Irina Nazarova
INTRODUCTION
Ukraine’s investment environment has seen much change in the last seventeen years; however, one thing that is becoming increasingly apparent is the refusal by Ukrainian authorities to conform to internationally accepted business and legal norms. The failure of Ukrainian authorities to act in the spirit of good faith and fair dealing with investors can be traced to any one of several causes. Vague regulatory standards, a refusal to recognize or enforce foreign and international arbitral awards, and internal political feuding stand out among the most serious and pressing causes of conflict between foreign investors and the state of Ukraine. Despite President Yushchenko’s belief that WTO accession would make Ukraine “open for business”, these unresolved problems stand in the way of that belief’s realization.
The majority of international bilateral and multilateral investment agreements executed and implemented by Ukraine contain provisions on investor-state dispute settlement. These provisions entitle investors to seek remedy for infringement of their rights by the state of Ukraine. Recently the trends towards the use of investor- state arbitration have been strengthening.
The following are examples of why resolution of investor-state problems is absolutely essential to the growth of investor confidence and to the reduction of conflict between investors and the state of Ukraine.
LEGISLATIVE DEFICIENCIES
When vague or ambiguous laws exist, foreign investors can be vulnerable to predatory practices of governments or their agencies. This is particularly illustrated by the case of Lemire v. Ukraine (ICSID Case No. ARB(AF)/98/1 (United States/Ukraine BIT)).
In 1995, Lemire, an investor from the United States of America, founded Gala Radio in Ukraine. Gala hoped to gain listeners by applying for more broadcast licenses and expanding its network, which were denied by Ukrainian authorities. Mr. Lemire initiated arbitration proceedings against Ukraine in 1998 at the International Centre for Settlement of Investment Disputes (ICSID) for violations of the US-Ukraine Bilateral Investment Treaty. It appears that Gala Radio did not receive several broadcast licenses because of vague Ukrainian legislation. Broadcast license selection criteria are seemingly not well defined and thus, completely subjective. Furthermore, there is also no obligation for Ukrainian authorities to explain their decisions to license applicants. It could appear to investors that these types of decisions are made arbitrarily and without rationale.
Without clarification of legislation or written explanations of authoritative decisions, investors could be helpless against the subjective interpretations of various Ukrainian authorities. Fortunately for Mr. Lemire, a settlement was reached in 2000 regarding his ICSID case; however, another related case between Mr. Lemire and Ukraine is now pending. If legislation remains vague and subject to arbitrary interpretation, investors could continue bringing suits against Ukraine for what they believe are arbitrary violations of their rights as investors. Legislation in areas of investment should be written clearly, so everyone can come to a common understanding of its meaning. Additionally, Ukrainian authorities should be obliged to provide written explanation of the rationale behind their decisions. These two steps could go a long way towards reducing conflict between investors and the state of Ukraine.
FAILURE TO RECOGNIZE AND ENFORCE FOREIGN AND INTERNATIONAL ARBITRAL AWARDS
It appears that Ukrainian authorities are not working as hard as they could to enforce arbitral awards and are disregarding arbitral agreements which often become the basis for subsequent foreign and international arbitral awards. One case that highlights Ukraine’s disregard of arbitral agreement between the parties and its unwillingness to enforce arbitral awards is Telenor Mobile Communications AS v. Storm, LLC, 524 F. Supp. 2d 332 (S.D.N.Y. 2007), a case involving an arbitration conducted under the United Nations Commission on International Trade Law (UNCITRAL) Rules on International Commercial Arbitration and a competing proceeding in the Ukrainian courts. In Telenor, two telecommunications firms-one Ukrainian (Storm) and one Norwegian (Telenor)-got into a dispute over the corporate governance provisions of their shareholder agreement.
Storm successfully sought to have Ukrainian courts nullify an arbitration clause in its shareholder agreement between the two companies. Telenor was given no notice of the hearing and was not even named as a party to the Ukrainian case. Thus, Telenor commenced arbitration in New York pursuant to the arbitration clause in its contract with Storm. Storm argued that because Ukrainian courts had already decided the issue, the arbitration tribunal in New York did not have jurisdiction. On this basis, Storm withdrew from arbitration. The tribunal held that the Ukrainian court had not given “meaningful consideration” to certain key issues and thus the tribunal was not barred from continuing with arbitration. The arbitration continued and the arbitral tribunal ruled in favor of the Norwegian firm, which sought to enforce the award in federal court in New York.
