By Barrister Aemen Maluka

(Published 2011)

 

Introduction

When 52 countries signed the Energy Charter Treaty (ECT) in 1994, it was viewed as an ambitious initiative on behalf of the international community to build “common economic spaces” between the major players in the International and particularly the Eurasian gas market[1]. Then in June 2009 Russia announced that it would be withdrawing from the Energy Charter based on its decade long objections to the ECT dispute settlement mechanisms and investment protection provisions[2]. For many commentators and political analysts this has been viewed as a crass attempt at evasive unilateralism by a Russia anxious to avoid the implications of the ongoing Yukos[3] arbitration[4]. In terms of the legal impact of Russia’s withdrawal from the ECT the majority view as put forward and argued by lead Counsel for Yukos, Professor Guillard[5], is that even after its October 2009 formal withdrawal Russia cannot evade its obligations under the ECT to give equal treatment to foreign investors. This is due to the effect of Article 45(3)(b) ECT that binds Russia in its capacity as a signatory provisionally applying the Charter. Furthermore another view that has been put forward is that even after its withdrawal from the ECT Russia cannot minimize the legal significance of the ECT and will continue to be bound by the ECT in terms of its commitments until 2029 under Article 45 ECT[6]. This view has infact been confirmed during the December 2009 interim outcome of the Yukos trial confirming the application of the ECT to the Yukos dispute and all set to have interesting ramifications for the past and future legal arrangements carried out by the Russian Federation.

The currently ongoing Yukos arbitration involves a claim for compensation by the former majority shareholders of the Yukos oil company which in 2007 was declared bankrupt by the Russian government in 2007 through an allegedly politically motivated, illegal and discriminatory expropriation of the assets of their energy business concerns. The prevailing academic view [7] has been until now that well timed as this preemptive withdrawal may have been, it still does not allow Russia to claim that the ECT does not apply to the Yukos case due to the absence of formal ratification of the Charter. Even though the final ruling to determine an arbitral award for the Yuko’s investors will be based on merits but it seems that this interim decision confirming the jurisdiction of the ECT arbitral tribunal has just opened the Pandora’s box pertaining to the impact of the ECT on Russia’s past and future transactions as will be examined later in this essay.

Russia’s provisional application of the ECT and the Vienna Convention (VCLT)

Russia’s agreement in 1994 to apply the ECT provisionally essentially meant that under Article 45 of the ECT, it would be obliged to apply the charter “to the extent that such provisional application is not inconsistent with its constitution, law or regulations.” It must be noted that this provisional application was being carried out in line with the 1969 Vienna Convention on the Law of Treaties (Part II)[8]. The corresponding local Russian law confirming this provisional application is the 15 June 1995 Federal Law on International Treaties of the Russian Federation, Section II[9]. Furthermore it has been argued by Nappert[10] that Article 23 of the 1995 Russian Federal Law on International Treaties expressly permits the provisional application of treaties to the Russian Federation. The case for Russia’s commitment to the ECT is further strengthened by Article 8 of the Vienna Convention which states that provisional application of a treaty entails that a state will basically undertake to refrain from doing any acts which would be contrary to the pith and substance of the treaty originally signed by the state.[11]In terms of a treaty’s provisional application, Article 25 of the VCLT states that an international treaty being applied “provisionally” will be deemed to be in force if this is stated with in the Treaty itself or expressly agreed by the contracting parties themselves[12]. Back in 1994 the ECT’s provisional application was expressly restricted to those states who had atleast signed the treaty even though there was no ratification[13]. This was meant to secure a reasonable level of commitment from the signatories and in case of Russia steps towards ratification were infact were taken by Russia to introduce the ECT to the Russian Parliament[14] but this procedure was postponed due to internal parliamentary disputes regarding the transit protocol[15].

The scope of the ECT’s provisional application to Russia has nonetheless remained vague until the recent December 2009 decision in the Yukos arbitration which it is hoped will clarify many aspects of the scope of the scope of ECT’s provisional application upon Russia’s past and current transactions. Previously the ambiguity regarding the scope of the provisional application of the treaty upon other ECT signatories has been considered in many arbitration cases[16] like Petrobart v Kyrgyzstan[17], Plama v Bulgaria[18] and Kardassopoulos v Georgia[19] and has caused much academic debate[20].

