Obsolete Treaties Expose Ukraine to Wave of International Arbitration by Russia
TL;DR
- Ukraine faces numerous arbitration claims from Russian entities leveraging dated bilateral investment treaties.
- Russian oligarchs and companies are contesting asset freezes and nationalizations linked to sanctions imposed after Russia's invasion.
- These cases cost Ukraine millions in legal fees and expose it to potential significant compensation liabilities.
Overview
Ukraine is the target of a growing number of international arbitration cases initiated by Russian businesses and individuals. These cases rely on legacy bilateral investment treaties (BITs), including some from the Soviet era, and challenge measures such as asset freezes and bank nationalization that were enacted following Russia's full-scale invasion and the imposition of sanctions.
What Happened
Russian oligarchs and state-linked enterprises have filed arbitration claims worth billions of dollars against Ukraine and Western allies, exploiting provisions in longstanding BITs. Notably, financier Mikhail Fridman has initiated several claims totaling €16 billion concerning asset freezes in Luxembourg and the nationalization of Sense Bank, formerly Alfa-Bank.
Key companies involved include Gazprom, Tatneft, and Rusal, among others. Many claims are connected to assets held in European financial institutions such as Euroclear and Clearstream.
The cases are based on Investor-State Dispute Settlement (ISDS) mechanisms, which allow foreign investors to bypass domestic courts in favor of private arbitration tribunals. The recent rise in claims follows an escalation in sanctions imposed after Russia's 2022 invasion.
Defending these arbitrations imposes significant financial burdens on Ukraine, with average legal costs per case exceeding $5 million and the potential for compensation orders in the billions.
Context
Bilateral investment treaties containing ISDS provisions proliferated in the 1980s and 1990s, with the USSR signing multiple agreements with European countries. Such treaties afford investors the right to contest government actions in private forums outside national courts.
Ukraine has moved to terminate its investment treaty with Russia since the 2022 invasion, but a 'survival clause' keeps protections in place for a decade. Meanwhile, over 20 BITs between Ukraine and European states remain active, enabling claims involving assets in those jurisdictions.
Why It Matters
- These cases threaten Ukraine with substantial financial liabilities and drain scarce resources needed for its defense against Russian military aggression.
- The situation exposes vulnerabilities within Europe's international investment regime and highlights the political and legal risks posed by outdated treaties.
- EU member states also face risk, as many have not terminated their own investment agreements with Russia, potentially allowing further claims.