The Hague’s Arbitration Tribunal orders Russia to pay Naftogaz $5bn compensation for loss of Crimean assets

The Hague’s Arbitration Tribunal orders Russia to pay Naftogaz $5bn compensation for loss of Crimean assets
The arbitration court in The Hague has made a landmark decision, awarding Ukraine's gas company Naftogaz $5bn in compensation for assets appropriated by Russia as part of its annexation of the Crimean peninsula in 2014. / bne IntelliNews
By bne IntelliNews April 13, 2023

The Hague’s Arbitration Tribunal has ordered Russia to pay Ukraine’s state-owned natural gas champion $5bn in compensation for losses and damage caused by Moscow’s seizure of Naftogaz’s Crimean assets during the annexation of the peninsula in 2014, the company said on April 13 in a press release.

The court found that compensation should be equal to the fair market value of Naftogaz assets before expropriation.

"The Naftogaz team has won a key victory on the energy front. Despite Russia's attempts to obstruct justice, the Arbitration Tribunal ordered Russia to compensate Naftogaz for losses of $5bn. This relates to the seizure of our assets in Crimea by Russia in 2014. Russia must now comply with this decision in accordance with its obligations under international law," commented Naftogaz CEO Oleksiy Chernyshov in the release.

In September 2017, Naftogaz filed a lawsuit against Russia with the International Tribunal demanding compensation for lost assets in Crimea. The list of property valued includes the production assets of the company’s subsidiary Chernomorneftegaz, gas in an underground storage facility in Crimea, as well as assets of other subsidiaries of Naftogaz.

The ruling is a big blow for Russia, as it sets a precedent that makes the Kremlin liable to compensate all Ukrainian companies that have lost assets after Russia took over the peninsula following a highly controversial referendum.

The court also ruled that Russia must reimburse Naftogaz for the costs associated with the arbitration proceedings. The award is the largest compensation ever awarded by an International Arbitration Tribunal as indemnity for the expropriation of assets by Russia in Crimea.

Previously, the Stockholm Arbitration court ordered Russia’s state-owned gas behemoth Gazprom to pay Naftogaz a total of $2.6bn in March 2018, ending a four-year legal battle over gas supply contracts. The ruling follows on from the court's rejection of Gazprom’s claim for a payment of $56bn by Naftogaz for undelivered gas under the take-or-pay clauses of its supply deal to Ukraine.

While Gazprom initially resisted paying, the company eventually conceded defeat and coughed up. At the time it was by far the largest award made in Ukraine’s favour from among the numerous legal cases the two countries brought against each other as energy relations deteriorated in recent years.

The new award by the court in The Hague is twice as large, but will be even more difficult to collect, now that diplomatic relations between Russia and Europe have been cut off in all but name.

Arbitration awards can be executed through an enforcement mechanism, as the legal order allows European countries to seize Russian government state property and Gazprom assets based in Europe.

If Russia refuses to voluntarily execute the decision, Naftogaz has the right to initiate the process of recognition and admission to enforce the award in the territory of those states where assets of the Russian Federation are located, Naftogaz said in the press release.

In October 2016, Naftogaz and six other companies of Naftogaz Group initiated arbitration proceedings against the Russian Federation based on the Agreement between the Cabinet of Ministers of Ukraine and the Government of the Russian Federation on the Encouragement and Mutual Protection of Investments, also known as the Ukrainian-Russian Investment Treaty, the company reports.

Naftogaz requested the Tribunal to force the Russian Federation to pay compensation for violation of the investment treaty including for the illegal expropriation of Naftogaz energy investments, which were among the main targets of the Russian Federation in Crimea in 2014.

In February 2019, the tribunal ruled in favour of Naftogaz, confirming its jurisdiction over the case and recognising that the Russian Federation had illegally expropriated Naftogaz investments in violation of its obligations under the investment treaty.

The second stage of the arbitration proceedings, which has just concluded, was initiated to determine compensation for Naftogaz losses. In July 2022, The Hague Court of Appeal confirmed the jurisdiction of the tribunal in this case as well.

The arbitration award was made after hearings to determine the amount of compensation, which ended in March 2022 amid Russia's full-scale invasion of Ukraine.

UPDATE: Since Naftogaz announced the result of the court's decision, the company has updated its claim and is now demanding $10bn in compensation, Tass reported later the same day on the basis of "lost opportunity to use assets in Crimea."

The Kremlin has yet to react to the decision, the decision, "must be analyzed before a course of action is determined," presidential spokesman Dmitry Peskov told Tass the same day. 

"Indeed, this litigation took place. It is not new. The decision, however, is new and it needs to be analyzed. Our specialists who are engaged in protecting our rights in this case will analyze it and decide on a course of action," Peskov said, commenting on the court’s ruling.