After the occupation of the Crimean peninsula by the Russian Federation (RF) in February 2014, the RF began to take active measures to spread its legislation and law and order in this territory, as well as to eradicate everything Ukrainian and replace it with Russian.

The financial sector was no exception, as the relevant legislation was quickly adopted, requiring Ukrainian banks in Crimea to comply with Russian law, report to the Bank of Russia, make payments in rubles, etc.

Failure to comply with these legislative requirements and breach of their obligations could have resulted in Ukrainian banks being banned from conducting any banking activities on the peninsula.

Oschadank, as one of the largest state-owned banks in Ukraine, had a presence through its representative offices in Crimea. Accordingly, it could not avoid such legal requirements, which eventually led to the expropriation of all property on the peninsula.

In this regard, in 2016, Oschadbank (the Claimant) initiated an investment dispute against the Russian Federation based on 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 27.11.1998 (the Treaty).

The RF (the Respondent) ignored participation in the case, citing, among other things, the Tribunal’s lack of jurisdiction and the absence of investments within the meaning of the Treaty.

However, this did not prevent the Tribunal from rendering its award in favour of the Claimant in November 2018. The award was made public in March 2023 and, having analysed it, we would like to share with you some of the tribunal’s findings and our opinion.

Jurisdiction

The RF did not recognise the Tribunal’s jurisdiction to consider this dispute (delete this sentence). The RF did not recognise the Tribunal’s jurisdiction to consider this dispute under the Treaty. Therefore it had to pay attention to this issue first, considering, in turn, the application of the Treaty to the Crimean peninsula and the definitions of “investment” and “investor“.

“Territory”

The Tribunal found that when the Treaty entered into force on 27 January 2000 and until February-March 2014, the Crimean peninsula was part of the territory of Ukraine, which had to fulfil its obligations under the Treaty to the Respondents’ investors in Crimea. However, it was important for the Tribunal to be satisfied that, after the beginning of the occupation of Crimea in February 2014, the RF assumed its obligations under the Treaty to Ukrainian investors in Crimea, or, in other words, that Crimea was part of the Respondent’s for the purposes of the Treaty.

The annexation of Crimea raised the question before the Tribunal as to which state party to the Treaty was obliged to provide the protection provided for in the Treaty to foreign investors on the Crimean peninsula. Here, the Tribunal disagreed that the Treaty no longer covered the Crimean peninsula due to a dispute between the Respondent and the Claimant as to which State has de jure sovereignty over the region.

As the Tribunal noted “[t]he present situation is not a case of extending a treaty with a third party to a new area acquired by the State in question. Here, the territorial coverage of the Treaty has not changed. It is simply a matter of determining whether there has been a change in the State that owes the duties under the Treaty and a consequent change in the investors to which such duties are owed. For this reason, the Tribunal focuses its analysis on the text of the Treaty.”

Having examined the definition of the term “territory”under the Treaty, the Tribunal concluded that “the term “territory”

is used generally within the Treaty with a view toward the ability effectively to legislate and to enforce its laws… “territory” means a geographical area over which a Party exercises jurisdiction or control.”

Moreover, as the Tribunal further noted, this definition of “territory” under the Treaty does not contain any exceptions for any part of the territory of the Claimant or the Respondent, i.e. it covers the entire territory of both parties. This allowed the Tribunal to conclude that “the Treaty is intended to apply to the entire territory of each contracting State” and”the Treaty is binding upon the Respondent in respect of the Respondent’s entire territory”.

The opinion of Professor Shaw, with which the Tribunal agreed and which stated the following, deserves special attention:

What is significant and distinctive in this case is not just the effective control established and maintained by Russia over Crimea, but the claim by the former to have sovereign title to the territory, so that for Russia, the territory is no more and no less than sovereign Russian territory. While this claim is contested by the internationally recognised sovereign (Ukraine) and by the international community (see UN General Assembly resolution 68/262…, its maintenance, coupled with the effective control manifested by Russia, cannot be without consequence within the context of the BIT. Russia cannot deny its sovereign claim without contradicting its own constitution and its own stand taken before the UN.

This led the Tribunal to conclude that Crimea should be considered part of the territory of the RF for the purposes of the Treaty.

