Clifford Chance

Compensation Mechanisms and Investment Protection in the context of the Russian War on Ukraine

As we are approaching the second anniversary of Russia's invasion of Ukraine, the amount of damage suffered increases daily. As of November 2023, the overall damages and the costs of reconstruction is estimated at USD 400 billion. Thereby, economic resilience and development remain critical for Ukraine. This post briefly overviews the key recent developments and available mechanisms for compensation of damages suffered as a result of Russia's full-scale invasion and investment protection available for international investors.

International Compensation Mechanism

Ukraine has made progress in the creation of an international compensation mechanism for victims of Russian aggression. Despite the initial scepticism about the design of the compensation commission, one of its elements, the Register of Damage is already set to commence work in spring 2024. In addition, investment arbitration continues to be a viable option for Ukrainian and foreign companies able to resort to protection of respective investment treaties.

The Register of Damage was set up by the Enlarged Partial Agreement adopted at the Summit of the Heads of State and Government of the Council of Europe held in Reykjavik on 16-17 May 2023. The Register will serve a record of evidence and claims for damage, loss or injury caused to individuals and legal entities and the State of Ukraine. To date, 44 countries and the European Union have joined the Register.

Establishing the management bodies is also almost complete: In June 2023, the Executive Director of the Register was appointed. In November 2023, the Board of Register was elected, composed of seven members from four continents. The Board's core functions are to propose the rules and regulations governing the work of the Register and record the eligibility criteria for claims to be filed with the Register, which was partially done at the first meeting in The Hague on 14 December 2023. The Board adopted the Rules of Procedure and was presented with a list of categories of claims yet to be approved. The current proposal includes claims related to loss of life, torture and sexual violence, personal injury, involuntary displacement and forced relocation of individuals, loss of property and revenue, rates of economic loss, damage to critical infrastructure and other governmental facilities, damage to historic and cultural heritage, and environmental damage.

The Register of Damage is the first pillar of the concept, which has been developed by the Working Group set up by President Zelenskyy in May 2022. The proposal's architecture parallels the UN Compensation Commission (UNCC) established following the Iraq-Kuwait conflict. In addition to the Register of Damage, a compensation commission and a compensation fund are supposed to be set up. Regarding the letter, Ukraine advocates for the seized assets to be transferred into the compensation fund – a concept which might be supported in view of the recent push of G7 countries to confiscate Russian assets for the recovery of Ukraine.

However, some sceptics are pointing out that, contrary to the UNCC, the concept of the Compensation Commission is lacking Russia's consent and Russia is unlikely to participate in such proceedings. Accordingly, obtaining the necessary international support to set up the Compensation Commission might take additional time and diplomatic effort. Until then, victims are well advised to consider other available mechanisms.

For more information, you can find our Briefing here.

Investment Arbitration

As the compensation commission and the compensation fund are still to be set up, some corporations, individuals and state-owned entities are exploring the option of filing investment arbitration claims based on Bilateral Investment Treaties (BITs). BITs grant investment protection during an armed conflict and Russia has more than 60 BITs. The level of protection differs depending on the language of a specific BIT. Regarding the territorial scope of application of the BIT, in December 2023, the panel at the Kyiv Arbitration Days highlighted that tribunals dealing with the Crimea-related cases had developed a uniform approach to applying investment treaties beyond the territory in which the State exercises its lawful sovereignty. Crimean cases could be extrapolated to the Eastern and Southern Ukraine – the territories over which Russia performs a de facto control or which have been recently formally annexed by Russia. Here, a recent ECHR judgment confirming Russia's de facto control in the so-called Donbas region could provide additional guidance as well (Applications nos. 8019/16, 43800/14 and 28525/20).

Following the full-scale invasion in February 2022, only the Ukrainian investors in SCM Group v. Russia and Energoatom v. Russia (II) initiated investment proceedings against Russia. Time will tell whether additional BIT claims will be filed. Interestingly, only the Ukraine-Russia BIT has been invoked so far. It is yet to be seen whether foreign companies would also start exploring this avenue. Numerous companies have left Russia, such that the negative implications for business operations in Russia are no longer of concern to them. However, the challenge of enforcement against Russia remains the primary concern here, whereas there has been some recent progress on enforcement of Crimea-related claims in the US and UK.

Investment Protection

Attracting national and foreign investment at times of war is critical to the survival and resilience of Ukraine's economy. 2023 was a year of significant progress towards expanded insurance coverage. Several instruments were created to safeguard investments from the risks associated with the war on different levels: international (e.g. MIGA), regional (e.g. EBRD) and national (e.g. the UK, Germany, France). The Ukrainian government is keen to build upon this positive development further in 2024.

Comment

Overall, as the Russian war against Ukraine progresses, the Ukrainian and international legal communities have made some progress to ensure that a number of procedures, such as compensation claims and investment protection, are developed and being deployed. With G7 countries pushing for confiscation of seized Russian assets for the benefit of Ukraine's recovery, more positive developments are likely to take place in 2024.