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Partner, Sayenko Kharenko
Olexander Droug is a partner at Sayenko Kharenko, which specialises in dispute resolution and restructuring with a focus on international arbitration and cross-border commercial litigation. His experience includes advising local and foreign clients at all stages of complex multijurisdictional proceedings, as well as commercial and investment arbitration under the arbitration rules of all major international arbitration institutions (LCIA, ICC, SCC), CIS-based arbitration institutions, ICSID Arbitration Rules and ad hoc arbitration rules. Mr Droug also advises clients on obtaining and implementing interim relief, as well as on the recognition and enforcement in Ukraine of arbitration awards and foreign court judgments.
In March 2017 Olexander was added to the list of arbitrators elected to settle disputes arising in financial restructuring procedures.
Mr. Droug regularly contributes to key legislation in the areas of arbitration, litigation and restructuring.
Senior Associate, Sayenko Kharenko
Andriy has more than 9 years of experience of consulting clients on international arbitration and cross-border litigation matters. His expertise includes representing clients in international commercial arbitration proceedings under ICC, SCC, ICAC and LCIA Arbitration Rules. He also participated in a number of investment arbitration proceedings, representing clients in disputes with the state, in particular under UNCITRAL as well as ICSID arbitration rules. Andriy is equally experienced in representing clients in Ukrainian courts in commercial and civil disputes, bankruptcy proceedings and cases related to recognition and enforcement of foreign arbitral awards in Ukraine. In particular, he acted for investors in the first ever recognition in Ukraine of an emergency arbitral award rendered under the SCC Rules.
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Founded in 2004, Sayenko Kharenko enjoys a global reputation as a leading Ukrainian law firm with an internationally oriented full-service practice. The firm works on the largest and most sophisticated transactions and disputes representing the leading international and local companies. Every client is unique and our services are tailored to fit their business needs and individual profile.
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Invade, Plunder, Retreat: Can Russia be Held Legally Accountable for Damages Caused to Ukraine, and How?
The russian military invasion of Ukraine is, in many aspects, without precedent for the 21st century. It has exposed serious global political, legal, and economic weaknesses that remained unseen before. The world order established after WWII turned out to be fragile and unable to deter the brutal and unprovoked use of military force in the heart of Europe.
The war has already caused and will undoubtedly further cause significant political and economic implications for the world. But for Ukraine, perhaps the most vital question is whether it can expect to be compensated for losses caused by the Russian military gamble. With the war dragging on, Ukrainian cities and infrastructure continue to be turned into ruins, while important sectors of the economy are brought to a standstill. The final size of damages is yet to be assessed. Still, it is already clear that the sum will be unprecedented since WWII.
The issue of Russian liability is now in the spotlight in Western political circles and media. This, first of all, concerns the confiscation of Russian assets and their use for the reconstruction of Ukraine. Many ideas and good aspirations are being discussed in this context. But the main question still remains unanswered. Can Russia be legally made to pay for all the destruction inflicted upon the Ukrainian state, its citizens and businesses in practical terms, and how can this be done?
The purpose of this paper is to briefly analyse the available legal instruments that can be employed against Russia, and whether one or other instrument is actually workable in the world’s current political and economic agenda.
1. Russian Case in View of Examples from the Past
When it comes to the discussion of compensation for inflicted war damages, the first example that comes to mind is the case of post-WWI Germany. Under the Treaty of Versailles of 1919, Germany accepted its responsibility for the damages caused due to the war. The size of the damages subject to compensation was to be established by the special Inter-Allied Commission.
The end of WWII resulted in a different scenario. As Germany was completely defeated in military terms and occupied by the Allied Powers, the latter decided during the Potsdam Conference in 1945 that Germany would be subject to significant reparation payments. The amounts of such payments to affected countries were determined later at various conferences and stipulated in treaties.
Another applicable example is the resolution of claims between Iran and the United States following the Iranian Revolution of 1979 and the United States Embassy hostage crisis of 1979-1981. Although not a consequence of a full-scale war, the parties agreed to set up an arbitration tribunal, which would resolve the claims resulting from the conflict. Based on the Algeria Declarations of 1981, adhered to by both Iran and the United States, Iran agreed to bring about the release of hostages, and in exchange, the United States agreed to lift the freeze over the asset of Iran. The parties also agreed to establish the Iran–United States Claims Tribunal. This was an ad hoc arbitration body empowered to consider the claims of United States nationals and companies against Iran as well as claims made by Iranian nationals and companies against the United States. In the current context, it is important to emphasise that the tribunal was established based on an agreement between both states, and both of them generally honoured the tribunal’s decisions.
Each of the above examples is different but unlikely to be practically applied to the ongoing Russia – Ukraine war.
Despite any current and future setbacks during its invasion of Ukraine, Russia obviously remains a sovereign state and a permanent member of the United National Security Council with very significant military capabilities, including nuclear weapons. Hence, it is not possible to force Russia to sign any kind of capitulation agreement by which it, among other aspects, would admit its liability for damages it caused to Ukraine and agree to pay the required compensation.
An option with the establishment of a bilateral ad hoc judicial body, which would independently assess each case regarding inflicted damages based on claims made by Ukrainian nationals, is also hardly possible. We discuss the reasons for this further below.
There is also an option for Western governments to unilaterally confiscate the assets owned by the Russian government, sanctioned companies and individuals. This approach is being widely discussed nowadays and may seem the most realistic. But it is yet to be seen whether this is a workable solution.