The argument that Russia has used against it being bound by the provisional application of the ECT[21] to its affairs is the wording of the 45(2), which allows it to have a “domestic exception” (local laws prevailing over treaty obligations)[22]. Belz has argued that this defence can itself not be used because at the time of signing the ECT Russia failed either by omission or purpose (possibly in the urgent need to attract some capital after the Soviet collapse) to make a declaration under Article 45(2)(a) that they were unable to apply the treaty provisionally[23]. This means that the provisional application under Article 45 ECT can clearly be deemed to be in force until the October 2009 withdrawal[24]. It is clear therefore that Russia can be held to be fully bound in any legal dispute for the acts committed by it, which ran contrary to the spirit[25] of the ECT before the October 2009 formal withdrawal from the ECT.

State Responsibility of Russia

It has been argued academically that Russia has made use of the ECT in its other Bilateral investment treaties as an “umbrella clause” and this should subject it to Article 10 of the ECT [26]which means that it is bound to “observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party[27]. Furthermore Russia has not in the past taken advantage of the option of exclusion of Article 26’s application[28] to such disputes covered by Article 10 ECT’s umbrella clause option under articles 26 and 27 ECT clause and thus implies that it remains bound by the Arbitration process of the ECT under Article 26[29].

Based on the above the application of the concept of state responsibility to Russia under international law is important here which means that ECT’s legal significance is not as limited as Russia would like to insist upon with regard to its previous breaches of the ECT. This idea is also supported by a consideration of ECT Art.22, which requires state companies in the host state to “conduct [their] activities in relation to the sale of or provision of goods and services in its Area in a manner consistent with the Contracting Party’s obligations under Part III of this Treaty (ECT Article 22)”. This would mean that Russia is directly responsible for the acts and omissions of Gazprom and other state enterprises, which were in breach of the ECT and affected the foreign investors[30]. Finally in a recent ECT case[31] the combined effect of Art 22 and Art 10 ECT was seen as making a state entities damaging commercial actions the responsibility of the state itself, a view which strengthens the case for Russia’s commitment to the ECT.This final outcome of the Yukos case will also confirm this point of view if the tribunal finds in the favour of the Yukos investors.

 

Legal implications of the ECT for Russia and foreign investors

Based on the discussion above, it can be seen that even if Russia formally withdrew from the ECT on 19 October 2009, it is still bound in its governmental capacity to uphold the proprietary rights of the oil and gas investors under Article 45 ECT until 2029 even after it has withdrawn from the charter[32]. This is an important case for ECT arbitration history as the expected amount of compensation; mainly 100 million dollars would be one of the biggest amounts to be awarded to an aggrieved investor if the tribunal finds the judgment in favour of Yukos[33]. Another issue is that even though the arbitration award is also unlikely to be given recognition by Russia’s local judiciary, it should be remembered that once a final ruling is made in the Yukos case, Russia will be unlikely to default on the payment of this compensation easily. At that time if Russia refuses to pay the compensation award it will be possible to secure court orders in countries particularly in the UK and Germany, to have Russian assets seized under the New York Convention on the Enforcement of International Arbitration[34].

Conclusion

 

The impact of the recent decision in the Yuko’s arbitration should have profound political and economic ramifications for Russia’s standing in the international community and there might still be hope for investors bringing claims until 2029 even after the provisional application has been withdrawn in October 2009.To answer the question then, viewing Russia’s withdrawal from the ECT as having limited legal significance would be a mistake in light of its obligations under the Vienna Convention, its local constitutional provisions as well as the provisions of the ECT it signed up to in 1994.Clearly lack of ratification even after fifteen years of involvement in the ECT process cannot permit such evasive unilateralism on behalf of Russia in terms of its legal responsibilities and undertakings .Finally there is much more to come in terms of Russia’s legal responsibilities once a final decision is reached in the Yukos trial by next year.

