Ukrainian state-owned bank Oschadbank has set a legal precedent with a billion-dollar international arbitration court victory over the Kremlin related to the 2014 Russian seizure of Crimea
April 2014 was a very challenging month for Ukraine, to put it mildly. The entire country was perilously close to spinning out of control. The Revolution of Dignity had sparked the flight of Ukraine’s former leadership and been followed by the start of Russian military aggression in the south and east of the country. Naturally, these unprecedented problems made themselves keenly felt within the Ukrainian banking system.
Distressing information flowed relentlessly into the office of the Oschadbank Chairman, where I had arrived to take up my position just a few weeks earlier. The outflow of deposits from the bank was around UAH 200 million to UAH 300 million per day. Meanwhile, the chaotic and frightening situation in Crimea continued to escalate, with the prospect of losing our Crimean assets becoming more and more realistic with each passing day. I had a good overview of the bank’s position and a clear vision of what was required. Nevertheless, it was difficult to escape the impression of a runaway train that was heading inevitably towards a terrible crash.
Unlike other banks operating in Crimea, we did not have the option of winding down our business on the peninsula in order to save our assets. Instead, we had to remain in Crimea as long as Ukrainian laws were in effect. Meanwhile, we were receiving information on a daily basis about shameless looting by the self-proclaimed leaders of the annexed peninsula. We could not do anything to stop these actions. Instead, we focused on what we could do, which was to document everything as it had been on the eve of the annexation crisis. We began collecting everything from documentary evidence to photos, video footage and eyewitness testimonies. We recognized that this factual basis would be crucial in the coming legal battle to recover our losses.
This approach has produced results. In late November 2018, an international arbitration court backed Oschadbank’s claims against Russia and awarded around USD 1.3 billion in compensation for the bank’s losses in Crimea, together with interest on late payment of approximately USD 100,000 per day. This compensation award covers both lost assets and loss of business. Oschadbank assets in Crimea were considerable and included a branch network of more than 300 outlets together with a solid credit portfolio. It took an entire day for the arbitration court to assess how our losses were calculated. Crucially, we were able to provide the necessary documentary evidence, all of which was collected during the dramatic spring of 2014.
Oschadbank’s eventual victory was not a foregone conclusion. While we had a considerable amount of evidence in our possession confirming our losses, it was far from clear whether this would prove a sufficient legal basis for success in the international courts. When we began the process, there was no consensus legal opinion, with around half of the experts we polled saying it was a waste of time and money. There were queries over all manner of issues, including the fundamental question of whether Oschadbank qualified in a legal sense to sue the Russian Federation. Having analyzed all the pros and cons of the situation, we decided that a lawsuit was the most appropriate way forward.
Following discussions with the more optimistic members of the expert legal community, we concluded that the best approach would be to make our claim based on a bilateral agreement between Ukraine and Russia on the mutual protection of investments dating from November 1998. Significantly, both countries subsequently ratified this agreement. Such details often play an important role in international proceedings of this nature. The most obvious example of this is the Yukos vs Russia case. Yukos was initially awarded USD 50 billion in arbitration, only for it to transpire that the European Energy Charter on which the claimant based their lawsuit had not been ratified by Russia. This allowed the Russian Federation to avoid any payouts.
Choosing the right legal adviser was a cornerstone for our further progress. We held talks with ten leading international law firms. Six were not ready to take on the case. Of the four who were ready to proceed, we chose London-based Quinn Emanuel Urquhart & Sullivan LLP, a law firm that specializes in high value and complex disputes, often with an international or cross-border element. They are a global leader when it comes to dealing with investment disputes involving states. Most importantly, they were convinced that victory was achievable. This confidence came despite the fact that there were no such precedents globally. We would be the first. Of course, there have previously been lawsuits regarding investments in regions subsequently occupied by foreign powers. However, Crimea was a completely different story. De facto, Russia had annexed the peninsula. De jure, it remained part of Ukraine and the international community refused to recognize Russian claims. How would the court choose to interpret the situation?
Making Our Claim
The next step was a letter of notification to the respondent in our claim. Oschadbank sent letters to several recipients in Moscow including the President of the Russian Federation, the Prime Minister, and the Ministry of Foreign Affairs. In line with the relevant legislation, we waited six months for any response. We received none.
Our legal counsel advised against so-called bifurcation of our claim into separate component parts and advised us to opt for a single hearing. They also proposed the Honorable Charles N. Brower as our arbitrator. Mr. Brower once took part in the preparation of disarmament agreements between the United States and the USSR and came with a reputation as a respected international expert. This added considerable credibility to our arbitration case.
The hearing was held by an arbitration court in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL), administered by the Permanent Court of Arbitration (PCA), based in The Hague (Netherlands). This choice was determined by the terms of the 1998 mutual protection of investments agreement between Ukraine and Russia. The hearings took place in Paris, because French laws are less indulgent of participants in legal proceedings who initially refuse to participate and then try to appeal unfavorable decisions. Indeed, international arbitration awards based on the results of arbitration proceedings conducted in France are not subject to review by appeal. They can only be appealed by setting aside the award itself, and French law provides very limited grounds for such actions. Furthermore, French awards in international investment arbitration courts are enforceable in 154 different jurisdictions, including the seizure of assets.
