One of Ukraine’s legal responses to Russia’s full-scale aggression was a legislative initiative aimed to confiscate the property of the aggressor state. On 3 March, the Ukrainian Parliament put this initiative into practice by adopting the Law of Ukraine “On Basic Principles of Confiscation of Property Held in Ukraine by the Russian Federation and its Residents” (“Law”), and on 10 March, the Law was signed by the President.
How and against whom will the confiscation be carried out?
The Law establishes an extremely efficient and quick confiscation procedure. The Ukrainian Government determines the list of the relevant property, while the National Security and Defence Council (an advisory body to the Ukrainian President) adopts the decision on confiscation, which shall then be enacted by a presidential decree. The Law also provides that within six months after the martial law is lifted, the relevant presidential decree must be approved by the Ukrainian Parliament. The confiscated property will automatically be transferred to state ownership without any compensation once the presidential decree enters into force.
The Law applies to both the property of the Russian Federation and that of its “residents”. Because of the wording used, the media have spread the view that assets of Russian non-state businesses in Ukraine would also be confiscated. However, the Law gives a special definition of the term “resident”, which encompasses only those Ukrainian and foreign legal entities whose beneficiary or direct or indirect owner is the Russian Federation.
The question as to which Russian property Ukraine intends to confiscate under the Law remains open. After the beginning of Russian aggression in 2014, the share of Russian business in Ukraine, especially state-owned Russian business, has decreased dramatically. In addition, almost immediately after the full-scale Russian invasion, the National Bank of Ukraine revoked banking licences and initiated winding-up of the remaining state-owned Russian banks in Ukraine – Prominvestbank and International Reserve Bank (a subsidiary of Russian Sberbank) – from the market. The buildings and property of diplomatic and consular institutions enjoy immunity from confiscation under the norms of two Vienna Conventions. Thus, it is yet unclear what kind of property the government will propose the National Security and Defence Council to seize under the Law. Perhaps it will concern goods and products which Ukrainian enterprises have not delivered to Russian state-owned companies due to the outbreak of hostilities. According to some media reports, Ukrainian authorities have already drawn up a list of potential targets, containing more than 20 enterprises.
Can Russia prevent or appeal against confiscation?
Russia and the companies controlled by it are likely to seek ways to reverse or at least obtain compensation for the confiscation of their property. Given the unambiguous provisions of the Law, it seems unlikely that they will be able to appeal against the confiscation of property on the basis of procedural violations. However, they may try substantiating their case by references to rights and freedoms enshrined in the Ukrainian Constitution. Article 41 of the Constitution provides that the right of private property is inviolable, prohibiting the confiscation of private property without full compensation. It is difficult to predict whether such arguments will be successful in Ukrainian courts, as it will largely depend on the facts of the case, including the types of property involved. For example, different counter-arguments could be raised in relation to property directly owned by state bodies or companies of the Russian Federation as opposed to property privately owned by a Ukrainian company that indirectly belongs to Russia.
In addition, we should keep in mind that the Agreement on Encouragement and Mutual Protection of Investments (“Agreement”) between Ukraine and Russia remains in force. The provisions of this Agreement imply, inter alia, that any expropriation must be followed by a prompt, adequate, and effective compensation. The Agreement contains no explicit exceptions to this rule. Most probably, in the event of confiscation under the Law, an investment claim would be brought against Ukraine under the Agreement. Again, the prospects of such a claim are anything but certain.
Issues at play in potential investment dispute
First, only “investors” can file a claim under the Agreement. The definition of an “investor” under the Agreement covers legal entities established under Ukrainian or Russian law, respectively, and does not apply to Russia or Ukraine as states (or their state bodies). Thus, if the property owned directly by Russia (e.g., by one of its governmental authorities) is expropriated, it would not have the opportunity to make a claim under the Agreement, since it would not qualify as a protected investor.
Second, a claim can only be filed with respect to “investments”. The prerequisites for an asset to qualify as an “investment” is a separate and complex topic, but it is safe to say that transactions in ordinary international trade (for example, goods bought but not yet delivered to Russia) most likely will not be regarded as investments.
Second, even if criteria of “investor” and “investments” are met, Ukraine still would be able to raise a number of arguments in defence of the potential investment claim. For example, customary international law sets out a number of “grounds precluding wrongfulness”, exceptions according to which a state may be wholly or partially exempted from liability for acts constituting a violation of international law (in this case, a potential violation of the prohibition of expropriation).
One of such tools is the doctrine of necessity, recognised as part of customary international law. It provides that the wrongfulness of a state’s conduct may be precluded if its actions are aimed at protecting its essential interests against a grave and imminent peril. However, such actions must be the only available course of action and must not affect other essential interests. There is no doubt that Russia’s full-scale military aggression against Ukraine poses a grave and imminent threat to Ukraine and its essential interests, as it calls into question its territorial integrity and very existence as a sovereign state. Ukraine can also argue that the expropriation of Russian property is the only response possible in the face of such an unprecedented violation of international law by Russia. In international investment disputes, necessity has been applied successfully in a few cases only. In LG&E v. Argentina, for example, government representatives proved that the imposition of price controls in response to a severe economic crisis was the only feasible step to restore economic stability and public peace in Argentina. However, in other cases that involved claims by other investors under the same factual circumstances, the arbitrators did not consider it possible to apply the state of necessity. Therefore, to successfully avail of this defence it will be essential for Ukraine to prove that the expropriation was the only possible step in these factual circumstances.
Another potential line of defence is to qualify the expropriation as countermeasures, another ground precluding the wrongfulness of the state’s conduct. Countermeasures are temporary non-performance by the state of its obligations under international law in response to a violation of international law by another state. However, the doctrine of countermeasures has not yet been successfully applied in international investment disputes. One of the main reasons is the view that countermeasures may only be applied against a state and not against investors of that state. In such a case, applying this line of defence to assets seized from Russian companies owned by Russia would require convincing arbitrators to take a more liberal and broad approach to countermeasures.
An attentive reader might wonder: if the Agreement gives Russian investors an opportunity for compensation, why not terminate the Agreement? Unfortunately, it’s not that simple. Even if Ukraine unilaterally terminates the Agreement, the Agreement will remain in force for 10 years for all Russian investments made prior to the termination.
The confiscation of Russia’s assets is an understandable and legitimate response to aggression. However, before applying it to specific assets of the aggressor state, Ukraine should carefully weigh potential benefits of against the existing international law restrictions and consider in advance whether such confiscation may lead to legal claims against Ukraine and what Ukrainian defences in such proceedings will be.
By Oleksiy Maslov, Senior Associate, Avellum