Iaroslav Cheker, partner
Viktoriia Kravchenko, Junior Associate
Andrii Salo, Associate
With the international community anxious for an end to the war in Ukraine and restoration of the country’s borders, lawyers are exploring the prospects for compensation and restitution, and thus for the rebuilding of Ukraine.
KEY SANCTIONS ISSUES FROM A UKRAINIAN PERSPECTIVE
It is important to remember that the war did not commence with the full-scale invasion on 24 February 2022, but with the annexation of Crimea and the occupation of parts of the Luhansk and Donetsk regions back in 2014. These events did not go unnoticed by the international community, as the first sanctions were imposed on Russia in 2014 not only by Ukraine, but also by the EU, US, Canada and other Western countries, and their intensity has grown tremendously as a response to the escalation in 2022. From 2014, the sanctions mostly affected financial and investment opportunities, especially for companies in the military and energy sectors. But since the beginning of the full-scale war, the sanctions have extended to every industry and damaged every aspect of Russia’s economy as well as its international relations and trade. The EU Council has already introduced nine packages of economic and individual sanctions in connection with Russia’s military aggression against Ukraine. On 16 December 2022, the ninth package of EU sanctions was adopted. It included export control measures, especially regarding Iranian UAVs that have been actively used by Russia in its attacks on Ukrainian civil infrastructure, disconnection of Russian banks from SWIFT, a ban on several Russian mass media companies on EU territory, etc. Moreover, after many years of very carefully setting easily navigable constraints on dealings with Russian energy companies, the EU imposed a ban on the importation of Russian oil delivered by sea, which came into effect on 5 December. Shortly afterwards, the US also declared that it has no intention of buying Russian oil to replenish its strategic reserves. The democratic world is finally beginning to show Putin that one of the main threats that gave him so much influence over Europe – the power to cut off oil supplies – is not that fearsome after all. Ukraine is also leading by example with its national legislation on sanctions. The Law of Ukraine ‘On Sanctions’ provides for a broad list of restrictions. These are set out in relation to the sanctioned persons in the decisions of the National Security and Defence Council of Ukraine (‘NSDC’), approved by the President of Ukraine. The National Agency on Prevention of Corruption has created its own webpage containing a sanctions list (with imposed sanctions and targeted individuals), a list of international war sponsors, war supporters’ assets and other useful information. Ukraine and its international partners have put, and continue to put, a huge amount of work into discovering and freezing Russian assets. Russia is the most sanctioned country in the world today, outnumbering even Iran by volume of designations. While sanctions mostly impact and restrict doing business with Russia and its companies, it is very important for Ukraine that Russian assets are discovered and frozen. This will secure the necessary funds for the future rebuilding of Ukraine. Since late February 2022, Western countries have frozen over $330 billion in Russian assets. The EU has frozen over €68 billion in Russian assets, with, according to preliminary estimates, about €50 billion worth in Belgium alone. Meanwhile, the UK has frozen Russian assets totalling $20.9 billion. About $300 billion of this amount are reserves kept by the Central Bank of Russia in accounts in foreign banks. Ukraine’s Minister of Justice has announced that Ukraine expects to receive these funds as reparations, and the mechanism that will transfer these funds to Ukraine is expected to be created in cooperation with the United Nations General Assembly.
COMPENSATION MECHANISMS AND FUNDING
Both Ukrainian and international partners are working on mechanisms to ensure that Russian assets abroad can be a source of funds for Ukraine’s future rebuilding, as asset freezing is only the first step in achieving this goal.
