Will Luxembourg have to go before an arbitration court at the request of Russian oligarch Mikhail Fridman, who is claiming €14.6bn from the country in compensation for the freezing of his assets? The subject is expected to occupy the government’s agenda in the next few weeks. And it is likely that prime minister (CSV) will set out the government’s position on this matter after a fortnight of analysis with his legal advisers on 4 September at the end of the autumn cabinet meeting. While we await the government’s position, what might such a procedure imply for Luxembourg? To take stock of the situation, Paperjam interviewed Javier Garcia Olmedo, researcher at the Faculty of Law of the University of Luxembourg and senior counsel at Bonn Steichen & Partners (BSP) and lecturer at Queen Mary University of London, where he teaches investment treaty law and arbitration.

Summary of the facts

A quick look back: following Russia’s full-scale invasion of Ukraine, the EU increased the number of sanctions against Russia, its leaders, its general staff and personalities reputed to be close to Vladimir Putin. These include the Russian oligarch Mikhail Fridman, who had made Luxembourg the operational centre for his international investments. On 10 April, the Court of Justice of the European Union ruled that Mikhail Fridman and his associate Petr Aven had been unjustifiably placed on the list of persons subject to sanctions by the Council of the European Union. Without ordering their assets to be unfrozen. This is the key to the case. Such an order would require a unanimous vote by the members of the EU Council. “Cleared,” Fridman intends to recover his assets, and to do so he is demanding that Luxembourg, which applied the sanctions, return his assets and pay damages for the loss suffered. This amounts to €14.6bn ($15.8bn). In the absence of a response from Luxembourg, he has turned to arbitration to have his dispute settled under the rules of the United Nations Commission on International Trade Law (UNCITRAL). He would like the arbitration to take place in Hong Kong. In his view, the freezing of his assets constitutes an illegal expropriation, and on the advice of a number of law firms--including Omnia Strategy, run in London by Cherie Blair, the wife of former Labour prime minister Tony Blair, and the Paris law firm Kiejman-Marembert--he is invoking a treaty concluded in 1989 with the Soviet Union in conjunction with Belgium. This treaty protects investors’ assets against expropriation, nationalisation or “any other measure having similar effects.” According to Javier Garcia Olmedo, this arbitration procedure suggests that there may be others, as there are hundreds of treaties protecting the interests of Russian investors like the one signed in 1989.

The expert’s analysis

Why do you think Mikhail Fridman’s lawyers advised him to go to arbitration?

Javier Garcia Olmedo: Tactically, Mikhail Fridman had two options following his removal from the list of persons subject to sanctions. The first, taking the matter to court in Luxembourg, offered no interest, because Luxembourg courts will in principle respect European law and therefore the principle of asset seizure, which has not been called into question. The only option left was international arbitration. An option that the provisions of the 1989 treaty open to him in the event that Luxembourg adopts a measure that causes damage to a Russian investor.

The treaty provides for recourse to either institutional arbitration under the Arbitration Rules of the Stockholm Chamber of Commerce or ad hoc arbitration. Institutional arbitration is conducted in accordance with the rules of procedure published by a particular arbitration institution (an arbitration centre), which usually “manages” the arbitration. If the parties choose institutional arbitration, the designation of the arbitration institution must be included in the arbitration agreement, although it can also be agreed subsequently, when the dispute has arisen, if the parties so wish.

The best-known arbitration institutions are the Paris Chamber of Commerce, the London Court of International Arbitration or the Stockholm Chamber of Commerce (SCC) Arbitration Institute. Ad hoc arbitration is conducted without recourse to an administrative authority and, usually, without the assistance of institutional rules of procedure. However, the parties sometimes adhere to a set of pre-existing procedural rules designed to govern ad hoc arbitrations (such as the UNCITRAL Arbitration Rules). Why choose ad hoc arbitration when institutional arbitration is more efficient and faster in investment cases? Surely because the SCC Arbitration Institute is located in Sweden, a European country linked to countries that are parties to sanctions against Russia. All the more so since the measures adopted against it by Luxembourg are European measures.

Does the choice of Hong Kong as the place of arbitration reflect a desire to avoid the geopolitical dimension of this case?

The seat of arbitration links the arbitration proceedings and the award to a specific national legal system. The choice of the seat of arbitration carries important legal consequences, including whether state courts will support or interfere with the arbitral process.

And the most important aspect is that at the end of the arbitration, if a party contests the result, the state court can annul it. In each country, there is an arbitration law--in Luxembourg too--which contains the different grounds on which an arbitral award can be annulled. These must obviously be serious and limited reasons such as the defect of consent or the lack of impartiality of the tribunal. This is for me the most important aspect in choosing Hong Kong. Hong Kong is an arbitration-friendly jurisdiction and the state courts there will in principle respect the arbitration clause and support the parties and the arbitral tribunal during the arbitration if necessary.

Can Luxembourg refuse to take part in this arbitration procedure?

It can refuse. It happens. If Luxembourg does nothing, Fridman can ask the secretary general of the Permanent Court of Arbitration in The Hague to appoint an arbitrator for Luxembourg and the president of the arbitral tribunal. That way, if one party defaults, the proceedings can continue. The question that then arises would be what happens afterwards if Luxembourg is condemned by default by the arbitral tribunal. I would be surprised if Luxembourg did not participate in the arbitration.

How long can such a procedure last?

In a commercial arbitration, the procedure is quick. But when a state is involved, the processes are more complicated, because questions of public law come into play. In general, states are attacked for having taken national measures. In our case, the arbitration is also taking place in a context of international economic sanctions that bind Luxembourg. This is going to be a complicated case. For me, the procedure could last two to five years if things go normally and the parties do not adopt a strategy of procedural obstruction.

If Luxembourg were to be found guilty, how could Mikhail Fridman’s lawyers enforce such a decision?

Normally, a state must voluntarily comply with an arbitral award. There are two international conventions that have been signed by all states: the International Convention on the Settlement of Investment Disputes and the New York Convention on the Recognition and Enforcement of Arbitral Awards. Here, it is the latter that applies. The executive of the decision is automatic, except in the event of a procedural defect in the arbitration or if there is a violation of the public interest.

The parties may agree on a settlement. If not, Mikhail Fridman’s lawyers will be able to have Luxembourg’s assets seized in various countries by initiating enforcement proceedings during which Luxembourg will be able to put forward its arguments to avoid seizure. Obviously, Fridman will not initiate such proceedings in an EU country. He will try his luck elsewhere, probably in the United States.

This article was originally published in .