Views from the East: Updates and trends from Russia and CIS-related arbitration
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Compliance with investment treaty awards: Surprises in Ukraine
Since 2019, arbitration practitioners have observed that enforcement risk has risen to the top of the agenda in negotiations with third party funders.
This trend has been particularly noticeable in cases involving claims under investment treaties against CIS countries, especially Ukraine.
Until relatively recently, enforcement was a secondary consideration for funders, ranking behind concerns such as the strength of the prima facie case, the clarity of jurisdictional basis and the nature of the breach.
This poses a dilemma for arbitration lawyers, who typically find it difficult to say with any certainty how an award will be treated by a particular state and what the process of enforcement will be in three or four years' time, pending the conclusion of any arbitral proceedings.
In cases involving sovereign states, finding non-sovereign assets in jurisdictions that will respect arbitral awards has always been challenging, and statistical analysis of how awards have been treated by states, based on public information, can be unhelpful when trying to convince funders to support a claim.
Much published analysis appears to indicate that frequently sued states like Ukraine have a poor record in complying with adverse awards in investment treaty arbitrations.
However, such analysis typically fails to capture what may in fact be surprisingly high, but poorly documented, levels of voluntary compliance.
Ukraine has reportedly adopted an unofficial policy of complying promptly with awards against the state, unless there is a defect with the award. This is subject to the stipulation that the award must be confirmed in Ukraine, rather than seeking assets in other jurisdictions.
Another frequently overlooked detail is that Ukrainian courts operate in a prompt and predictable manner. Anecdotally, it is understood that in about half of cases, simply filing the litigation to confirm the award has resulted in settlements. In most of the remaining cases (with the notable exception of the highly politicised Tatneft dispute), a first instance decision was sufficient to enforce the award.
Ukraine is something of an outlier in the Russia/CIS and wider Central Asia region, where other governments with a number of known awards against them seem less inclined to comply voluntarily.
In some cases, states in this region have argued that local law precludes them from paying awards and/or that they need to obtain budgetary approval to comply, the process for which does not coincide with the timeline set for paying the award.
A possible reason for Ukraine's anomalous status is that it has a vested interest in upholding the reputation of its domestic courts for operating independently and reliably, due to the government's heavy involvement in international bond markets.
Its desire to attract inward investment means the government wants to be seen to be taking action on properly rendered investor-state awards, however evidence suggests Ukraine has more to do in communicating its approach to the international arbitration community.
Enforcing awards in Kazakhstan: Lessons from the Stati saga
An example of the difficulties parties to arbitration experience in enforcing awards against states in Russia and the CIS region is the long-running case of Stati, Ascom and others v. Kazakhstan (aka "the Stati arbitration").
Briefly, Moldovan investors Anatolie and Gabriel Stati had invested in petroleum operations in Kazakhstan, which they alleged the state subsequently expropriated.
The legal battle between the Statis and the Kazakh government began in 2010, when the Stati investors initiated a Stockholm Chamber of Commerce (SCC) arbitration, following the alleged expropriation of oil and gas exploration and production assets held by companies owned by the Statis.
In 2013, an SCC tribunal awarded the Statis approximately US$500 million under their Energy Charter Treaty (ECT) arbitration claim against Kazakhstan.
Kazakhstan however refused to pay the award for a combination of reasons, alleging it was obtained through fraud and citing arguments of sovereign immunity and the differing status of the Kazakh state versus the National Bank of Kazakhstan.
In the years since the award was issued, national courts in various jurisdictions (including Sweden, Belgium, The Netherlands and the UK) engaged in enforcing the award and in follow-on proceedings have reached a number of significant findings that have contributed to the question of how assets implicated in such awards will be treated.
While there are many strands to this case, one of the key challenges for the Stati investors is that state assets are generally regarded as separate from those held by national entities, such as national funds. Assets in the latter category are unavailable to satisfy arbitral awards made against the state.
In the Stati case, the investors argued that Kazakhstan had attempted to shield assets from attachment (i.e., availability to pay the award) by putting them in the country's national fund and out of reach of the Stati investors.