Canada was the first country to establish a legislative procedure by which these assets can be confiscated and transferred to Ukraine. Bill C-19 was passed in June 2022. In particular, it amended the Law on Special Economic Measures and the Law on Justice for Victims of Corrupt Foreign Officials (the so-called Magnitsky Law). These changes include the ability to confiscate assets frozen or seized under these laws. Recently the US Congress has adopted the necessary amendments to allow the transfer of the income received from seized assets directly to Ukraine. European countries are also actively working on such mechanisms and are expected to introduce the relevant laws in the very near future. However, that the expropriation of Russian assets, though it may be righteous and fair, does not always comply with international legal customs, has been reinforced by the decision of the International Court of Justice in the case of jurisdictional immunities of the state (Germany v Italy, 2012), where the Court indicated that the issue of the right of a state to immunity in the courts of another state is completely different from the issue of the international responsibility of such a state and the obligation of reparations, stating that ‘customary international law continues to require that a State be accorded immunity in proceedings for torts allegedly committed on the territory of another State by its armed forces and other organs of State in the course of conducting an armed conflict’. Therefore, it is crucial to develop a mechanism which would not contradict these customs, as this could potentially create an opportunity for the Russian Federation to contest such decisions. Although it is doubtful that international institutions would take Russia’s side after the atrocities committed by the regime, fighting these claims would still involve significant time and costs, which could delay the rebuilding of Ukraine. Nor does Russia’s disregard of the rules of international law mean that the regulations do not matter. Ukraine is fighting not only for its own freedom, but also for the values of democracy and international law and order. A huge step in this direction was taken by the United Nations General Assembly (‘UNGA’), when, on 14 November 2022, it approved (the historic) Resolution L.6/2022 entitled ‘Furtherance of Remedy and Reparation for Aggression against Ukraine’, thus recognising the need for the establishment of an international mechanism for reparation for damage, loss or injury arising from the Russian Federation’s internationally wrongful acts. If created, it is assumed that this will be the most effective mechanism. However, as the war continues, there is no telling what future rebuilding might cost Ukraine. The country is already actively using all available options and working on new opportunities to secure the necessary funds from the Russian Federation for such restoration on an international level. In September, Ukraine’s Ministry of Justice filed a new lawsuit against Russia with the European Court of Human Rights (‘ECHR’) which detailed Russian authorities’ violation of the European Convention on Human Rights in connection with their illegal intrusion into the sovereign territory of Ukraine. In addition to the complete withdrawal of Russian troops, Ukraine demands monetary compensation for the injured parties (at the first stage of the Russian military invasion, the damage amounted to at least $80 billion). Ukrainian nationals and business owners who have suffered due to the war can also submit individual claims against Russia to the ECHR. However, as Russia has been expelled from the Court, only crimes committed before the date of its expulsion (16 September 2022) can be considered by the Court. Around 17,000 lawsuits have already been filed. The legal community is also actively discussing: (1) the possibility for those businesses to apply to investment arbitration institutions in connection with their loss of assets due to Russia’s military actions after the occupation of certain territories of Ukraine and its establishment of control over them; (2) filing with foreign courts for compensation for damages – with the intention of reaching Russian assets abroad. On the national level, and for assets on its territory, Ukraine has implemented several mechanisms for the expropriation of Russian assets:
Forced alienation as a type of sanction
The confiscation option is based on the Law of Ukraine ‘On Sanctions’, which was amended by the Law of Ukraine ‘On making changes to some legislative acts of Ukraine regarding increasing the effectiveness of sanctions related to the assets of individuals’ on 12 May 2022.12 Article 4, p. 1-1 recognises, as one possible measure, forced alienation of assets owned directly or indirectly by natural and legal persons and their transfer to the state. This measure can only be applied by the NSDC, and only to assets that have been frozen by its decision of 24 May 2022. The implementation of this decision lies within the competence of the Ministry of Justice, which is authorised to submit the claim to the High Anti-Corruption Court after the relevant decisions are made. This procedure, however, may be applied only to natural and legal persons who, by their actions, have created a significant threat to the national security, sovereignty or territorial integrity of Ukraine or have significantly facilitated such actions by other persons, including Ukrainian residents. The first case to test this procedure involved the forced alienation of the property of Russian oligarch Volodymyr Yevtushenkov, which included 17 real estate objects with a total area of almost 100,000 square metres and shares in several Ukrainian companies. The case proved successful, as the assets have already been transferred to the relevant governmental institution. Since then, the NSDC has frozen the assets of 3500 other legal persons and individuals, and in December 2022 the High Anti-Corruption Court approved forced alienation in its second case – this time concerning the assets of Ukraine’s infamous former President Viktor Yanukovych,14 which included a real estate object of 825.8 square metres, a boat, funds totalling over UAH 34 million (US $920,900) and historically, culturally and materially valuable works of art (paintings, antique furniture etc) worth almost €19 million. While such individuals pose a definite threat to Ukraine’s national security and territorial integrity, there are thousands of Russian-owned businesses in Ukraine that cannot be identified as threats per se, although their income has directly or indirectly become a source of sponsorship for Putin’s ambitions. To deal with these non-obvious threats, Ukraine is actively working on other mechanisms to uncover and shut down their businesses. It should be noted that, by the resolution of 14 April 2022 in case No. 308/9708/19, Ukraine’s Supreme Court, while considering a case in which the Russian Federation was identified as the defendant, stated that it is appropriate to ignore this country’s immunity and consider cases of compensation for damages caused as a result of Russia’s armed aggression. This opened a way for Ukrainian courts to file for compensation for damages against Russia.
