A Multi-Billion Dollar Claim and One Insurmountable Hurdle

19.11.2015 A Multi-Billion Dollar Claim and One Insurmountable Hurdle

There is a tendency for high-net-worth individuals to acquire multiple passports not only as a matter of convenience (for travel or residence purposes) but also as a form of an insurance policy, in case relationships with high-ranking official(s) deteriorate past the point of no return. For example, an acquired nationality has been used recently to bring compensation claims under a bilateral investment treaty against a state for an alleged expropriation of investments.

This brief note is concerned with a recent investment claim brought by Sergei Viktorovich Pugachev, a wealthy businessman, against the Russian Federation, pursuant to a bilateral investment treaty concluded between France and Russia. In particular, this note highlights one hurdle that Mr Pugachev is bound to face, and that is his standing, as a dual national of Russia and France, to bring such a claim against the former.

Notice of Arbitration

On 21 September 2015, Mr Pugachev filed a Notice of Arbitration against the Russian Federation seeking, inter alia, “[c]ompensation for Respondent’s violations of the France-Russia BIT and international law, in an amount to be quantified at a later stage of the arbitral proceeding but no less than US$ 12 billion” (the “Notice”).1

According to the Notice, “[t]hrough its various branches and organs, including the judiciary, the Russian Federation has mistreated Mr. Pugachev and his investments, outright taken several investments without paying any compensation, coerced Mr. Pugachev to enter into transactions on unfavourable terms, threatened the security and wellbeing of Mr. Pugachev and his family, and commenced unfounded criminal proceedings against him.”

Mr Pugachev claims to be an “investor” under the France-Russia BIT (the “BIT”) 2 because he “has been a national of France since 2009 and has resided permanently in France from 2011 onwards (he has not travelled to Russia since then). Mr. Pugachev also is a national of Russia. Neither the France-Russia BIT nor the UNCITRAL Rules preclude dual nationals from bringing claims against either of the State contracting parties.”

France-Russia BIT

Article 1(2)(a) of the BIT provides as follows:

“2. The term “investor” shall apply to:

  1. Any individual having the nationality of either Contracting Party who is entitled, under the legislation of that Contracting Party, to make investments in the territory or in the maritime zone of the other Contracting Party […]”

Mr Pugachev brought his investment claim against Russia pursuant to Article 7 of the BIT that concerns settlement of disputes between “one of the Contracting Parties and an investor of the other Contracting Party” alleging that Russia has breached its obligations under the France-Russia BIT and customary international law.

It should also be noted that throughout the BIT relevant articles clearly state that a Contracting Party only holds obligations towards investors of the other Contracting Party and not to its own investors. For example, Article 3(1) of the BIT contains the following provision:

“1. Each Contracting Party shall undertake to accord, in its territory and in its maritime zone, just and equitable treatment, in accordance with the principles of international law, to investments made by investors of the other Contracting Party excluding any unjust or discriminatory measure which might impede the management, maintenance, enjoyment or liquidation of those investments.”

Thus, the BIT is clear that Russia’s obligations benefit only investors having the nationality of France, and vice-versa. In other words, Russian and French investors are not permitted to claim against their host states, pursuant to the BIT.

Dual National

According to Mr Pugachev’s Notice, he is a national of both states and, therefore, is claiming against Russia as a French national. And, he correctly states, that “[n]either the France-Russia BIT nor the UNCITRAL Rules preclude dual nationals from bringing claims against either of the State contracting parties.”

Yet, to be precise, the BIT and the UNCITRAL Rules do not expressly address the issue of dual nationality in international investment claims, as, for example, does the ICSID Convention in its Article 25(2)(a).3

UNCITRAL Rules

It seems reasonable to expect that Russia will raise objections to the jurisdiction of the arbitral tribunal, including jurisdiction ratione personae. Consequently, the arbitral tribunal will have to decide on its own jurisdiction based on the well-established principle of Kompetenz-Kompetenz derived from peremptory rules of customary international law, which has been enshrined in Article 21 of the UNCITRAL Rules.4

Real and Effective Nationality

Another principle of international law is the rule of real and effective nationality, which the International Court of Justice (the “ICJ”) summarised in its decision in the Nottebohm Case:

“[…] International arbitrators have decided in the same way numerous cases of dual nationality, where the question arose with regard to the exercise of protection. They have given their preference to the real and effective nationality, that which accorded with the facts, that based on stronger factual ties between the person concerned and one of the States whose nationality is involved. Different factors are taken into consideration, and their importance will vary from one case to the next: the habitual residence of the individual concerned is an important factor, but there are other factors such as the centre of his interests, his family ties, his participation in public life, attachment shown by him for a given country and inculcated in his children, etc.”5

It is to be noted that the Iran-United States Claim Tribunal (the “IUSCT”) in Case No. A/18 endorsed the ICJ’s approach in theNottebohm Case above:

“[…] Thus, the relevant rule of international law which the Tribunal may take into account […] is the rule that flows from the dictum in Nottebohm, the rule of real and effective nationality, and the search for ‘stronger factual ties between the person concerned and one of the States whose nationality is involved.’ In view of the pervasive effect of this rule since the Nottebohm decision, the Tribunal concludes that the references to ‘national’ and ‘nationals’ in the Algiers Declaration must be considered as consistent with that rule unless an exception is clearly stated.”6

In the Malek Case, the IUSCT provided further guidance regarding the facts that a Tribunal should take into account when faced with the issues of dual nationality:

“[T]o establish what is the dominant and effective nationality as the date the claim arose, it is necessary to scrutinize the events of the Claimant’s life preceding this date. Indeed, the entire life of the Claimant, form birth, and all factors which, during this span of time, evidence the reality and sincerity of the choice of national allegiance he claims to have been made, are relevant.”7

Therefore, to be regarded as an ‘investor’ under the BIT for the purposes of his claim, Mr Pugachev will have to demonstrate to the arbitral tribunal that his real and effective nationality has been French.

Mr Pugachev

Without going into too much detail, it is a truth universally acknowledged, that Mr Pugachev was born in the USSR in 1963, lived and subsequently made a fortune in Russia in 1990-2000s, was a member of the Council of the Federation of the Federal Assembly of the Russian Federation between 2001 and 2011.

Mr Pugachev moved to London in 2011, which he fled earlier this year defying the court’s decision to seize his passports. Presently, Mr Pugachev is residing in southern France. So far, the situation resembles the plight of Mr Ablyazov, a Kazakh banker now awaiting extradition to Russia.8

Interestingly, it has been also reported that Mr Pugachev “intends to go back to London […] as soon as his legal issues are cleared up.”9

Accordingly, considering Mr Pugachev’s factual background and the factors mentioned in the cases concerning dual nationality above, the known facts indicate that Mr Pugachev has a very high initial hurdle to overcome: to demonstrate, as a matter of fact, that he is predominantly a French national to proceed with his investment claim under the BIT against the Russian state.

* * *

MENA Chambers

Dalby House F5

398 City Road

London

EC1V 2QA

United Kingdom

For more information, please contact Sergejs Dilevka.

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1 Sergei Viktorovich Pugachev v. The Russian Federation, Notice of Arbitration, 21 September 2015.

http://www.italaw.com/cases/3661

2 The Agreement between the Government of the French Republic and the Government of the Union of Soviet Socialist Republics on the Reciprocal Promotion and Protection of Investments, signed on 04 July 1989 and entered into force on 18 July 1991, at pp. 352-358.

https://treaties.un.org/doc/publication/UNTS/Volume%201662/v1662.pdf

3 Convention on the Settlement of Investment Disputes between States and Nationals of Other States.

https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_English-final.pdf

4 UNCITRAL Arbitration Rules (1976).

http://www.uncitral.org/pdf/english/texts/arbitration/arb-rules/arb-rules.pdf

5 Nottebohm Case (Liechtenstein v. Guatemala) Second Phase, Judgment of 06 April 1955, I.C.J. Reports 1955, at p. 22.

6 Iran-United States Claims Tribunal, Case No. A/18, Decision of 06 April 1984, 5 Iran-U.S. C.T.R. 251, at p. 194.

7 Reza Said Malek v. Government of the Islamic Republic of Iran, Interlocutory Award of 23 June 1988, 19 Iran-U.S. C.T.R. 48.

8 Mukhtar Ablyazov: Kazakh billionaire to be extradited to Russia from France.

http://www.independent.co.uk/news/business/news/mukhtar-ablyazov-kazakh-billionaire-to-be-extradited-to-russia-from-france-a6691731.html

9 Sergei Pugachev: ‘Putin’s banker’ now lives in fear of man he put into power.

http://www.theguardian.com/world/2015/jul/28/sergei-pugachev-putins-banker-interview-lives-in-fear


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