Case No. #32-47144/2022 (Russia).

[7]              The Commercial Court of the Krasnodar Region (Krasnodar Court), 18.07.2023, Case No. #32-47144/2022 (Russia).

[8]              The Supreme Court of the Russian Federation, 26 July 2024, Case No. А45-19015/2023 (Russia).

[9]              Decree of the President of the Russian Federation on Additional Temporary Economic Measures aimed at Ensuring Financial Stability of the Russian Federation, no. 81 of 2022, 1 March 2022.

[10]            Federal law of the Russian Federation of December 30, 2006, no. 281-FZ.

[11]            Maxim Kulkov and Nikita Chernyshenko, ‘Russian Courts Justify Refusal to Enforce Arbitral Award in Favour of "Unfriendly" Parties by Reference to Counter-Sanctions Decrees’ (Thomson Reuters, 20 December 2023) <https://kkplaw.ru/files/Russian_courts_justify_efusal_to_enforce_arbitral_award.pdf> accessed 11 September 2024.

[12]            United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards [1958].

[13]            The Supreme Court of the Russian Federation, 26 July 2024, Case No. А45-19015/2023 (Russia).

[14]            For instance: ICC Arbitration Rules 2021, Article 13(1,5,6); LCIA Arbitration Rules 2020, Article 6.

[15]            Alan Redfern & Martin Hunter, Law and Practice of International Commercial Arbitration, (4th ed.2004). 202

[16]            Russian Federation Law on International Commercial Arbitration Act 1993 (as amended on 3 December 2008; 29 December 2015), Article11(1).

[17]            United Nations Commission on International Trade Law, Model Law on International Commercial Arbitration [1985].