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“The team was recently visible advising on a number of pharmaceutical cases. Sources agree that the team is “moving in the right direction” and are particularly impressed by its work in the pharmaceutical sector”.


Costly Promises


Dmytro Shemelin , Lawyer at Ilyashev & Partners Law Firm

Ukrainian Prime Minister, Arseniy Yatseniuk, ordered to carry out official investigation related to issue of the license to joint companies of NJSC Nafrogaz and foreign investors for mining exploration at the Black Sea shale.

The scheme of cooperation between NJSC Nafrogaz and two Cyprus companies – Grovisla Limited and Ostexpert Limited – raises many issues. In its press release the state company represented that it ensured access of the Cyprian companies to the field deposits in exchange for their promises to finance their development.

Taken as such this scheme is totally justified but it the participants of the scheme who raise doubts. The parties of the scheme are the companies which have never been involved into oil and gas projects before. Such companies were registered by little-known businessmen who, however, are ready to invest almost billon dollars of unsecured financing.

The task of the official investigation is to analyze how trustworthy the Cyprian party is and, in the meanwhile, it is worthwhile bringing particular focus to the following.

Ukraine and Cyprus are the parties to the Agreement to the Energy Charter which stipulates for a possibility of protecting interests of the Cyprian investors at the international arbitration court in case initiated against a particular state.

Somebody may be misguided by reference to the word “investors” – it sounds seemingly convincing: it is the companies making investments to plants, electric power stations, pipelines etc. In reality the arbitration practice may treat investment as almost any assets controlled by a foreign company in Ukraine if the national state of such foreign company signed an agreement with Ukraine on investment protection. In practice investments include shares and real estate, as well as, for example, the right of recourse under a certain agreement especially if such agreement stipulates for long-term cooperation between the parties and certain contributions into joint projects.

In this particular case investors did not acquire any substantial assets or rights in Ukraine, such as a production license or rights for the land plots. However, if their actions had resulted in at least temporary success the right for mining development would have been subject to arbitration protection.

Unfortunately, our state authorities often have tendency to protect the state’s interests by taking “strong-arm decisions” brushing aside “unnecessary formalities” such as limitation period, judgments which entered into force, own earlier documents etc. The main reason for this is that it is very difficult to get any monetary compensation for losses suffered as a result of taking an administrative decision. Not risking much our state authorities are prone to making hasty but ill-advised actions guided by the motto “success is never blamed”.

However, according to the general law it is stipulated that the state must act in a sensible and predictable manner taking into view positions of all interested parties. As a result late cancellation of the lawfully obtained license may easily result in lodging an international suit and submitting a claim on compensation of profits which Cyprian companies could have gained from exploration of the deposits.

The amount of such profits may have been be calculated based on the estimate of the mined materials even in case when the investors had carried out no actual activities (more precisely, failed to start exploring them). For the international arbitration it would have been an important factor to have a permit of NJSC Nafrogaz and the State Geology and Mineral Resources Service for establishment of Ukrainian companies together with investors from Cyprus. If the state, as represented by the State Geology and Mineral Resources Service, had analyzed its potential partners and acknowledged their multi-million promises as being trustworthy the state later cannot disappoint the investors’ expectations.

Suchwise, provision of a “couple of documents” and their almost immediate “strong-arm” cancellation could have resulted in a multi-million claim against Ukraine.

There have been similar cases in the practice of international arbitration against Ukraine, for example the case Inmaris Perestroika Sailing Maritime Services and others v. Ukraine. The claim was filed in connection with the “strong-arm” decision of the then-Minister to forbid the sailing-ship Khersones to leave the port for its annual voyage. The sailing ship was exploited by German investors. As a result the sailing season was disrupted and investors were compensated for their losses from the state budget. The amount of losses was calculated on the basis of the lost profits up to the end of the vessel’s exploitation.

In the same way in another case, Alpha Projektholding GmbH v. Ukraine, our state authorities viewed corporatization of the state-owned hotel to be a good reason to uphold a “strong decision” and stop making regular payments to the Austrian investor which had earlier made an investment into the hotel renovation. Although the arbitration court acknowledged that investment procedure was carried out with numerous violations of Ukrainian laws it was not enough to dismiss the claim in its entirety.

Unfortunately, there is little evidence so far that while making decisions about the assets of international investors in Ukraine the state authorities will keep the probability of suffering negative consequences of international lawsuits in mind.

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