Moscow Stays Silent
The Russian authorities ignored all invitations to participate in the arbitration proceedings. The country’s various authorized representatives did not respond to numerous letters and messages from the arbitration tribunal. Nevertheless, the process continued. In line with international arbitration regulations established by the United Nations, if one of the parties fails to appear in court without good reason after having received the proper notifications, the case may proceed without that party’s participation. Any award remains binding, regardless of this nonparticipation.
Russia’s decision to ignore Oschadbank’s arbitration case testifies to the fact that Moscow has no convincing counterarguments to put forward in its favor. Nor has Russia accepted the verdict. After refusing to participate in the arbitration process, Russia is now attempting to continue its resistance in the implementation stage.
I will not speak in detail about the arbitration claim procedure itself, beyond commenting that everything strictly adhered to the existing international legal framework. The most emotional moments were the hearings themselves, held in March 2017. I can vividly recall two sleepless nights on the eve of the hearings when we worked endlessly on the more than 600 slides featured in our presentation. My own appearance before the arbitrators also naturally stands out in my memory. At the time, I was acutely aware of how important my speech would be for the future success of Oschadbank’s claim. Then there was the day we had to find a printing house to publish a mountain of paperwork, and the moment we found ourselves relying on a Parisian motorcyclist courier to deliver crucial documents to the tribunal despite the traffic jams for which the French capital city is rightly famous.
Setting a Precedent
Oschadbank is a large state institution with a global reputation. Ever since we began arbitration proceedings, it has been clear that the fate of numerous similar cases would depend on the outcome of our claim. A large number of Ukrainian companies also suffered losses due to the Russian annexation of Crimea. Whenever I asked my colleagues from these companies why they did not also pursue justice via international arbitration proceedings, they would answer: “We are waiting to see the outcome of your claim.” Now that we have secured victory, I can confidently advise them to avoid any further delay and actively defend their rights in the international judicial bodies available to them.
While we have demonstrated that success is possible, future Ukrainian claimants will need to be well prepared and will be reliant on the quality of their team. We were lucky in that we could call upon the Oschadbank legal team together with colleagues from our Crimean Regional Department. During the most intense days of spring 2014, Olexandr Matiukha was the de facto representative of the bank’s management board within the Crimean Regional Department. He painstakingly recorded and documented the actions of the invaders. Thanks to him, we had a detailed account of who burst into our premises, what documents they wielded, and what they took away with them. This was to prove crucial in helping us win. The careful preparation of all necessary documentation at the preparatory stage of our claim also helped to establish trust and mutual understanding with the arbitrators. Due to this, there were only a few unanswered questions left to address following the official hearings, whereas it is common in such cases for there to be dozens of outstanding issues.
This does not mean that it was all plain sailing. On the contrary, there were many tense discussions. Our experts and partners repeatedly had to retreat to the library and consult legal papers like students, especially when it came to ascertaining the correct procedure for estimating the value of banking sector businesses. As a lawyer by education, I was very much aware of our preparations, but I was nevertheless surprised by the how deeply the arbitrators immersed themselves in the details of our claim.
Looking back, the whole process has the air of a Herculean task. For four and a half years, we worked tirelessly and simply refused to accept Russian robbery. Including all the relevant attachments, our claim eventually expanded to more than thirty thousand pages. There were countless meetings, negotiations and discussions along the way. The most important point to remember is that we ended up on the winning side. Thanks to our efforts, all the other Ukrainian companies that also lost business in Crimea now have the green light to proceed with their own claims against Russia.
Making Russia Pay
I am sincerely grateful to the entire team behind our success. I would like to thank both Oschadbank’s lawyers and our English partners for their hard work in securing a happy end to our arbitration story. However, the wider story of our search for justice continues. Russia refuses to pay the compensation awarded by the international arbitration process. Given their refusal to recognize or participate in arbitration proceedings, this is unsurprising. In response to this refusal, we plan to trace assets belonging the Russian Federation or state-owned Russian companies located in other states. We will work to freeze these assets and enforce the arbitration ruling. There are additional mechanisms we can pursue such as targeting international loan repayments due to Russia. The process of making Russia pay will necessarily take many years, but they will eventually pay. The underlying principle is clear – any nation guilty of international aggression can and must pay the price for this aggression.
I have one final point to make. Many people have asked me whether we plan to pay out any bonuses in response to our arbitration success. My answer is clear and unequivocal. There will be no bonuses. I cannot honestly say whether this is a good or a bad thing. It is simply our decision. Nevertheless, I am convinced that my legal team are deserving of wider national and international recognition. Their names are Iryna Mudra, Iryna Kiryeyeva and Andrii Pozhydaiev. Thanks to them, this case will become part of legal history and appear in future editions of international law textbooks.
Our victory has now established a legal precedent. It has shown everyone, including Ukraine’s state-owned companies, how they can protect their investments in Crimea and seek compensation for their losses. This is an important legal victory over Russia. Hopefully it will be the first of many.
About the author: Andriy Pyshnyy is Chairman of the Management Board of Oschadbank