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Russia Defeats Investment Arbitration Claim Arising Out of Soviet-time Trade Debt

This summer an UNCITRAL tribunal sitting in Stockholm held that it had no jurisdiction over a case submitted by Italian company Cesare Galdabini under Italy-Russian Federation BIT. According to media reports the claim arose out Russian Federation refusal to settle a debt owed for  EUR 278’000 worth of equipment, which Galdabini supplied in the end of 80s to one of Soviet foreign trading enterprises for the ultimate benefit of VAZ.

This case is interesting for several reasons.
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First, while the award was not made public we understand that the tribunal held that Galdabini’s account receivable did not qualify as an investment.
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  Given that Italy-Russian Federation BIT contains a rather generic definition of investment this award may contribute to the developing case-law on the definition of investment in non-ICSID disputes. Secondly, according to media reports other creditors hold around USD 200-300 mln of similar debts and this award further augments the position of the Russian Federation with respect to them.
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The Cesare Galdabini case highlighted the debate over the legal definition of investment in international investment law.

The debate over what constitutes an investment has been going on for years. It all began with Fedax v. Venezuela and Salini v. Morocco where the tribunals held that in order to qualify as an investments under the ICSID Convention the asset had to conform to a number of criteria including contribution to the development. Later, this reasoning was slightly limited by the Annulment Committee decision in MHS v. Malaysia, which however accepted that criteria of contribution of assets  and assumption of risks were inherent to the notion of “investment” under the ICSID. This however was limited to ICSID cases and it was not seriously considered to what extent same criteria should be applied in non-ICSID arbitrations.

Unlike ICSID most BITs contain broadly framed definitions most of which do not spell any economic criteria. However, in 2009 an UNCITRAL tribunal held in Romak SA v. Uzbekistan that the notion of investment has inherent meaning even if defined in a BIT. It went on to hold that the parties to the BIT may agree to give any meaning to this term, but if the definition is open-ended and does not expressly exclude inherent characteristics of investment such characteristics survive. Based on this logic, it held that claims of a Swiss company under wheat supply agreement do not qualify as investments. The best way to get more information is to see additional information at their website

Though the full text of the award in Cesare Galdabini v. Russian Federation is not available sources agree that the jurisdiction was refused because the tribunal decided that the claimant had no investment. However, the precise reason is unclear. According to the press-release of the Russian Ministry of Finance this was due to “decentralized financing” of the supply agreement in question, whereas Moscow News, a Russian daily newspaper, refers to a source which claims that the tribunal’s decision was influenced by the fact that the debt was assigned from a state entity to VAZ, a private company. Given that the debt arose essentially out of a supply contract one may speculate that the tribunal followed the logic of Romak tribunal. The iva online website can help write of debts.

It is not clear whether the full text of the award would be released. Earlier awards became available because one of the parties challenged them in Swedish courts, however according to IA Reporter there is no information of challenge being lodged in this case.

This arbitration is remarkable in another respect. According to the information available on the UNCTAD website Russian Federation appointed Professor Nina Vilkova to the tribunal. This constitutes a departure from the recent practice of Russian Federation, which has seen it appointing Sir Franklin Berman KCMG QC in Rosinvestco, Toby Landau QC in Renta 4 et al and Judge Stephen M. Schwebel in Hulley/Yukos Universal/Veterna Petroleum.

Sergey Usoskin

About the Author:

Sergey Usoskin is an advocate (member of the Russian bar) and a senior associate at Ivanyan&Partners. He has experience advising clients on and representing them in commercial and investment arbitration matters as well as before the Russian court (including the Supreme Commercial Court). He is a graduate of St Petersburg State University, Faculty of Law and University College London Faculty of Laws.

1 Comment on "Russia Defeats Investment Arbitration Claim Arising Out of Soviet-time Trade Debt"

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  1. I do not think it is remarkable that Russia now appoints Russian nationals to act as an “impartial arbitrator” in a dispute. It has been Rusian state practice in several investment disputes to use Russian nationals on ever interchanging roles servings as arbitrators, counsel and also expert witness. As a matter of fact Prof. Nina Vilkova has been retained by the Russian Federation as an expert witness and has -inter alia-prepared legal opinions in a number of investment cases the Russian Federation has been a party to. This is a classical case of conflict of interest that might not have much influence on the outcome of this case as goes for questions of law, but it does demonstrate that any party to an arbitration dispute with the Russian Federation should first do their home work by identfying who sits on their “impartial” panel. Likewise, I think it is good practice for any individual wishing to establish and to keep a good reputation as an arbitrator to disclose such highly questionable professional links to an appointing party, before the panel goes to work. Franz J. Sedelmayer

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