Applications by the Statis to freeze and attach large sums held by the Kazakh government in European bank accounts and arguments by Kazakhstan that these investments should be protected by sovereign immunity have tested and divided the approaches of national courts.
In April 2020, the England and Wales High Court issued a decision that Kazakh national funds held in a custodial account in the UK branch of BNY Mellon could not be used to settle the award, on the basis that BNY Mellon had effectively agreed a contractual debt with the Bank of Kazakhstan and only the Bank of Kazakhstan can enforce a call on that debt.
However, in a subsequent significant and possibly contradictory development in June 2021, the Belgian Court of Appeal rejected Kazakhstan's appeal against the attachment of c.US$22 billion belonging to the National Fund of Kazakhstan in its account at BNY Mellon in Belgium, finding the assets had been invested for commercial purposes.
This decision indicated that awards against sovereign states can be enforced, even when the assets in question are seemingly held by an independent third party.
No doubt frustrated by the legal equivocations over enforcement of the initial award, in August 2021, the Stati investors launched a second claim against Kazakhstan on the grounds that the state's failure to pay the award is in itself a breach of its international treaty obligations.
In general, the Stati case illustrates that investors seeking to enforce arbitral awards against resistant states face a complex patchwork of legislative approaches on the one hand, but have a variety of possible routes to enforcement on the other.
IAFC: The rise of the Kazakh-seated arbitrations
While enforcing awards against the Kazakh state has its challenges, the country is taking steps to make a name for itself as a seat for domestic and wider regional arbitration.
Established in January 2018, the Astana International Financial Centre (AIFC), which includes an International Arbitration Centre and an independent common law court, is building a reputation as a well-functioning, low-cost alternative to other dispute resolution centres for parties with regional interests.
In its first four years of operation, the AIFC focused on smaller (sub-US$500 million), local disputes between parties seeking in-country remedies, however it has ambitions to expand the value of its cases and to render international awards as the centre grows in stature.
Notably, the centre has jurisdiction to determine investor treaty disputes and (as of September 2021) reportedly had at least one case underway against the Kazakh state.
The AIFC's court and International Arbitration Centre are both pointedly independent of the local Kazakh court system, however its proponents note that it remains on good terms with the domestic courts, which helps with domestic enforcement.
In addition to hearing cases brought by domestic parties, the centre has also registered cases from Russia, the UK, Azerbaijan, Turkey, India and China, among others, and as of 2021 had registered more than 700 cases, the majority of which are arbitration and mediation cases.
While incentives such as no initial administrative fees and rapid turnaround times for decisions (some taking a matter of hours) mean the centre has been successful in attracting litigation and arbitration, critics have suggested that the AIFC's low costs are unsustainable (administrative fees are expected to be raised in 2022, albeit kept comparatively low) and are suspicious of the soundness of decisions reached in such short spaces of time.
Nevertheless, practitioners in Kazakh law firms have reported seeing more AIFC arbitration clauses in contracts, especially those involving Russian clients.
The international arbitration community, particularly those specialising in Russia and CIS arbitrations, are therefore watching the development of the centre closely.
Russia's new arbitration code: Arbitrating with sanctioned parties
In mid-2020, Russia amended its Arbitrazh (Commercial) Procedure Code to allow sanctioned Russian parties to bring claims before Russian courts, instead of resorting to international arbitration or foreign courts.
The revised code made it possible to obtain anti-suit injunctions from Russian courts to prevent foreign arbitral proceedings, which was a novel development in Russian civil procedure.
Many in the international arbitration community were anxious to see how this new legislation would be interpreted, as there had previously been evidence of Russian parties using sanctions as an excuse for not respecting international arbitration clauses in their contracts.
So far, to the relief of many in the international arbitration community, it seems Russian courts have interpreted the code fairly restrictively.
In the widely reported Uraltransmash case decision in March 2021, the Russian Supreme Court found that arbitration clauses in contracts with sanctioned Russian parties are only invalidated when sanctions render them impossible (and not merely more difficult) to perform.