The special nationalisation procedure
On 3 March 2022, Ukraine’s parliament, the Verkhovna Rada, adopted the law ‘On the Basic Principles of Forcible Seizure of Objects of Russian Property and Its Residents in Ukraine’ targeted at legal entities, their branches, and their representative offices operating in Ukraine when the founder, shareholder, or beneficial owner is the Russian Federation, or in which the Russian Federation, directly or indirectly, owns interest in its capital, shares and membership units, which allowed expropriation of movable and immovable property, funds, bank deposits, securities, corporate rights, and other property and assets located or registered in Ukraine. According to this Law, the decision of the NSDC and the Presidential Decree on the nationalisation of Russian quasi-state assets must be approved not later than six months after martial law is cancelled. This complicated procedure bestows the most significant degree of legitimacy to the process, since Verkhovna Rada is the country’s highest elected legislative authority. However, it still requires amendments and clarifications since only the legislative part (i.e., the process of decision-making) is explained properly, while the implementation of this procedure still needs to be further clarified. The Law states that assets are transferred to the state automatically, although the procedure for transfer of assets other than funds, registration of property and corporate rights, etc, remain unclear. These flaws became evident after the first nationalisation case, regarding shares in Russia’s Prominvestbank and International Reserve Bank, was set in motion. For the time being, the only action that was possible was cancellation of the banks’ licences by the National Bank of Ukraine (‘NBU’); the NBU also initiated their liquidation. However, the latest reports note that it is possible to transfer the banks’ frozen funds to the state budget, which amounts to over UAH 3 billion – so the law, however imperfect, is still able to replenish the Ukrainian budget. This option, however, is reserved for businesses directly or indirectly owned by the Russian Federation itself, which leaves out a significant number of private businesses operating in Ukraine. Nationalisation of banks There is only one Russian bank on Ukrainian territory that falls into the category of systemically important: Alfa-Bank (recently renamed to Sense Bank), which allowed Ukraine to work out a special procedure for its nationalisation. On 10 October 2022, the Law of Ukraine ‘On amendments to the Tax Code of Ukraine and other laws of Ukraine regarding the peculiarities of withdrawing a systemically important bank from the market under martial law’ was adopted, which allowed nationalisation for just UAH 1.00 of the most important banks in Ukraine in case of their insolvency. There is no doubt that this Law specifically targets the aforementioned Sense Bank, although no legal action has been taken in this direction yet, as the procedure is still in discussions with international partners and private investors as well as owners, who publicly claim to be open to nationalisation.
Confiscation as a measure of criminal law The main available option remains confiscation of property in the course of criminal proceedings against Russian and Belorussian nationals and legal entities on the basis of funding terrorism, money laundering and tax evasion. In contrast to the aforementioned procedures, this is purely judicial, as seizure and confiscation of such assets, as well as their transfer to the Ukrainian Agency for search and asset management, is carried out based on the court’s decision.