Bibliography

  1. A.Amkhan , “Consent to submit investment disputes to arbitration under Article 26 of the Energy Charter Treaty”Int. A.L.R. 72
  2. Andrew Belyi, (2009), ‘Why a Political Accord is Needed to Make EU-Russia Relations Work’, Working Paper nr 19/2009, Elcano Royal Institute, p. 7-11.
  3. Matthew Belz, “Provisional Application of the Energy Charter Treaty: Kardassopoulos v Georgia and Improving Provisional Application in Multilateral Treaties”, 22 Emory International Law Review, 2008.
  4. Doeh, Doran, Sophie Nappert and Alexander Popov, “Russia and the Energy Charter Treaty: common interests or irreconcilable differences?”, International Energy Law & Taxation Review, 2006, 7, 189-191
  5. Fredrick Erixon (2008) Europe’s Energy Dependency and Russia’s commercial assertiveness ,ECIPE Policy Briefs No 07/2008
  6. Chris Flynn,“Russian roulette: the ECT, transit and Western European energy security”, International Energy Law & Taxation Review, 2007, 1, 12-17
  7. Emmanuel Gaillard , “Russia cannot walk away from its legal obligations”, Financial Times, August 18 2009
  8. K.Hober, Kaj, and Sophie Nappert, “Provisional application and the Energy Charter Treaty: the Russian Doll provision”, International Arbitration Law Review, 2007, 3, 53-57
  9. K. Hobér; “The Role of the Energy Charter Treaty in the Context of the European Union and Russia”OGEL 4 (2007), www.ogel.org
  10. K.Hobér; “Arbitrating Disputes under the Energy Charter Treaty” OGEL 2 (2009), www.ogel.org K. Hobér; “Arbitrating Disputes under the Energy Charter Treaty” OGEL 2 (2009), www.ogel.org pp-15-18
  11. C. Imhoos, C.Seraglini and D.Rooz, International arbitration and alternative dispute resolution ,International Business Law Journal 2009 *I.B.L.J. 255 -26
  12. U.G. Klaus; “The Gate to Arbitration – The Yukos Case and the Provisional Application of the Energy Charter Treaty in the Russian Federation”OGEL 2 (2005), www.ogel.org
  13. A .Konoplyanik, (2009) Energy Charter and the Russian Initiative-Future prospects at the legal base of International Cooperation Vol 7 ,Issue 2 OGEL
  14. A.A. Konoplyanik; “A Common Russia-EU Energy Space (The new EU-Russia Partnership Agreement, acquis communautaire, the Energy Charter and the new Russian initiative)” OGEL 2 (2009), www.ogel.org
  15. Gaffney and Loftis, “The ‘Effective Ordinary Meaning’ of BITs and the Jurisdiction of Treaty-Based Tribunals to Hear Contract Claims” (2007) 8 The Journal of World Investment and Trade, No.1,
  16. Sophie Nappert, “Russia and the ECT: The unplumbed depths of provisional application”, Global Arbitration Review, Volume 3, Issue 2, April 1 2008
  17. Sophie Nappert (2009) EU-Russia Relations in the Energy Field:The continuing role of International Law,OGEL2 (2009) www.ogel.org pp 7-13
  18. Noah Rubins and Azizjon Nazarov, “Investment Treaties and the Russian Federation: Baiting the Bear?”, Business Law International, Volume 9(2), May 2008.
  19. Norton Rose, “Russia withdraws from the Energy Charter Treaty” https://www.nortonrose.com/knowledge/publications/2009/pub22691.aspx?lang=en-gb11
  20. Sergey Seliverstov (2009) Energy Security Of Russia and the EU:Current Legal Problems Note de L’Ifri published by The Institut Francais Des Relations Internationales (IFRI) available via Ifri.org pp 7-9
  21. T. Walde, “The Energy Charter Treaty”, in M. ROGGENKAMP et al. (Eds.) Energy Law in Europe       (Oxford: OUP 2008) page
  22. Kirsten Westphal (2009) Taking Medvedev at his Word :The Russian Presidents proposal for an International Energy Accord and the Energy Charter Treaty :SWP Comments (24): Stiftung Wissenschaft and Politik; German Institute for International and Security Affairs,October 2009.
  23. Gregory White , “Court Rules against Russia in Yukos Claim” Euractive (1 December 2009) retrieved on 9 Dec 2009 available at https://www.euractiv.com/en/energy/court-rules-russia-yukos-case/article-187869

Legislation Cited

 

Energy Charter Treaty 1994

Vienna Convention on the Law of Treaties 1969

New York Convention on the Enforcement of International Arbitration

15 June 1995 Federal Law on International Treaties of the Russian Federation

 

Table of Cases

Kardassopoulos v Georgia ICSID Case ARB/05/18; decision on jurisdiction, July 6 2007

Nykomb Synergetics Technology Holding AB v Republic of Latvia, Award December 16, 2003