However, on 29 September 2021, the Russian Supreme Court accepted the case for reconsideration, so it is now possible that it will overturn the decisions leading up to this conclusion, reigniting concerns about the interpretation of the code.
The amended code also raises questions about how foreign courts will deal with anti-suit injunctions rendered in Russia and how, if arbitrations proceed abroad despite injunctions, parties can enforce awards in Russia.
Practitioners should therefore be aware of the amended Arbitrazh (Commercial) Procedure Code when drafting contracts with sanctioned parties.
Arbitrating in Russia: Licensing arbitral institutions
Adding to upheaval in the Russian arbitration system, major reforms to Russia's arbitration laws and arbitral institutions in 2015-2016 have created some turmoil.
The reforms were intended to modernise the country's legal framework by bringing it in line with the UNCITRAL Model Law on International Commercial Arbitration 1985 as amended in 2006 (the UNCITRAL Model Law 2006).
As part of this overhaul, a new government licensing system was introduced for domestic and international Russian arbitral institutions to give licensees the status of 'permanent arbitral institutions' (PAIs).
The principle professed purpose of these licences was to combat suspected corruption in so-called ‘pocket’ arbitral institutions (usually set up by companies that induced their counterparties to refer disputes to such institutions) and generally make Russia a more arbitration-friendly jurisdiction.
The new system was also intended to prevent Russian institutions registered abroad from circumventing the licensing process.
To obtain a licence, an arbitral institution must be established by a reputable non-profit organisation with sufficient financial resources to meet the costs of running arbitrations. As of September 2021, there were five Russian institutions licensed to administer arbitrations in Russia (as opposed to more than 1,000 before the reforms).
These are: the International Commercial Arbitration Court (ICAC) and Maritime Arbitration Commission (MAC) at the Chamber of Commerce and Industry of the Russian Federation; the Arbitration Centre at the Russian Union of Industrialists and Entrepreneurs; the Russian Arbitration Centre at the Russian Institute of Modern Arbitration (RIMA); and the National Centre of Sports at the Sports Arbitration Chamber.
Questions have been raised about the policy for awarding licences, however, as the highly-respected and fully independent Russian Arbitration Association (RAA) has had its applications repeatedly turned down.
International institutions have also been incentivised to apply for licences, primarily because awards made under the auspices of foreign centres in Russian territory are considered to have been rendered by ad hoc tribunals (ad hoc arbitration being subject to certain restrictions under Russian law).
As of 2021, there are four foreign licensed institutions able to administer international arbitrations seated in Russia, namely: the Hong Kong International Arbitration Centre (HKIAC) and the Vienna International Arbitral Centre (VIAC); the International Court of Arbitration of the International Chamber of Commerce (ICC) and the Singapore International Arbitration Centre (SIAC).
A number of major institutions have not yet applied for a licence, including the London Court of International Arbitration (LCIA) and the Stockholm Chamber of Commerce (SCC), despite regularly dealing with cases involving Russian parties. One of the reasons put forward for this, at the time, is that operating under a licence would impose an obligation on these institutions to adopt a separate set of rules specific to corporate disputes.
Yet, under Russian law, such rules are required to contain particular provisions relating to the transparency of proceedings and notification of non-party interests, which could potentially make arbitration under those rules quite unattractive to some Russian parties.
This article is based on a discussion between leading arbitration experts during an event co-hosted by European law firm Fieldfisher and RCAN as part of Paris Arbitration Week on 23 September 2021. The contributors to the discussion were Daniel Hayward (partner, Fieldfisher, London); Stephanie Balsys (managing associate, Mishcon de Reya, London); Noah Rubins QC (Head of International Arbitration, Freshfields, Paris); Artem Doudko (Head of Russia & CIS Disputes, Osborne Clarke, London); Laurence Ponty (Counsel, Archipel, Geneva); Evgeniya Rubinina (Partner, Enyo Law LLP, London); and Tomas Vail (Head of Vail Dispute Resolution, London).
