Renowned arbitrator probes Russian energy dispute

BY ILJA PENUSLISKI

Prof. William Alford ’77 an Emmanuel Gaillard

Facing three Energy Charter Treaty (ECT) arbitrations brought by the majority shareholders of former Yukos Company, the Russian Federation terminated on July 30, 2009 the provisional application of the ECT, the world’s largest and most comprehensive international energy agreement. Introduced by Professor Bill Alford, Professor Emmanuel Gaillard (Paris XII University; head of the International Arbitration Group at Shearman & Sterling LLP; lead counsel for the Claimants in the Yukos arbitrations), gave a lecture at Harvard Law School on the importance of the ECT and the legal and policy implications of Russia’s change of heart with respect to the ECT.

The ECT arbitrations were instituted against the Russian Federation by the majority shareholders of Yukos Oil Company in early 2005. The Claimants allege that the Russian Federation expropriated their investment in Yukos, a loss that amounts to over US$50 billion. Awaiting the award on jurisdiction in these arbitrations, Professor Gaillard stated that Russia’s termination of provisional application of the ECT is a policy decision within the State’s discretion. The withdrawal, however, does not affect past investments. The termination takes effect on October 19 of this year, and pursuant to Article 45(3) of the ECT, investments made before that date will be protected, even in relation to new illicit acts from the Russian Federation, for a period of 20 years expiring on October 19, 2029.

As part of the same reformulation of its energy policy, the Russian Federation put forward, three months prior to the termination of provisional application of the ECT, a proposal to its European counterparts to replace the ECT with a new instrument. Russian President Medvedev described the Russian proposal as a well-balanced solution for the energy sector, unlike the ECT. To Medvedev’s proposal the EU Energy Commissioner, Andris Piebalgs, responded that it is for the ECT members to decide the fate of the Treaty. The ECT, which now binds 50 parties (including Russia for past investments until 2029, almost all of Europe, Central Asia and Japan), seems not to be in danger of being supplanted. Energy investors within the geographic area of the ECT can still enjoy substantive investment protection and a standing offer by States to arbitrate in case of a dispute. Professor Gaillard believes that the ECT will continue to be a vibrant instrument and that the number of ECT investor-State arbitrations, currently at 23, will increase further.

Professor Gaillard then addressed the extent of the coverage of investment protection based on bilateral investment treaties entered into by the Russian Federation. Those treaties, which complement the protection offered by the ECT, follow two different models: the treaties entered into after the collapse of the former Soviet Union and embracing a modern approach, and the treaties entered into by the former Soviet Union (for example, with most of the Western European countries, China and Canada), which contain a narrow dispute resolution provision limited to the quantum of expropriation. The latter raise interesting legal issues such as the impact of the most-favored-nation provision on the dispute resolution clause and the question of whether those treaties empower arbitrators to decide on the existence of the State’s liability for expropriation as a prerequisite to the quantum issue. For those countries such as the US that have no investment treaty in force with Russia, be it on a bilateral or multilateral basis, the lack of any international protection of their investors in Russia is a real concern. Professor Gaillard observed that the US’s “ideology of bilateralism,” which led to the decision not to become a party to the ECT, has hurt US investors considerably, as the bilateral investment treaty with Russia never came into force.

Professor Gaillard concluded that, in light of the finite nature of oil and gas resources, energy producing countries, and particularly giants like Russia, are now increasingly tempted to use the bargaining power attached to their position to shape the international legal framework in the energy sector to their advantage. A proper balance between such policy and the need to attract international investments in the energy sector, which remains crucial in many parts of the world, will have to be found.

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