“Investment” and “Investor”

In the Tribunal’s view, under normal circumstances, establishing a branch of a Ukrainian bank in the territory of the Respondent would constitute an investment within the meaning of the definition of “investment” in the Treaty. It meets the criteria set out therein, as it includes material assets (including right to property (leases of premises)), as well as rights and economic interests (arising out of loans, deposited funds and other banking instruments).

However, in one of its letters to the Tribunal, the Respondent stated that the Claimant’s assets are not investments within the meaning of the Treaty because they

1. were not made on the territory of the RF, and even if they were, they were made before the accession of the Republic of Crimea and the city of Sevastopol to the RF The Tribunal’s position: for the purposes of determining jurisdiction, it is immaterial when the investment was made, as the Treaty does not contain any time requirements in the term “investment” that would limit the investment to those made after the RF’s obligations under the Treaty came into force on the Crimean peninsula.
2. were not made under the laws of the RF The Tribunal’s position: in March and April 2014, the RF adopted two federal laws No. 6 and No. 37, which expressly allowed Ukrainian banks to continue operating on the peninsula until 1 January 2015. This gave rise to the conclusion that at the time when the Crimean peninsula became part of the RF’s territory, the Claimant’s activities were in compliance with the Respondent’s legislation for the purposes of the Treaty.
3. were not taxed under Russian law The Tribunal’s position: this argument has no bearing on the Tribunal’s jurisdiction, and payment of taxes is not a prerequisite for the recognition of an investment as such under the Treaty. Moreover, based on the legislation adopted by the Respondent itself, no taxes could have been owed by Claimant to the Respondent prior to January 2015.
4. did not contribute to the development of the Russian economy The Tribunal’s position:(1) The limited economic benefit to the Respondent from the Claimant’s investment results from the latter’s withdrawal from the Crimean peninsula, allegedly due to the Respondent’s own breach of the Treaty. If the Claimant had continued to operate its Crimean branch, the Respondent would have received a more substantial economic benefit.(2) A small economic benefit from an investment does not invalidate the protection under the Treaty.

Thus, having considered and rejected each of the Respondent’s arguments, the Tribunal concluded that the Claimant’s assets could qualify as an investment under the Treaty.

The Tribunal’s preliminary and preceding findings made it easy for it to find that the Claimant is an investor within the meaning of the Treaty.

Thus, the Tribunal has considered all the necessary elements to determine whether it has jurisdiction to hear this dispute under the Treaty in favour of the Claimant and has proceeded to consider the question of the Respondent’s liability.

Responsibility

First, the Tribunal considered and determined the grounds on which the Respondent as a State should be held responsible under the Agreement for the actions of certain individuals. To do so, it applied the provisions of customary international law set out in the International Law Commission’s Draft Articles on the Responsibility of States for Internationally Wrongful Acts (the ILC Articles).

In light of Articles 4 and 8 of the ILC Articles, the Tribunal concluded that the Respondent is responsible not only for the actions of its army, parliament and the Bank of Russia, which are organs of the State, the Depositor Protection Fund (DPF), but also for the actions of the Crimean authorities, which became part of the Respondent’s state authorities as of 18 March 2014, and the actions of the Crimean self-defence forces, which, as the Tribunal emphasised, were subject to instructions, direction or control of the Crimean authorities at all times after 11 March 2014.

Secondly, the tribunal noted that in order to establish the Respondent’s guilt, the Claimant must prove two facts: (i) the Respondent expropriated the Claimant’s investment; and (ii) such expropriation was unlawful under the Treaty. In considering the first issue, the Tribunal concluded that the Respondent had developed a scheme to force Ukrainian banks out of Crimea, which resulted in the expropriation of the Claimant’s investments, because of the following circumstances:

