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How can Ukraine win European court fight against Gazprom


Dmytro Shemelin, attorney at law, Ilyashev & Partners Law Firm

Source: The Liga

Opinion: Gazprom deal not profitable, but trying to get a discount is a better option than termination

Since April 1, Russian gas export monopoly Gazprom has twice raised gas prices for Ukraine. In only a week, natural gas price increased by 80%. Now the price of “blue fuel” for Ukraine’s national operator NAK Naftogaz of is the highest in Europe with $485 per thousand cubic meters. Moreover, under the 2009 contract, Ukraine may not raise transit prices by more than 10%. A presidential candidate and poll leader Petro Poroshenko said Ukraine will need to commence international arbitration in Stockholm to terminate the unfavourable contract signed by Yulia Tymoshenko more than four years ago. LIGABusinessInform has come up with some ideas whether, and to what extent, it is realistic to have this onerous contract modified through arbitration.

Ilyashev and Partners’ Dmytro Shemelin:

Disputes relating to the validity and breach of contracts shall be resolved in arbitration. To terminate the contract unilaterally, Ukraine will have to commence arbitration in Stockholm.

However, going to arbitration does not automatically mean the case will be won. If a claim is made, Gazprom is sure to bring a counterclaim to collect all gas debts under the contract and probably the default interest within the range of limitation periods.

So why terminate the contract and not try to have it changed through arbitration instead? Ukraine could demand, for example, that the ‘take or pay’ provision be recognized invalid or that the formula to calculate gas price be changed, etc. This was the way followed in many successful cases to date.

As far as legal grounds for arbitration are concerned, it is difficult to tell something without having the situation thoroughly analysed. So far, no disputes between European operators and Gazprom have dealt with termination of gas contracts. Instead, the point was to amend the terms as regards prices and supply volumes.

For example, in the case of RWE Transgas (Czech Republic) v. Gazprom (2013), the arbitration tribunal in Vienna ruled to change the formula under which gas prices were calculated. The price was “untied” from oil prices and reduced in accordance with spot market gas prices. The tribunal also ordered that Gazprom should return the money already paid by RWE Transgas for previously supplied gas (i.e., the judgment took effect retrospectively).

In late 2012, in another arbitration between the same parties, the tribunal ruled that RWE Transgas mat reduce its take-or-pay drawings by volumes supplied to Czech Republic directly by Gazprom. Further, the tribunal lifted a de-facto ban on the export of gas imported by RWE Transgas from Gazprom. At this point, the arbitrators have invoked the violation of the Antimonopoly law of the European antitrust laws.

On the other hand, who can say that Russia’s refusal to grant a gas discount under denounced agreement on the Russian Black Sea Fleet in Crimea is a violation of contract between Naftogaz and Gazprom? The issue is subtle as there is no obvious legal relationship between the international-law part of the so called “Kharkiv agreements” with Russia and their private-law component as addenda to gas contract.

Importantly, too, it is very unlikely that the arbitration tribunal will be enthusiastic about having to make a clear ruling in this very subtle political issue, as the validity of Russia denouncing an international agreement is exactly what underlies the legitimacy of Ukraine being denied the discount.

The mechanism generally resembles a lawsuit, with both parties filing written statements (once or twice each) and all related evidence, expert opinions, etc. In a hearing, the parties present their arguments and interrogate each other’s witnesses and experts. Arbitrators also ask questions to the parties and witnesses. After that, the tribunal shall hold a conference and deliver an arbitration award within few months.

Given the effective conduct of proceedings, arbitration between Naftogaz and Gazprom may take about a year to complete.

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