Compensation for damage caused by the Russian invasion of Ukraine | In Principle

The NYSBA 2023 Warsaw Spring Meeting raised the vital issue of compensation for damage inflicted by the Russian invasion of Ukraine.

In this article, we take a look at some problematic aspects of the issue of compensation for the damage caused to Ukraine.

Estimated damages for the first year of full-scale war

According to the second Ukraine Rapid Damage and Needs Assessment, a report developed by the World Bank Group, the Government of Ukraine, the European Commission, and the United Nations, the first year of war has resulted in:

• More than USD 135 billion in direct damage to buildings and infrastructure
• Almost USD 290 billion of aggregate economic, social, and other monetary loss
• About USD 411 billion in total reconstruction and recovery needs.

According to statements by the Prime Minister of Ukraine, the injury and losses of Ukraine amount to USD 700 billion. Considering that the war is not over, the final numbers may be much higher.

Register of damage caused to Ukraine

On the international level, in November 2022 the UN General Assembly:

• Recognised the need for establishment of an international mechanism for reparations for damage, loss, or injury arising from the Russian Federation’s internationally wrongful acts
• Recommended establishment of an international register of damage to serve as a documentary record of evidence and claims, information on damage, loss, or injury to all natural and legal persons concerned, as well as the Ukrainian state, caused by internationally wrongful acts of the Russian Federation in or against Ukraine, and to promote and coordinate evidence-gathering.

On 17 February 2023, the Dutch government announced that it would be willing to house this register in the Netherlands. It could be established via an international organisation, such as the Council of Europe or the United Nations.

Historically, there are at least two similar examples for processing claims for compensation of damage on the international level:

• In 1991 the UN Security Council established the United Nations Compensation Commission to process claims and pay compensation for losses and damage suffered as a direct result of Iraq’s unlawful invasion and occupation of Kuwait in 1990–1991:
  • About 2.7 million claims, with an asserted value of USD 352.5 billion, were filed with the commission
  • The commission concluded claims processing in 2005
  • Total compensation of USD 52.4 billion was awarded to some 1.5 million successful claimants
  • Funds to pay compensation were drawn from the United Nations Compensation Fund, which received a percentage of the proceeds generated by the export sales of Iraqi petroleum and petroleum products.
• In 2007 the UN General Assembly established the United Nations Register of Damage (UNRoD) to serve as a documentary record of the damage caused to all natural and legal persons concerned as a result of Israel’s construction of the wall in occupied Palestinian territory in and around East Jerusalem:
  • By 15 November 2022, 73,235 claim forms for registration of damage and more than a million supporting documents had been collected
  • As of 1 July 2020, the UNRoD board had reviewed and decided 37,257 of the claims for inclusion in the register
  • No compensation has been paid to claimants yet.

Even though establishment of a register and record of damage is essential, what is even more important is development of a compensation mechanism to ensure that victims actually receive funds.

On the national level, on 23 February 2023 the Ukrainian Parliament adopted a law on compensation for damage and destruction of real estate as a result of the military aggression by the Russian Federation against Ukraine and establishment of a state register of property damage, entering into force on 22 May 2023.

Under that law, an administrative procedure for payment of compensation in respect of real estate will be established:

• Compensation will be provided to individuals or associations of co-owners of apartment buildings in respect of apartments, houses, unfinished construction (including multi-family dwellings), and common property of multi-family dwellings damaged or destroyed as a result of the Russian aggression
• Applications for compensation will be considered by special commissions established by local authorities
• Compensation will be calculated based on the total area of real estate multiplied by the value per square metre (to be set by the Cabinet of Ministers—not determined yet)
• Compensation for damage will be paid from:
  • Funds of the state budget (including the Destroyed Property and Infrastructure Restoration Fund) and municipal budgets
  • Funds of international financial organisations, creditors and investors
  • International technical aid and refundable or non-refundable aid
  • Reparations or other forms of recovery from the Russian Federation
  • Other sources not prohibited by Ukrainian law.

Thus, this law deals only with compensation for real estate belonging to individuals, and does not address the issue of damage to legal entities or Ukrainian infrastructure.

Worldwide freezing of Russian-linked assets

The full-scale invasion of Ukraine by the Russian Federation has led to imposition of extensive individual and sectoral sanctions by EU member states, the UK, the US, and certain other countries against individuals and legal entities linked to Russia, including freezing of their assets and the assets of the Central Bank of the Russian Federation.

