NJSC Naftogaz of Ukraine and others v. Russian Federation
PCA · Investment (ICSID and treaty) · Russia · 13 Feb 2019
Why it matters
This is one of the largest awards ever rendered in an investor-state arbitration, arising from Russia's annexation of Crimea. The tribunal's detailed valuation of upstream, midstream, and service assets sets a precedent for valuing state-owned enterprises' investments. The case also addresses the application of the BIT to investments made by state-owned entities and the consequences of a state's failure to participate in proceedings.
Summary
The case concerns claims by six Ukrainian state-owned energy companies (collectively 'Naftogaz') against the Russian Federation for expropriation of their investments in Crimea following Russia's annexation in 2014. The investments included upstream gas fields, midstream pipelines and storage facilities, service assets (drilling rigs, vessels, helicopters), local distribution companies, and other assets. The tribunal, constituted under the UNCITRAL Rules and the 1998 Russia-Ukraine BIT, had to determine whether the investments were protected under the BIT, which applies to investments 'made' after 1 January 1992. The majority found that the Claimants had made investments after that date, either directly or through legal succession from the state. On quantum, the tribunal valued the assets at fair market value as of the valuation date (18 March 2014), applying a Russian regulatory scenario (since the assets were located in Crimea after annexation). The tribunal awarded USD 4.22 billion, including USD 3.23 billion for upstream assets, USD 227 million for midstream assets (pipelines, UGS facility, gas inventories), USD 530 million for service assets (drilling rigs, vessels, helicopters), and USD 8.5 million for local distribution companies and other assets. Interest was awarded at 6-month EURIBOR +2% compounded semi-annually from the expropriation date. The tribunal also awarded costs of USD 23.9 million and EUR 882,435.90. The award was issued by a majority; Professor Stanivuković dissented on several issues, including the valuation of upstream assets and the treatment of sunk costs.
The detail
Parties: NJSC Naftogaz of Ukraine and others v. Russian Federation
Case number: PCA Case No. 2017-16
Outcome: The Tribunal ordered Russia to pay USD 4,222,875,858.81 plus interest and costs to the Claimants for expropriation of their investments in Crimea.
Quantum: USD 4,222,875,858.81
Applicable law: Agreement between the Government of the Russian Federation and the Cabinet of Ministers of Ukraine on the Encouragement and Mutual Protection of Investments (1998); UNCITRAL Arbitration Rules (1976)
Issues in play: The case involved the definition of 'investment' under the BIT, the temporal scope of the treaty (Article 12), and the valuation of expropriated assets. The tribunal majority held that the Claimants had made investments after the treaty's entry into force and that Russia's annexation of Crimea constituted an expropriation without compensation.
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