2. Potential Options for Today: None of Them is Certain
The modern world requires modern solutions. In fact, the world has changed drastically since the World Wars and even since the second half of the 20th century. Notable global changes relate to the rapid development of the international legal order, as well as deep integration of the global economy and financial system. Another issue is the existing dependencies of even developed countries on natural resources and goods supplied from other regions of the world.
Substantiated analysis of the above global issues lies beyond the scope of this paper. However, the briefly described global agenda largely defines the measures that can realistically be introduced against the Russian federation for its actions in Ukraine. This especially concerns the freezing of around USD 300 billion belonging to the Russian Central Bank in reserves held in the United States, United Kingdom, Canada, Japan and the EU. The Western governments introduced such quite unprecedented measures shortly after the start of Russia’s invasion on 24 February 2022.
However, there is a substantial difference in implications between the temporary freeze and confiscation of Russian assets for the benefit of Ukraine. In the event of a freeze, the assets are temporarily restrained but nevertheless continue to belong to Russia. Confiscation obviously means taking the assets from their owner. This distinction results in different legal regimes applying to each mentioned concept.
EU and American legislation permits the temporary freezing of assets owned by a foreign state. But the situation is different for a permanent confiscation of a foreign state’s assets. It can be argued that the fundamental principle of state immunity prohibits such action in the context of judicial or related enforcement proceedings. The basic meaning of this principle is that a state, in general, cannot be subject to court proceedings or enforcement proceedings in another state.
Although the permanent confiscation of Russian assets would not necessarily require filing of a court claim against the Russian federation in the respective state holding the frozen Russian assets, any out-of-court mechanism (e.g., based on the act of the state’s government or Parliament) with the same purpose may also potentially be viewed as barred under the principle of state immunity. For instance, the US Foreign Sovereign Immunities Act of 1976 (FSIA) establishes the quite general rule that the property in the United States of a foreign state shall be immune from attachment, arrest and execution except for limited exceptions (28 U.S. Code § 1609). Similar rules may also exist in many EU states, including fundamental principles on the inviolability of private property.
Another issue is that only Canada has so far introduced the legal framework establishing the procedure for confiscating Russian assets. On 23 June 2022, the Canadian Bill C-19 came into legal effect. This law, among other aspects, enables the forfeiture of assets subject to sanctions and enables the Canadian government to sell the forfeited assets and use the proceeds for providing assistance to a foreign state. The new legislation does not mention specific countries, e.g., the Russian federation. Still, it is clear that it was introduced in connection with Russian aggression against Ukraine.
None of the EU states, the United Kingdom, Japan or the United States has so far adopted similar laws. The reason is that perhaps the governments are not yet ready to proceed with actual actions aimed at taking Russian assets and transferring them to Ukraine. The legal obstacles are unlikely to be the only cause of inaction. Adverse economic consequences for the Western countries caused by the confiscation of Russian assets are not less important. Those issues require separate analysis by economic and policy experts. By way of general observation, we may guess the economic consequences for the Western countries if, following, for instance, the actual confiscation of the mentioned USD 300 of the Russian Central Bank reserves, other major economies (e.g., China) decide to withdraw their central banks reserves and transfer them to other jurisdictions.
Another discussed subject is the potential confiscation of assets belonging to the so-called Russian oligarchs. In recent months, billions of USD and expensive properties have been arrested in the EU, the United Kingdom and the United States in connection with the Russian aggression against Ukraine. But just as with actions against the Russian state, actual confiscation for the benefit of Ukraine has not occurred anywhere. Although this might seem easier compared to actions against the state (e.g., in view of absence of state immunity and similar issues), other issues arise. In particular, the inviolability of private property is a very important fundamental principle, and hence it is likely to be a very tough precedent if a private individual is deprived of his/her assets due to a tenuous connection with Russian elites. This topic should be discussed in a separate paper.
We have already mentioned a potential option of establishing an arbitral tribunal that would consider claims of Ukrainian companies and individuals against Russia. This could be an effective and transparent option from the legal perspective. But the key issue is that any arbitration court can function only based on the consent of the parties. For instance, in the event of the Iran–United States Claims Tribunal, it was operating based on the Algeria Declarations of 1981, which was agreed upon by both nations. Hence, to establish any arbitration institution that would consider the claims against Russia, the Russian government should officially recognise the jurisdiction of such an institution. In other words, Russia should agree to establish an arbitral tribunal, which would undoubtedly render many adverse decisions against Russia. This is obviously unlikely to happen.
So far, only theoretically, if the new Russian government is installed in the future, it may need urgent access to its frozen foreign reserves and to international capital markets more generally due to the severe economic crisis. In that event, Russia might agree to the establishment of the above-described arbitral tribunal in exchange for Western countries lifting a freeze over a certain part of Russian assets.
It can also be said that Ukraine and Western powers are in a position to establish certain judicial or arbitration bodies (e.g., a compensation commission) without Russia’s consent. But such a move would require the unified political will of all the countries holding frozen Russian assets, as this goes against the very basics of international law. And even if such a body is established and starts to function, decisions against Russia rendered by it would face significant enforcement issues. The likely defence from the Russian side would involve, for instance, state immunity, absence of jurisdiction and public policy. Russia is also very likely to submit its claims for compensation against the respective countries as a result of loss of its assets.
Russia’s war is continuing without an end in sight. The considerations we discuss above reflect the current state of affairs, but the situation can change in future depending on how the war progresses, just like political processes both in Russia and in Western states. One thing is clear though. No matter how unlawful and barbaric the Russian invasion of Ukraine is, for the time being, Ukraine’s allies prefer to act very cautiously against the Russian federation. They respect both international and domestic law and try to minimise any adverse consequences for their own economies.