Petrobart v Kyrgyzstan International Chamber of Commerce Case 126/2003,

Plama v Bulgaria ICSID-Case ARB/03/24

 Yukos Universal Ltd (Isle of Man) v Russian Federation; Hulley Enterprises Ltd (Cyprus) v Russian Federation; Veteran Petroleum Trust (Cyprus) v Russian Federation

 

[1] A.A. Konoplyanik; “A Common Russia-EU Energy “(2009) pages 1-3

[2] On 30 July 2009, Russia withdrew from the ECT through Government Ordinance 1055-r and a notice was accordingly served to the current depository of the Energy Charter Treaty.Thereby under Article 45 (3) provisional application of the ECT to Russia has ceased in October 2009 (sixty days after the notice was served)

[3] Yukos Universal Ltd (Isle of Man) v Russian Federation; Hulley Enterprises Ltd (Cyprus) v Russian Federation; Veteran Petroleum Trust (Cyprus) v Russian Federation

[4] Gregory White , “Court Rules against Russia in Yukos Claim” Euractive (1 December 2009) retrieved on 9 Dec 2009 available at https://www.euractiv.com/en/energy/court-rules-russia-yukos-case/article-187869

[5] Emmanuel Gaillard “Russia cannot walk away from its legal obligations” (2009).

[6] A.A. Konoplyanik; “Energy charter and the Russian initiative – Future prospects of the legal base of international cooperation” (2009)

[7] See the views of Emmanuel Gaillard ft.4 above

[8] Doeh et al, “Russia and the Energy Charter Treaty: common interests or irreconcilable differences, 2006 pp 189-191

[9] Hobér et al, “Provisional application and the Energy Charter Treaty: the Russian Doll provision”(2007) 3, 53-57

[10] See Nappert ft 8

[11] Hobér et al ft 11.

[12] K. Hobér; “Arbitrating Disputes under the Energy Charter Treaty (2009), pp 15-18

[13] Sophie Nappert, “Russia and the ECT: The unplumbed depths of provisional application” 2008.

[14] As required by Articles 71,105 and 106 (d) of the Russian constitution for ratification. A head of the state may however sign and negotiate a treaty on behalf of Russia as in the case of the ECT under 86(b) of the Russian Constitution.

[15] Sergey Seliverstov (2009) Energy Security Of Russia and the EU- pp 7-8

[16] Discussed in U.G. Klaus; “The Gate to Arbitration -(2005) pp 10-13

[17] International Chamber of Commerce Case 126/2003

[18] ICSID-Case ARB/03/24

[19] ICSID Case ARB/05/18; decision on jurisdiction, July 6 2007- It was held in this case that under 45(1) ECT Georgia would have to treat the ECT as if the ratification had already occurred. However the ambiguous “domestic exception” was upheld in that fewer than 45(2) ECT Georgia was only liable to the extent its laws were in consonance with the ECT.It will be interesting to see how this matter is dealt with in the final Yukos award.

[20] See Nappert ft 13

[21] Kirsten Westphal (2009) Taking Medvedev at his Word (2009).

[22] Matthew Belz, “Provisional Application of the Energy Charter Treaty (2008).

[23] See Belz (ft.1)

[24] Norton Rose, “Russia withdraws from the Energy Charter Treaty” (2009)

[25] See Nappert (ft.6) and Articles 18 and 31 VCLT 1969, which support this view.

[26] Hobér, Kaj, and Sophie Nappert, “Provisional application and the Energy Charter Treaty: the Russian Doll provision”, 2007, 53-57

[27] Hobér et al (ibid) have called this the “pacta sunt servanda clause”

[28] A.Amkhan, “Consent to submit investment disputes to arbitration under Article 26 of the Energy Charter Treaty”Int. A.L.R. 72

[29] Ibid and see also K. Hobér; “The Role of the Energy Charter Treaty in the Context of the European Union and Russia”(2007) pages 31-33.

[30] Sophie Nappert (2009) EU-Russia Relations in the Energy Field: The continuing role of International Law, OGEL2 (2009) pp 7-13

[31] Nykomb Synergetics Technology Holding AB v Republic of Latvia, Award December 16, 2003

[32] Belyi, (2009), ‘Why a Political Accord is Needed to Make EU-Russia Relations Work’, Working Paper nr 19/2009p. 7-11.

[33] C. Imhoos, C.Seraglini and D.Rooz, International arbitration and alternative dispute resolution, I.B.L.J. 255 -262

[34] Ibid