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What secrets will be disclosed during arbitration Naftogaz VS Gazprom


Dmytro Shemelin, lawyer, Ilyashev & Partners Law Firm
Source: The Liga

Lawyer Dmytro Shemelin knows what may rise to the surface in an arbitration hearing in Stockholm

Legal battles of Abramovich v Berezovsky and Pinchuk v Kolomoysky in London were an unspeakable luck for journalists. Testimonies of witnesses and the oligarchs gave a rich pour into the modern history of Russia and Ukraine. The public was able to learn the whole story: who, how and at what price settled the issues in the offices of high-ranking officials. Just in a few months, Ukraine’s national oil and gas operator Naftogaz and its Russian counterpart Gazprom will face arbitration in Stockholm. The LigaBusinessInform asked lawyer Dmytro Shemelin what, if anything, we would be able to learn from the courtroom.

Unlike courts of general jurisdiction (cases of Abramovich v Berezovsky or Pinchuk v Kolomoysky), commercial courts of arbitration do not allow people from outside to attend hearings. Therefore, although arbitration between Naftogaz and Gazprom in Stockholm will certainly raise questions interesting to the general public, we should not very much expect this information to become common knowledge – unless one of the parties will make a voluntary disclosure.

For example, did the public learn much about the issues raised in the arbitration between OAO Tatneft and Ukraine? After all, at stake was the largest Ukrainian oil refinery and a rather large amount of compensation ($ 2.4 billion – Ed.) comparable to the “gas debt.”

Another thing is that the case of Gazprom v Naftogaz is much-touted and interesting to the public. It would be therefore quite reasonable that Naftogaz could be requested to inform the people about the progress, with at least the most important details and to the extent it meets its own strategy of conducting the case.

A battle of experts

As at today, Naftogaz says it demands from arbitrators to establish a fair gas price and a reimbursement of moneys overpaid in the earlier periods. This is a key issue likely to shape the fate of Gazprom’s claim. It also was the key item on agenda of the last tripartite talks held earlier.

Judging by the fact that Naftogaz has engaged Norwegian lawyers with proven experience against Gazprom in similar disputes, Naftogaz strategy should be based first of all on the existing favorable arbitration case law, rather than on any unique facts in its relations with Gazprom. In other words, the case will be of a technical nature, a dispute of experts with regard to the economically justified price (with a legal touch).

Indeed, Ukraine is now paying more than an average European country, although the cost of transportation of gas for Ukraine is much smaller. Of course, one does not simply approach the issue like that, because the price includes a whole bunch of other factors: volumes of supply, transportation routes, validity of the price and available ways of replacing Russian supplies with a conditional reverse.

It is unlikely that such dispute will be too spectacular. Laymen might be interested only in the immediate award of the tribunal – the sum of money. Economists, of course, would be happy to see expert opinions on the evaluation of factors influencing of gas pricing, as well as transcripts of interviews in which experts will defend their position. Lawyers would be interested in the methods of pricing, for example, whether the tribunal will base on economic parameters (netback), a substitute transaction or a combination of both, etc.

Of course, it is not unlikely that Naftogaz, based on any factual evidence, will try to show that the gas price in 2013-2014 was politically motivated and comprised non-economic components, like the “loyalty to Russia discount” for Yanukovych or the “fee for escaping Russia” for the present government. If so, it is quite possible that witnesses will be brought from both Ukraine and Russia. For, unlike Ukrainian courts, the arbitration tribunal, although preferring documentary evidence, is all supportive of witness statements.

Raising the ante

The problem, however, is that given the current difficult situation in the economy even the victory over Gazprom in arbitration will provide only a temporary relief. The gas price in the range of, say, USD 310-340 per thousand cubic meters that could be expected in the end will be market and fair, but still unacceptably high for Ukrainian companies. This may force Naftogaz to take a more aggressive stance.
Naftogaz may try to prove that some of the previous agreements with Gazprom aimed to lower the price of gas remain in force. So, for example, if the market price could be adjusted by the discount under Kharkiv agreements, it would be a drastic solution to the problem.

Kharkiv agreements themselves are a rather unusual legal chimera. While the contract was signed in 2009 by Naftogaz and Gazprom, the discount was set by a treaty between Russia and Ukraine. A compensation for the discount (the stationing of Russian Black Sea Fleet in Crimea) was an obligation of Ukraine as a state, but the immediate payer for gas at a discounted price was Naftogaz. Besides, there is a separate agreement directly between Gazprom and Naftogaz, which has nothing to do with the discount at all. No surprise, therefore, if the tribunal shall rule that the Kharkiv agreements create quadripartite relationship involving not only Gazprom and Naftogaz, but also the states of Russia and Ukraine.

It is clear that Russia will argue that Kharkiv agreements were terminated due to the change of circumstances in which they were concluded (rebus sic stantibus, as Russia’s PM Medvedev said), as Russia no longer needs Ukraine’s permission to station its military bases in Sevastopol.

Naftogaz, in turn, will have to prove that Medvedev’s statement is wrongful since the said change of circumstances was caused by the unlawful behaviour of Russia as a party to the contract (Article 62(2)(b) of the Vienna Convention on the Law of Treaties).

Accordingly, should the issue on the application of the Kharkiv agreements be brought about and should the arbitrators really want to try it on the merits not getting away with some formal objection, we should expect some interesting research of fact.

Firstly, it is the circumstances in which Kharkiv agreements were made, preparatory documents, minutes of negotiations between the parties and possibly the witnesses who had participated in the negotiations. Among other things, the specific amount of obligations of Ukraine under Kharkiv agreements can be investigated, an issue of whether there was something more than just providing territory for military bases.

Secondly, it is the circumstances of Russia’s involvement in Crimea’s proclamation of independence on March 17, 2014 and its annexation to Russia that followed. It is time that Ukrainian government presents all evidence of Russian involvement collected during the last months.

Unfortunately, these issues are so complex that the likelihood of their thorough review in arbitration is extremely small. Most likely, the case will be settled, and the “general public” will not learn more than a press release can accommodate.

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