Since 2019, arbitration practitioners have observed that enforcement risk has risen to the top of the agenda in negotiations with third party funders.
This trend has been particularly noticeable in cases involving claims under investment treaties against CIS countries, especially Ukraine.
Until relatively recently, enforcement was a secondary consideration for funders, ranking behind concerns such as the strength of the prima facie case, the clarity of jurisdictional basis and the nature of the breach.
This poses a dilemma for arbitration lawyers, who typically find it difficult to say with any certainty how an award will be treated by a particular state and what the process of enforcement will be in three or four years' time, pending the conclusion of any arbitral proceedings.
In cases involving sovereign states, finding non-sovereign assets in jurisdictions that will respect arbitral awards has always been challenging, and statistical analysis of how awards have been treated by states, based on public information, can be unhelpful when trying to convince funders to support a claim.
Much published analysis appears to indicate that frequently sued states like Ukraine have a poor record in complying with adverse awards in investment treaty arbitrations.
However, such analysis typically fails to capture what may in fact be surprisingly high, but poorly documented, levels of voluntary compliance.
Ukraine has reportedly adopted an unofficial policy of complying promptly with awards against the state, unless there is a defect with the award. This is subject to the stipulation that the award must be confirmed in Ukraine, rather than seeking assets in other jurisdictions.
Another frequently overlooked detail is that Ukrainian courts operate in a prompt and predictable manner. Anecdotally, it is understood that in about half of cases, simply filing the litigation to confirm the award has resulted in settlements. In most of the remaining cases (with the notable exception of the highly politicised Tatneft dispute), a first instance decision was sufficient to enforce the award.
Ukraine is something of an outlier in the Russia/CIS and wider Central Asia region, where other governments with a number of known awards against them seem less inclined to comply voluntarily.
In some cases, states in this region have argued that local law precludes them from paying awards and/or that they need to obtain budgetary approval to comply, the process for which does not coincide with the timeline set for paying the award.
A possible reason for Ukraine's anomalous status is that it has a vested interest in upholding the reputation of its domestic courts for operating independently and reliably, due to the government's heavy involvement in international bond markets.
Its desire to attract inward investment means the government wants to be seen to be taking action on properly rendered investor-state awards, however evidence suggests Ukraine has more to do in communicating its approach to the international arbitration community.
Enforcing awards in Kazakhstan: Lessons from the Stati saga
An example of the difficulties parties to arbitration experience in enforcing awards against states in Russia and the CIS region is the long-running case of Stati, Ascom and others v. Kazakhstan (aka "the Stati arbitration").
Briefly, Moldovan investors Anatolie and Gabriel Stati had invested in petroleum operations in Kazakhstan, which they alleged the state subsequently expropriated.
The legal battle between the Statis and the Kazakh government began in 2010, when the Stati investors initiated a Stockholm Chamber of Commerce (SCC) arbitration, following the alleged expropriation of oil and gas exploration and production assets held by companies owned by the Statis.
In 2013, an SCC tribunal awarded the Statis approximately US$500 million under their Energy Charter Treaty (ECT) arbitration claim against Kazakhstan.
Kazakhstan however refused to pay the award for a combination of reasons, alleging it was obtained through fraud and citing arguments of sovereign immunity and the differing status of the Kazakh state versus the National Bank of Kazakhstan.
In the years since the award was issued, national courts in various jurisdictions (including Sweden, Belgium, The Netherlands and the UK) engaged in enforcing the award and in follow-on proceedings have reached a number of significant findings that have contributed to the question of how assets implicated in such awards will be treated.
While there are many strands to this case, one of the key challenges for the Stati investors is that state assets are generally regarded as separate from those held by national entities, such as national funds. Assets in the latter category are unavailable to satisfy arbitral awards made against the state.
In the Stati case, the investors argued that Kazakhstan had attempted to shield assets from attachment (i.e., availability to pay the award) by putting them in the country's national fund and out of reach of the Stati investors.
