Nationalization of Sense Bank as the Dilemma of International Law

By Taras Dumych, managing partner of Wolf Theiss Kyiv

The nationalization of Sense Bank, one of Ukraine’s largest banks, promises to be a source of many future developments and news in international investment arbitration and foreign investment protection. Sense Bank used to belong to the founders of Alfa Group, a conglomerate with significant and diversified businesses in Russia, Ukraine and many other countries in the EU, and internationally, as well as to UniCredit Bank as a minority shareholder.

Before the nationalization, Sense Bank was owned by ABH Holdings SA, a banking holding company registered in Luxembourg. Among the shareholders and beneficiaries of the Luxembourg-based ABH Holdings SA, and thus Sense Bank, were both individuals sanctioned by Ukraine and two other shareholders, including UniCredit and a US registered foundation.

The nationalization of Sense Bank, which took place on 21 July 2023, was carried out at the level of the Ukrainian jurisdiction. The Government of Ukraine and National Bank of Ukraine did not have the possibility or mechanism to conduct the nationalization in the way as to ensure a selective approach to each of the individual shareholders of ABH Holdings SA. As a result, the entire stake of ABH Holdings SA in the Ukrainian Sense Bank was nationalized and transferred into state ownership.

In early January 2024, ABH Holdings SA announced that the company had filed a lawsuit with the International Centre for Settlement of Investment Disputes against the state of Ukraine to claim compensation for the losses incurred by ABH Holdings SA as a result of the nationalization of Sense Bank. As reported, a former shareholder of Sense Bank is seeking compensation from Ukraine for losses in the amount of USD 1 billion.

What are the peculiarities of investment arbitrations?

In disputes that may arise between foreign investors and the host country’s state authorities, foreign investors have a number of options as to where to initiate dispute resolution. In the instances when there is a bilateral or multilateral treaty on reciprocal protection and promotion of investments has been signed between the country of the foreign investor and Ukraine, foreign investors may rely on the dispute settlement mechanism provided for in the relevant treaty.

In the case of ABH Holdings SA, as the company is incorporated in Luxembourg, it relies on the relevant provisions of the Treaty between the Government of Ukraine and the Belgian-Luxembourg Economic Union on the Mutual Promotion and Protection of Investments.

Under the Treaty, one of the bodies that may resolve disputes between investors and, in this case, Ukraine, is the International Centre for Settlement of Investment Disputes (ICSID). It is safe to say that the ICSID, with which ABH Holdings SA filed its request for arbitration, is the most experienced global arbitration institution for resolving investment disputes.

It should be emphasized that investors turning with their investment arbitrations to ICSID, as compared to other arbitration institutions and ad hoc tribunals, gain a number of significant advantages. ICSID is one of the institutions of the World Bank Group and its activities are based on the Convention for the Settlement of Investment Disputes between States and Nationals of Other States (“Washington Convention”). Ukraine is a party to the Washington Convention.

ABH Holdings SA filed a claim with the ICSID. It is likely that an additional factor that persuaded the company to choose this arbitration institution is the additional obligations of states, including Ukraine, under the Washington Convention to enforce ICSID awards. Arbitral awards of other international arbitration institutions, such as the Arbitration Institute of the Stockholm Chamber of Commerce or awards of special ad hoc arbitrations, do not have such an additional privilege and are subject to recognition and enforcement, both under the New York Convention of 1957 and the national laws of the countries where such arbitral awards are to be enforced.

Canthe act of nationalization be considered as a violation by the state?

When I was studying international law and international arbitration in London, I remember our professor saying that nationalization is a sovereign right of any state. Indeed, all states, including those that are considered developed, nationalize certain assets or property from time to time.

However, in order for nationalization to be considered lawful and not violate the rights of the owner of the assets or business being nationalized, the state must fulfil a number of requirements. These requirements include that the nationalization act itself be carried out in accordance with the law and established procedures, and that the nationalized assets or business be compensated promptly, adequately and effectively. In fact, these rules are considered to be one of the principles of international law.

The provisions of the Treaty between the Government of Ukraine and the Belgian-Luxembourg Economic Union on Mutual Promotion and Protection of Investments actually repeat this principle of international law, providing for the following:

1. Each of the Contracting Parties undertakes not to apply any measures for the purpose of expropriation or nationalization, or any other measures intended to directly or indirectly deprive investors of the other Contracting Party of investments belonging to them in its territory.
2. The provisions of paragraph 1 may be waived if the public interest or security so requires, provided that the following conditions are met: a) the measures will be taken in accordance with applicable law; b) the measures are not discriminatory and do not contradict any specific obligations; c) the measures shall be accompanied by provisions for the payment of adequate and effective compensation.

Is the Government of Ukraine’s position legally vulnerable?

It is likely that the arbitration will focus not only on compensation, which is known to have not been paid, but also on whether the nationalization itself met the criteria other than compensation. Although ABH Holdings SA is not challenging the nationalization in terms of a claim for the return of Sense Bank, it is unlikely that the circumstances surrounding the nationalization will not be raised in the arbitration by both the investor and the Government of Ukraine. Thus, the issue of public interest or purpose and the conditions to be met for the nationalization, will be put under a microscope.

It can be predicted that the factor of nationalization “in accordance with the applicable law” will be among the easiest for the Government to rely upon. Nationalization was indeed carried out in accordance with the law. The only thing the Government will have to defend is why the relevant legislative provisions were developed and amended to accommodate the nationalization of a particular bank.