• The Respondent adopted Federal Law No. 37 on the financial system of Crimea, which imposed unduly burdensome conditions on the Claimant that prevented an orderly transition. The conditions were imposed without considering pre-existing Ukrainian legislation and without regard to the practicalities of compliance.
• Federal Law No. 37 provided that the Bank of Russia may terminate the activities of the relevant separate structural units of Ukrainian banks in Crimea if the Ukrainian bank fails to fulfil its obligations to creditors or depositors within one or more days from the date of their due date or fails to comply with other requirements stipulated by Federal Law No. 37.
• In April 2014, 85 of the Claimant’s Crimean branches were forced to close due to the early termination of the lease agreements for the premises without prior written notice and in violation of the terms of the relevant lease agreements. This was based on the decisions of the Crimean authorities and in the interests of the Russian National Commercial Bank (RNCB), which needed premises for its branches. The Claimant’s movable property from its Crimean branches was forcibly transferred to RNCB, and its employees were also transferred to work for RNCB.
• On 16 and 21 May 2014, the Claimant was subjected to two raids by the Crimean authorities, which were accompanied by significant pressure and intimidation from the Crimean self-defence forces, as well as requests for access to the Claimant’s private information systems.
• On 26 May 2014, the Bank of Russia imposed an official ban on the Claimant’s banking activities in the Crimean peninsula, applying the provisions of Federal Law No. 37.
• On 29 May 2014, proceedings were initiated against the Claimant in the Kyiv District Court of Simferopol, which by its decision appointed the DPF as the administrator of the Claimant’s Crimean assets and granted the DPF the powers of the Claimant’s executive bodies. The proceedings concerned the Claimant’s inability to conduct its banking operations in Crimea. However, the court did not consider how the Claimant was supposed to carry out any banking operations if its activities had been banned by the Bank of Russia the day before.
• The DPF started to pay compensation to the Claimant’s Crimean clients and later claimed that it had obtained a right of recourse against the Claimant in respect of the compensation it had allegedly paid to the Claimant’s clients in the amount of RUB 4.7 billion. The DPF stated that it planned to recover this alleged debt by seizing the Claimant’s assets in the framework of enforcement proceedings.

These circumstances led the Tribunal to conclude that the Respondent’s measures resulted in expropriating all of the Claimant’s investments in the Crimean peninsula.

In addressing the lawfulness of the expropriation, the Tribunal held that it is only lawful if it meets all of the following criteria:

1. (1) adopted in the public interest;
2. (2) taken under due process of law;
3. (3) non-discriminatory in nature; and
4. (4) accompanied by prompt, adequate and effective compensation.

However, the Tribunal did not analyse all of these criteria in the order in which they were set out, but immediately turned to whether the Claimant had received compensation for the loss of its investment. As the Claimant did not receive any compensation from the Respondent, the Tribunal concluded without question that the expropriation was unlawful.

Further consideration of this part could have ended there, but the Tribunal paid attention to two more important criteria that indicate the illegality of expropriation, namely:

1. Due process: the Tribunal found that “the legal framework established by the Respondent for the Bank of Russia’s decision on termination of activities of the Ukrainian banks did not even attempt to provide any meaningful assessment process nor any practical means for the Ukrainian banks to defend themselves. For example, Federal Law No. 37 did not provide an opportunity for the Claimant to present its case or to be heard in relation to alleged breaches of the regulations. In the view of the Tribunal, such requirements would be expected where a State could impose significant sanctions upon an entity such as the Claimant.”
2. Non-discrimination: in the Tribunal’s view, the federal law on the financial system of Crimea was discriminatory as it imposed more onerous obligations and requirements on the Claimant than on Russian banks. It highlighted, in particular, the striking difference in the treatment of the Respondent’s banks and Ukrainian banks in terms of compliance with and application of banking laws. Banks licensed by the Bank of Russia were “subjected to relaxed banking supervision” under the Federal Law on Banks and Banking Activities.

The preceding enabled the Tribunal to conclude that the Respondent’s liability under international law has been proven, as it unlawfully expropriated the Claimant’s investments and thereby breached its obligations under the Treaty.

Our comments

In this award, the Tribunal did not make any conclusions or comments on the current status of the Crimean peninsula under international law, nor did it comment on the lawfulness of the Respondent’s actions other than in relation to the Claimant during the relevant period of time within the framework of the proceedings under the Treaty.

Nevertheless, this case is a good illustration of certain facts about the arbitrary and raider-like manner in which the annexation of the Crimean peninsula by Russia took place, as well as another confirmation of the criminal actions of the political authorities of the Russian Federation. In addition, this decision can serve as an example of the proven connection between the Crimean authorities and the Crimean self-defence forces, on the one hand, and Russia on the other.