Applications by the Statis to freeze and attach large sums held by the Kazakh government in European bank accounts and arguments by Kazakhstan that these investments should be protected by sovereign immunity have tested and divided the approaches of national courts.
In April 2020, the England and Wales High Court issued a decision that Kazakh national funds held in a custodial account in the UK branch of BNY Mellon could not be used to settle the award, on the basis that BNY Mellon had effectively agreed a contractual debt with the Bank of Kazakhstan and only the Bank of Kazakhstan can enforce a call on that debt.
However, in a subsequent significant and possibly contradictory development in June 2021, the Belgian Court of Appeal rejected Kazakhstan's appeal against the attachment of c.US$22 billion belonging to the National Fund of Kazakhstan in its account at BNY Mellon in Belgium, finding the assets had been invested for commercial purposes.
This decision indicated that awards against sovereign states can be enforced, even when the assets in question are seemingly held by an independent third party.
No doubt frustrated by the legal equivocations over enforcement of the initial award, in August 2021, the Stati investors launched a second claim against Kazakhstan on the grounds that the state's failure to pay the award is in itself a breach of its international treaty obligations.
In general, the Stati case illustrates that investors seeking to enforce arbitral awards against resistant states face a complex patchwork of legislative approaches on the one hand, but have a variety of possible routes to enforcement on the other.
IAFC: The rise of the Kazakh-seated arbitrations
While enforcing awards against the Kazakh state has its challenges, the country is taking steps to make a name for itself as a seat for domestic and wider regional arbitration.
Established in January 2018, the Astana International Financial Centre (AIFC), which includes an International Arbitration Centre and an independent common law court, is building a reputation as a well-functioning, low-cost alternative to other dispute resolution centres for parties with regional interests.
In its first four years of operation, the AIFC focused on smaller (sub-US$500 million), local disputes between parties seeking in-country remedies, however it has ambitions to expand the value of its cases and to render international awards as the centre grows in stature.
Notably, the centre has jurisdiction to determine investor treaty disputes and (as of September 2021) reportedly had at least one case underway against the Kazakh state.
The AIFC's court and International Arbitration Centre are both pointedly independent of the local Kazakh court system, however its proponents note that it remains on good terms with the domestic courts, which helps with domestic enforcement.
In addition to hearing cases brought by domestic parties, the centre has also registered cases from Russia, the UK, Azerbaijan, Turkey, India and China, among others, and as of 2021 had registered more than 700 cases, the majority of which are arbitration and mediation cases.
While incentives such as no initial administrative fees and rapid turnaround times for decisions (some taking a matter of hours) mean the centre has been successful in attracting litigation and arbitration, critics have suggested that the AIFC's low costs are unsustainable (administrative fees are expected to be raised in 2022, albeit kept comparatively low) and are suspicious of the soundness of decisions reached in such short spaces of time.
Nevertheless, practitioners in Kazakh law firms have reported seeing more AIFC arbitration clauses in contracts, especially those involving Russian clients.
The international arbitration community, particularly those specialising in Russia and CIS arbitrations, are therefore watching the development of the centre closely.
Russia's new arbitration code: Arbitrating with sanctioned parties
In mid-2020, Russia amended its Arbitrazh (Commercial) Procedure Code to allow sanctioned Russian parties to bring claims before Russian courts, instead of resorting to international arbitration or foreign courts.
The revised code made it possible to obtain anti-suit injunctions from Russian courts to prevent foreign arbitral proceedings, which was a novel development in Russian civil procedure.
Many in the international arbitration community were anxious to see how this new legislation would be interpreted, as there had previously been evidence of Russian parties using sanctions as an excuse for not respecting international arbitration clauses in their contracts.
So far, to the relief of many in the international arbitration community, it seems Russian courts have interpreted the code fairly restrictively.
In the widely reported Uraltransmash case decision in March 2021, the Russian Supreme Court found that arbitration clauses in contracts with sanctioned Russian parties are only invalidated when sanctions render them impossible (and not merely more difficult) to perform.