The above leads to the question as to whether the nationalization of Sense Bank was “discriminatory“. Here, there are a number of issues that will require not only a well-founded and evidentiary position of the Government of Ukraine, but also the skills of the lawyers representing the Government.

After all, the nationalization took place a year and a half after the start of the full-scale invasion. Thus, it may be questioned whether, as long as ABH Holdings SA remained the bank’s formal shareholder, the Ukrainian authorities actually considered this state of affairs to be acceptable.

Moreover, it is likely to be argued in the arbitration that since full shareholder’s control over Sense Bank was transferred, yet in 2022 to an independent person approved by the National Bank of Ukraine (NBU), ABH Holdings SA no longer exercised its shareholder rights from the moment of such transfer. Therefore, ABH Holdings SA had no influence on the bank’s activities, appointment of the bank’s officers and the bank’s operation, which was carried out in accordance with the banking regulatory framework.

Also, the issue of ABH Holdings SA’s attempts to sell the bank to new shareholders, including institutional investors from the European Union, which were not approved by the NBU (the NBU, as the central bank and regulator, has the right to approve or disapprove the sale of banks), will be the subject of arbitration in order to determine whether such actions could be considered discriminatory or not.

What are the possible consequences of investment arbitration?

The arbitration process is an adversarial and competitive process in which the parties will have every opportunity to present their arguments and demonstrate their skills. There is no doubt that the ICSID arbitral tribunal will hear the case in an unbiased way.

With regard to the consequences or possible outcomes of arbitration, it is necessary to distinguish between the deciding on the case and making the award by the arbitral tribunal and the process of enforcement of the award. In the first case, the process will be subject to the jurisdiction of the ICSID arbitral tribunal, its rules and the Washington Convention. In the second case, in addition to the Washington Convention, Ukraine’s national legal framework will also have its effect.

If the judgment is not in favor of the Government of Ukraine, under the currently effective legal regime, it is unlikely that ABH Holdings SA will be able to enforce the judgment in Ukraine as the company has, among its ultimate beneficiary owners, individuals who have citizenship of the aggressor state (i.e. Russian Federation).

However, as the arbitration proceedings and their completion are a matter of the distant future and may well take more than five years, it is currently difficult to predict what the Ukrainian legal framework will be in the future with respect to the enforceability of such awards. Given that Ukraine as the country, which has suffered (and continues to suffer) from military aggression by Russia, will be putting its resources into its rebuilding, it is quite likely that future Ukrainian legislation will provide for various restrictions on Russian beneficiaries, similar to those currently in place.

It is also relevant to consider the status of the shareholders of ABH Holdings SA who are currently under sanctions. If the sanctions, whether Ukrainian or international, are lifted for these shareholders, this may also affect not only the outcome of the case, but also the possibility of enforcing the arbitral award, if the award is in favor of the investor. In addition, the factor of ABH Holdings SA’s shareholders who are not subject to sanctions may also affect the enforcement of the arbitral award.

An interesting possible turn in the case may be when the sanctioned shareholders cease to be shareholders of ABH Holdings SA. After all, since ABH Holdings SA ceased to be a shareholder in the Ukrainian bank, the NBU no longer has any leverage to approve or disapprove the disposal of shares in this company as the holding company for the Ukrainian bank. If this were to happen, it is unlikely that this would affect ABH Holdings SA’s rights in the arbitration proceedings, but on the other hand, it could affect the enforcement of the award or even the proceedings themselves, even before the award is made.

Given that international arbitration, as compared to dispute resolution in Ukrainian courts, provides much more scope and opportunities for the parties to disputes to enter into settlement agreements (and Ukraine has already had experience of entering into settlement agreements in investment arbitrations), this possibility should not be ruled out either. However, even if such a possibility is considered at any time, it is unlikely to be a prospect for the coming years.

What is the dilemma of international law?

ABH Holdings SA, as a foreign investor, in protecting its rights and the rights of its shareholders, relies upon international law and international treaties of Ukraine, which, in accordance with the current legislation of Ukraine, have higher force and priority in application over the acts of national legislation. Moreover, international law and international treaties of Ukraine will be applied in this dispute, not only by the state authorities of Ukraine, but also by the ICSID arbitration tribunal, and possibly by the state authorities of other countries, if the arbitral award is submitted for enforcement in other countries.

Accordingly, the Government of Ukraine and the country itself will face a dilemma in the future as to whether selective non-fulfilment of the country’s obligations under international law will be acceptable and how such possible non-fulfilment will be perceived by other foreign investors.

The tragedy of the situation is that Ukraine itself relied upon international law when it came to the inadmissibility of unjustified armed aggression against the country, which occurred as a result of a gross violation of international law by Russia. Moreover, the entire architecture of international order and security proved to be helpless and ineffective when it came to preventing or stopping the aggression against Ukraine.

So, is a country whose very existence is jeopardized by a dysfunctional international law and order obliged to fulfil its obligations under the same international law? This question is precisely the dilemma of international law that applies to many situations, including the nationalization of Sense Bank.

The best answer and solution to this dilemma would be to recognize and introduce a new principle in international law, which would be somewhat similar to the principle of estoppel in Anglo-Saxon contact law. The peculiarity of such a new principle in international law should be that a state or its subjects that have grossly violated international law, as Russia has done, cannot rely on international law, its principles, mechanisms and possibilities when it comes to protecting the rights of such a state or its subjects.

The effective implementation of this principle will not only make states consider whether they want to find themselves in a situation where they lose their rights under international law, such as sovereign immunity or diplomatic immunity, but will also make the subjects of such states influence their statesmen to prevent their states from violating international law.

Posted in Expert Opinion