So, which Russian and Belarusian assets are currently being confiscated in Ukraine? Just to give some examples:
• The court seized the part of the pipeline connecting Ukraine, Russia and Belarus which belonged to Viktor Medvedchuk, and transferred it to Ukraine’s largest national oil and gas company, ‘Nafrogaz Ukraine’.
• The court seized the corporate rights of nine Ukrainian enterprises belonging to the Russian holding companies Rostech, Tatneft, RusAl and HMS Group, totalling more than UAH 4.5 billion.
• The court seized 420 railway cars worth more than UAH 500 million and goods and material assets worth more than UAH 130 million, which belong to Russian and Belarusian enterprises. The railway cars were transferred to the state railway company ‘Ukrzaliznytsia’, which has already received over UAH 1.3 billion in income from their commercial use.
• Ukrainian law enforcement located the warehouses of Russian oligarch Alisher Usmanov, where more than 160,000 tonnes of iron ore were stored. Total value: almost UAH 2 billion.
• The court seized the corporate rights and property of the Lviv Isolation Plant,27 the owners of which are Russian citizens. Total amount: ca UAH 470 million.
Overall, according to the official sources, assets of a total value of almost UAH 9 billion were transferred to the Ukrainian Agency for search and asset management, intended for future sale. Meanwhile, the income received from the management of the transferred property has already exceeded UAH 28 million. All income received in the process is being transferred to the State Budget of Ukraine and directed to the Fund for liquidation of the consequences of armed aggression. The Fund was created and approved by Verkhovna Rada in October 2022 as a container for funds designated for construction; overhaul of property (public buildings, infrastructure facilities, etc) destroyed or damaged as a result of Russia’s armed aggression; protective structures for civil defence and housing for internally displaced persons; purchase of school buses, special vehicles for health care facilities and communal enterprises; medical equipment and equipment for health care institutions; and computer and multimedia equipment (which was destroyed, damaged or stolen) for educational institutions located in the affected territories. However, this is not the only Fund that has been created for the purposes of rebuilding. While the Fund for liquidation of the consequences of armed aggression is funded by assets confiscated within Ukraine and deals with the most pressing issues, the government had previously launched several Recovery Funds with various specialisations, calling on its international partners, investors, NGOs, businesses and citizens for aid in fighting Russian aggression, restoring Ukraine’s economy and rebuilding liberated Ukrainian territories. These are: the Small and Medium Business Support Fund; the Armed Forces of Ukraine Support Fund; the Economic Recovery and Transformation Fund; the Humanitarian Fund; the Debt Management and Redemption Fund, and the Destroyed Property and Infrastructure Restoration Fund. All partners are gathering to help Ukraine find ways to rebuild the country. On 4-5 July 2022, Switzerland and Ukraine jointly hosted the international Ukraine Recovery Conference (‘URC 2022’) in Lugano. The International Expert Conference on the Recovery, Reconstruction and Modernisation of Ukraine was held on October 25 at the initiative of the Federal Chancellor of Germany. The recent international Conference ‘Standing with the Ukrainian People’, held in Paris on 13 December, helped raise €1 billion for Ukraine. Still, the need for an international mechanism to reach sanctioned assets remains urgent.
CONCLUSION
With much of Ukraine still under occupation and the entire country suffering from constant missile attacks aimed at destroying Ukrainian infrastructure, it is very hard to predict the final cost of rebuilding. But for the past year we have seen the huge efforts that Ukraine and Western countries are putting into securing ways to fund this rebuilding, cutting all possible ties with Russia and exploring every possibility for receiving reparations from the aggressor state. And the fact that most of the developed mechanisms are working in Ukraine’s favour, and are already allowing Ukraine to receive the funds it needs to withstand Russian aggression and work on rebuilding the territories that have already been liberated, as well as the electricity infrastructure which is constantly being destroyed and damaged by mass missile attacks, is a positive tendency that will hopefully continue and amplify.
Special for WorldEcr