Ukrainian courts took this opportunity to further elaborate on their earlier decision by broadening the scope of the initial rulings. The Ukrainian court addressed the failure to join Telenor as a party in the earlier proceedings by announcing that the court’s earlier order “shall apply and be binding also upon those entities that were not among the parties to the [original] court proceedings.” The Ukrainian court also held that “should the parties and the arbitrators ignore the above circumstances and render an award on the dispute, such acts shall constitute a violation of the court decision.” The U.S. federal court denied Storm’s attempts to stop the arbitral proceedings citing, inter alia, “the apparently collusive nature of the Ukrainian litigation.” Subsequently, the U.S. federal court ruled in Telenor’s favor and enjoined Storm from seeking further legal rulings in Ukraine.
INTERNAL POLITICAL FEUDING
Internal political feuding has also been a source of conflict for investors. Given the politically polarized climate in Ukraine, foreign investment can serve as a springboard for opposition parties to launch attacks. For example, in October 2007, Vanco International won a bid for Ukraine’s first-ever production-sharing agreement for hydrocarbon deposits on the Black Sea shelf. In April 2008, the Ministry for the Protection of the Environment and Natural Resources, supported by Prime Minister Tymoshenko, unilaterally terminated the production-sharing agreement with Vanco, a U.S. company by revoking Vanco’s oil and gas license. After consultation with President Yushchenko, Ukraine’s Prosecutor General’s Office issued an order suspending the Ministry’s breach of the agreement. In response, the Cabinet of Ministers headed by Tymoshenko published a government resolution to completely void the production-sharing agreement. President Yushchenko and Prime Minister Tymoshenko are in open opposition on the matter, both citing corruption as a motivating factor.
Situations such as Vanco’s are an example of how Ukraine’s investment environment is deeply intertwined with Ukraine’s political feuding. Political opposition to certain investments hinders resolution of disputes on the merits. Vanco’s senior vice president, Jeffrey Mitchell, suggests that this has more to do with publicity and popularity than sound business sense. Mitchell cites Tymoshenko’s reliance on the press for communication, as opposed to direct talks with the company. In other words, the opposition is more political than meritorious. If the issue cannot be settled between the parties, there is an arbitration clause in the production-sharing agreement allowing for dispute settlement at the Arbitration Institute of the Stockholm Chamber of Commerce. Depending on the political climate in Ukraine, if the parties commence arbitration, who knows if Ukraine would recognize and enforce the arbitral decision? Based on recent examples, no one can be certain.
GENERAL CONCLUSIONS
There are many causes of conflict between investors and the state of Ukraine. In addition to those that are mentioned, Gene Burd addressed another serious issue in his article, High Commercial Court Tramples International Agreements, published in the Spring 2008 issue of the Russia/Eurasia Committee Newsletter, regarding the Recommendations of the High Commercial Court of Ukraine. In its Recommendations, the High Commercial Court stated that agreements among shareholders of Ukrainian joint stock companies containing non-Ukrainian choice of law provisions or international arbitration clauses are null and void. By preventing companies from choosing a foreign or international forum to settle certain corporate disputes, the High Commercial Court has handed investors yet another reason to stay away from Ukraine. There are those who argue that the Recommendations are not binding authority on the lower courts, but practice shows the lower courts will nonetheless rely on the higher court’s recommendations. The failure to resolve this issue and the others mentioned will undoubtedly give rise to future disputes between investors and Ukraine.
The first step towards rebranding Ukraine’s investment environment as positive is to get rid of the causes of conflict. Several changes could be made to reduce conflict:
legislation needs to be written with clarity and authorities should be obliged to explain their decisions in writing
foreign and international arbitral awards need to be recognized and enforced
investments cannot serve as a basis for political attacks
the High Commercial Court’s Recommendations regarding arbitration clauses should be cancelled, and a law should be drafted explicitly stating that the recommendations of the High Commercial Court of Ukraine shall not be relied upon by lower courts.
Many causes of conflict between foreign investors and the state of Ukraine continue to exist. Ukraine may be putting up its “open for business” sign; but with these problems still unresolved, caveat emptor.
* This article was adapted from a speech given by Ms. Nazarova at UNCTAD’s June 2, 2008 conference in Kiev on Investment Treaties and Alternative Methods of Investor State Dispute Resolution. All of the conclusions reached in this article are the author’s own and are based on personal experiences and knowledge as an attorney in Ukraine.