However, freezing of assets does not automatically make it possible to confiscate and further disburse these assets to pay reparations to Ukraine, as the issue of state immunity arises. Currently, several options for state immunity are being discussed:

• Enactment of special legislation by states depriving the Russian Federation of its immunity due to its military aggression against Ukraine and allowing confiscation of Russian assets and disbursement of funds to Ukraine (e.g. the UK Seizure of Russian State Assets and Support for Ukraine Bill and the US bill entitled Asset Seizure for Ukraine Reconstruction Act)
• Execution of a special multilateral international treaty addressing the issue of immunities of states and possible exceptions from those immunities.

Investment arbitration proceedings

As of today, despite the length and high costs of arbitration, one of the most effective means for seeking damages is investment arbitration, as it allows for enforcement of arbitral awards.

In 1998 the Russian Federation and Ukraine entered into an agreement on encouragement and mutual protection of investments. After the unlawful annexation of Crimea in 2014, several investment arbitration proceedings were initiated by Ukrainian investors against the Russian Federation, known as the “Crimean cases” (including Oschadbank v Russian Federation, Aeroport Belbek LLC and Igor Valerievich Kolomoisky v Russian Federation, Everest Estate LLC et al. v Russian Federation, NJSC Naftogaz of Ukraine et al. v Russian Federation, and others).

In April 2023 SCM Group announced that Rinat Akhmetov had initiated arbitration against Russia for assets seized in the Donetsk and Luhansk regions. It will be the first investment arbitration over the expropriation of assets and investments by the self-styled “Donetsk People’s Republic” and “Luhansk People’s Republic,” which have acted under Russian control since 2014.

Investment arbitration has proved to be an effective solution for protection of investors’ rights. For example, recently a panel of the Permanent Court of Arbitration in The Hague ruled that Russia must pay Naftogaz USD 5 billion for losses caused by the seizure of Naftogaz Group assets in Crimea in 2014.

However, investment arbitration will be an effective solution only for cases where the investor’s assets have been seized in territory effectively controlled by Russia. Unfortunately, investors who have lost their assets due to the war in the territory of Ukraine cannot rely on investment arbitration.

Proceedings in the European Court of Human Rights

Following Russia’s expulsion as a member state from the Council of Europe on 16 March 2022, the European Charter of Human Rights ceased to apply to the Russian Federation. However, Russia remained bound by the convention until 16 September 2022. Therefore, the ECtHR retains jurisdiction to hear cases against the Russian Federation concerning violations occurring before 16 September 2022.

Over 8,500 individual applications are pending before the ECtHR concerning the events in Crimea, eastern Ukraine, and the Sea of Azov. Considering that the Russian Federation has rejected enforcement of ECtHR decisions, there are concerns over execution of ECtHR decisions in cases of this type in the future.

Proceedings in Ukrainian national courts

In 2022 the Supreme Court of Ukraine declared that the Russian Federation has no jurisdictional immunity in war damage lawsuits in civil proceedings, and recognised the competence of Ukrainian courts to consider and resolve war damage lawsuits against Russia (decision of 14 April 2022 in case no. 308/9708/19 and decision of 18 May 2022 in case no. 760/17232/20-ц).

Following this ruling, there have been several other decisions of Ukrainian courts declaring the Russian Federation responsible for war damage. Although the Ukrainian courts have set aside the jurisdictional immunity of the Russian Federation, there is still the issue of its immunity from enforcement of court decisions, in Ukraine and abroad.

There are also certain concerns over lifting of the jurisdictional immunity of the Russian Federation by Ukrainian courts. As the International Court of Justice held in 2012 in Jurisdictional Immunities of the State (Germany v Italy: Greece intervening), the action of the Italian courts denying Germany immunity constituted a breach of Italy’s international obligations. The ICJ concluded that:

• “under customary international law as it presently stands, a State is not deprived of immunity by reason of the fact that it is accused of serious violations of international human rights law or the international law of armed conflict”
• “even on the assumption that the proceedings in the Italian courts involved violations of jus cogens rules, the applicability of the customary international law on State immunity was not affected.”

On the other hand, in its judgment the ICJ relied on international customary law at that time. Considering the current reaction of states to Russia’s full-scale military aggression against Ukraine, there may still be room to carve out certain exceptions to the customary rules of jurisdictional immunities.

A long road

The process of ensuring the possibility of obtaining compensation for damage caused by the Russian military aggression against Ukraine will last a long time and require much effort from the Ukrainian state and private stakeholders at the national and international levels. It will also depend on the political will of other states.

Mariia Derechina, M&A and Corporate practice, Wardyński & Partners