State Development Corporation VEB.RF v. Ukraine

Case summary

At a glance

Parties: State Development Corporation "VEB.RF" (Russian Federation) v. Ukraine
Case no.: SCC Case No. V2019/088; Svea Court of Appeal Case No. T 2406-21
Forum and rules: SCC Arbitration Rules 2017; seat Stockholm, Sweden
Treaty: Russia–Ukraine BIT of 27 November 1998
Tribunal: Constantine Partasides QC (Presiding), Paolo Michele Patocchi, Loretta Malintoppi
Court: Svea Court of Appeal (Kenneth Nordlander, Ulrika Persson (reporting judge, dissented on the reasoning), Mats Holmqvist)
Underlying award(s): Partial Award on Preliminary Objections, 31 January 2021
Sector: Banking (Prominvestbank)
Outcome: The Tribunal rejected Ukraine's objections on jurisdiction ratione personae and on the pre-arbitration requirements, and upheld its objection to importing FET, FPS and umbrella-clause protections through the MFN clause. The Svea Court of Appeal dismissed Ukraine's challenge to the Tribunal's jurisdiction (11 October 2024).
Amount: VEB says it spent about USD 900 million on PIB between 2008 and 2011. The Tribunal reserved costs. The Court of Appeal ordered Ukraine to pay VEB EUR 398,688 in costs (of which EUR 300,722 is counsel fees), plus interest.

The dispute

VEB.RF is a Russian State Corporation set up under a federal law of 2007. In December 2008 it bought a 75% stake in the Ukrainian bank Prominvestbank (PIB), which it later raised to 99.7%. VEB claimed that from 2015 to 2019 Ukraine took successive steps to force it out of the country. It listed the revocation of PIB's licences, sanctions barring State entities from dealing with PIB, limits on deposits, a ban on transfers to VEB, harassment through criminal investigations, and the attachment of its PIB shares, which bailiffs planned to auction to enforce the Everest award against Russia. VEB relied on the BIT's provisions on legal protection, national and MFN treatment, expropriation and free transfers, and sought to import FET, FPS and umbrella-clause protections from the UK–Ukraine BIT through the MFN clause. Ukraine argued that VEB is an organ or agent of the Russian State and so cannot bring a claim under Article 9. It also argued that VEB had not met the notice and negotiation requirements, and that the MFN clause cannot import other treaty standards.

Key holdings

Jurisdiction ratione personae upheld. Under Article 1(2)(b), an investor is any legal entity set up under the home State's law that has legal capacity to invest abroad, and VEB meets both conditions. Article 9 therefore covers claims connected with an investment whether or not the claimant is owned or controlled by the State, is an organ or agent of the State, or exercises governmental functions. Neither the unratified CIS Investment Agreement nor Article 10 (disputes between the States) changes this reading. Partial Award ¶¶ 116–149
The Tribunal added observations without deciding them, for possible later relevance on the merits. The Russian Government exercises comprehensive control over VEB in law and in fact. It would be unrealistic to conclude that Russian government policy played no part in the decision to acquire PIB, which Mr Dmitriev and Mr Putin presented jointly to VEB's Supervisory Board. No adverse inferences were needed. Partial Award ¶¶ 161–178
The pre-arbitration requirements were met. The Notice of Dispute of 14 September 2018 was adequate, and Article 9 does not require a power of attorney. VEB's invitation to negotiate was enough. Ukraine did not reply until close to the end of the six-month period, and Ukraine's own steps made further efforts futile. Partial Award ¶¶ 216–227
Ukraine's MFN objection upheld. Article 3(1) is a non-discrimination standard covering measures that could interfere with the management and disposal of investments. It does not import FET, FPS or umbrella-clause standards from other treaties. The Tribunal found support for this reading in the removal of an express FET clause from the 1997 draft of the Treaty. Partial Award ¶¶ 255–269
Costs of this phase reserved. Partial Award ¶ 271
The Svea Court of Appeal held that VEB is an investor under the Treaty and may bring an arbitration under Article 9. Buying shares in a bank in 2008 was a commercial act. It was not shown that VEB acted as a representative of the Russian State or exercised governmental functions in a way that took away its right to arbitrate. Ukraine's action was dismissed and Ukraine must pay VEB's costs. The Court allowed an appeal to the Supreme Court. Svea Court of Appeal judgment, pp. 19–22
Ulrika Persson agreed with the result but not the reasoning. In her view, the rules on attributing conduct to a State (ARSIWA) concern State responsibility and cannot be used to treat the claimant as if it were another party. VEB meets Article 1(2)(b) even if it acted for the State or exercised governmental functions. Svea Court of Appeal judgment, dissenting opinion, pp. 23–27

Procedural history

14 September 2018VEB sends a Notice of Dispute to Ukrainian officials.
20 June 2019VEB files a Request for Arbitration with the SCC.
14 August 2019The SCC Board fixes Stockholm as the seat.
28 August 2019Emergency arbitrator Joe Tirado grants interim conservatory measures.
10 September 2019Constantine Partasides QC is appointed Presiding Arbitrator.
2 March 2020Procedural Order No. 2 bifurcates the preliminary objections. Procedural Order No. 3 dismisses Ukraine's request to set aside the Emergency Award.
10 April 2020Two separate awards order Ukraine to reimburse its share of the advance on costs and to pay VEB's legal costs of the emergency proceedings.
9–10 September 2020Virtual hearing on the preliminary objections. Mr Dmitriev is examined on 15 October 2020.
31 January 2021Partial Award on Preliminary Objections.
11 October 2024The Svea Court of Appeal dismisses Ukraine's challenge to the Tribunal's jurisdiction and grants leave to appeal to the Supreme Court.

Tribunal, counsel and experts

Decided by: Constantine Partasides President — appointed by the institution (appointed by SCC after list procedure)
Paolo Michele Patocchi Co-arbitrator — appointed by the claimant
Loretta Malintoppi Co-arbitrator — appointed by the respondent
Joe Tirado Emergency arbitrator, Emergency arbitrator — appointed by the institution
Kenneth Nordlander Judge, Svea Court of Appeal
Ulrika Persson Judge, Svea Court of Appeal (reporting judge; dissented on reasoning)
Mats Holmqvist Judge, Svea Court of Appeal
For the claimant: Monastyrsky, Zyuba, Stepanov & Partners · Roschier Advokatbyrå AB · DER Juridik AB
For the respondent: Ministry of Justice of Ukraine · Shearman & Sterling LLP · King & Spalding LLP
Experts: Eyal Benvenisti (respondent) · Anton Asoskov (claimant) · Ursula Kriebaum (claimant) · Yves Nouvel (claimant)