However, on 29 September 2021, the Russian Supreme Court accepted the case for reconsideration, so it is now possible that it will overturn the decisions leading up to this conclusion, reigniting concerns about the interpretation of the code.
The amended code also raises questions about how foreign courts will deal with anti-suit injunctions rendered in Russia and how, if arbitrations proceed abroad despite injunctions, parties can enforce awards in Russia.
Practitioners should therefore be aware of the amended Arbitrazh (Commercial) Procedure Code when drafting contracts with sanctioned parties.
Arbitrating in Russia: Licensing arbitral institutions
Adding to upheaval in the Russian arbitration system, major reforms to Russia's arbitration laws and arbitral institutions in 2015-2016 have created some turmoil.
The reforms were intended to modernise the country's legal framework by bringing it in line with the UNCITRAL Model Law on International Commercial Arbitration 1985 as amended in 2006 (the UNCITRAL Model Law 2006).
As part of this overhaul, a new government licensing system was introduced for domestic and international Russian arbitral institutions to give licensees the status of 'permanent arbitral institutions' (PAIs).
The principle professed purpose of these licences was to combat suspected corruption in so-called ‘pocket’ arbitral institutions (usually set up by companies that induced their counterparties to refer disputes to such institutions) and generally make Russia a more arbitration-friendly jurisdiction.
The new system was also intended to prevent Russian institutions registered abroad from circumventing the licensing process.
To obtain a licence, an arbitral institution must be established by a reputable non-profit organisation with sufficient financial resources to meet the costs of running arbitrations. As of September 2021, there were five Russian institutions licensed to administer arbitrations in Russia (as opposed to more than 1,000 before the reforms).
These are: the International Commercial Arbitration Court (ICAC) and Maritime Arbitration Commission (MAC) at the Chamber of Commerce and Industry of the Russian Federation; the Arbitration Centre at the Russian Union of Industrialists and Entrepreneurs; the Russian Arbitration Centre at the Russian Institute of Modern Arbitration (RIMA); and the National Centre of Sports at the Sports Arbitration Chamber.
Questions have been raised about the policy for awarding licences, however, as the highly-respected and fully independent Russian Arbitration Association (RAA) has had its applications repeatedly turned down.
International institutions have also been incentivised to apply for licences, primarily because awards made under the auspices of foreign centres in Russian territory are considered to have been rendered by ad hoc tribunals (ad hoc arbitration being subject to certain restrictions under Russian law).
As of 2021, there are four foreign licensed institutions able to administer international arbitrations seated in Russia, namely: the Hong Kong International Arbitration Centre (HKIAC) and the Vienna International Arbitral Centre (VIAC); the International Court of Arbitration of the International Chamber of Commerce (ICC) and the Singapore International Arbitration Centre (SIAC).
A number of major institutions have not yet applied for a licence, including the London Court of International Arbitration (LCIA) and the Stockholm Chamber of Commerce (SCC), despite regularly dealing with cases involving Russian parties. One of the reasons put forward for this, at the time, is that operating under a licence would impose an obligation on these institutions to adopt a separate set of rules specific to corporate disputes.
Yet, under Russian law, such rules are required to contain particular provisions relating to the transparency of proceedings and notification of non-party interests, which could potentially make arbitration under those rules quite unattractive to some Russian parties.
This article is based on a discussion between leading arbitration experts during an event co-hosted by European law firm Fieldfisher and RCAN as part of Paris Arbitration Week on 23 September 2021. The contributors to the discussion were Daniel Hayward (partner, Fieldfisher, London); Stephanie Balsys (managing associate, Mishcon de Reya, London); Noah Rubins QC (Head of International Arbitration, Freshfields, Paris); Artem Doudko (Head of Russia & CIS Disputes, Osborne Clarke, London); Laurence Ponty (Counsel, Archipel, Geneva); Evgeniya Rubinina (Partner, Enyo Law LLP, London); and Tomas Vail (Head of Vail Dispute Resolution, London).