How Naftogaz of Ukraine intends to receive $5 billion from Russia for assets in Crimea

The Arbitration Tribunal at the Permanent Court of Arbitration in The Hague decided that Russia is obliged to pay compensation to the Naftogaz Ukrainy group in the amount of $5 billion for losses related to the loss of assets in Crimea. Naftogaz announced this on its website on April 13, 2023. The decision of the tribunal was made a day earlier.

The Ukrainian state-owned company said in a statement that, according to a court decision, the amount of compensation that Russia must pay to Naftogaz should be equal to the fair market value of the group’s assets until they are lost. The arbitration also disagreed with the assertion of the Russian side that Naftogaz was not entitled to any compensation, the Ukrainian company points out. Also, according to the decision of the tribunal, Russia must reimburse the Ukrainian company for the costs associated with arbitration proceedings.

The press secretary of the President of Russia Dmitry Peskov, commenting on the message of Naftogaz, said that the lawyers who represent the interests of Russia in this case will analyze the decision of the tribunal and decide on further actions.

Vedomosti sent inquiries to the Ministry of Justice and the Prosecutor General’s Office of the Russian Federation and the government of Crimea.

Naftogaz initiated arbitration proceedings in October 2016. It was based on the Russian-Ukrainian investment protection agreement of 1998. Naftogaz applied to arbitration demanding that Russia be ordered to pay compensation for alleged violation of the agreement, including expropriation of strategically important energy investments in Crimea in 2014.

After the entry of Crimea and Sevastopol into Russia in 2014, the property of Naftogaz’s subsidiaries Chornomorneftegaz and Ukrtransgaz, located on the peninsula and on the shelf, was nationalized and contributed to the authorized capital of the new company Chornomorneftegaz, owned by the Crimean authorities. The company’s website says that it is under the departmental control of the Ministry of Energy of the Republic of Crimea. Chernomorneftegaz develops hydrocarbon fields on the Black Sea shelf, in the Sea of ​​Azov and on the land part of Crimea.

Initially, Naftogaz estimated the amount of damage at $2.6 billion, then raised it to $5.2 billion, and even later to $8 billion. In August 2021, Naftogaz reported that the amount of the claim, including interest, exceeded $9 billion. Why as a result, the Hague arbitrators estimated the amount at $ 5 billion, not explained.

Forward Legal lawyer Rostislav Katz recalls that in the vast majority of cases, the losing states do not agree with the decisions of the tribunal and do not comply with them. “Russia will not be an exception,” he said.

Special Counsel for Sanctions at Pen & Paper Bar Kira Vinokurova believes that Russia’s voluntary enforcement of the decision now “does not seem realistic.” Vinokurova recalls that since 2020, the Constitutional Court of the Russian Federation, according to the law, considers issues on the execution of decisions of interstate bodies and may consider the decision of the tribunal to be contrary to public order.

According to Katz, Russia will challenge the decision of the arbitration in state courts of the Netherlands. If it is not possible to cancel the decision, the authorities of the Russian Federation, according to the lawyer’s assumption, will try to prevent its enforcement in foreign courts. Katz explains that the Ukrainian authorities will not get the right to independently expropriate Russian assets, for this they will have to apply for enforcement in the courts of Western countries. There are many Russian assets located there, including those already arrested, and the likelihood of enforcement against them is high, the lawyer notes.

Vinokurova recalls that seizures of Russian assets have already taken place in Europe, and after the adoption of the law on the forced seizure of Russian assets in Ukraine, such nationalization “is actually already being carried out.”

In 2022, the Ukrainian authorities adopted the law “On the Basic Principles for the Compulsory Seizure in Ukraine of Objects of the Property Rights of the Russian Federation and Its Residents”, which involves the nationalization in Ukraine of the property and financial resources of individuals and legal entities from the Russian Federation.

Earlier, Western countries blocked $ 300 billion of reserves of the Central Bank of the Russian Federation. The head of the EC, Ursula von der Leyen, in November 2022, proposed creating a structure for managing Russian assets. According to her, the blocked funds of the Central Bank of the Russian Federation and the assets of Russian oligarchs confiscated due to sanctions should be combined into a special fund, the funds should be invested, and the profits received should be used for compensation payments to Ukraine.