Investment disputes in the crossfire of War - Part I: Insights from Crimean Arbitrations

The nationalisation of Crimean assets in 2014 led to a wave of investment treaty cases against Russia, raising complex valuation challenges for quantum experts. In the first of a series of articles, Julian Delamer and Vladimir Tsimaylo [1] analyse publicly available awards from the Crimean cases. They identify five key challenges in assessing damages and argue that lessons from these disputes remain relevant for future investment claims arising from geopolitical conflicts.

The views expressed in this article are the views of the authors only and do not necessarily represent the views of Compass Lexecon, its management, its subsidiaries, its affiliates, its employees or its clients.

Series overview

In the new series “Investment Disputes in the Crossfire of War”, economists from Compass Lexecon’s International Arbitration practice will discuss challenges arising in the valuation of damages amidst Russian geopolitical shifts.

This first article provides a retrospective analysis of the first big wave of investment treaty cases related to assets in Crimea nationalised by the Russian Federation throughout 2014. Despite the unique setting of the disputes over the Crimean assets, these cases exposed valuation complexities that may repeat themselves in the future and therefore offer useful lessons for quantum experts and their instructing counsels. Economists Julian Delamer and Vladimir Tsimaylo, who were involved in three of the Crimean cases, provide their insights.

Summary

Following extensive nationalisation of assets in Crimea during 2014–2015, several investment treaty cases were brought against the Russian Federation (the “Crimean cases”), of which 11 are publicly known.[2] As the first of these arbitrations nears the 10-year anniversary since the commencement of proceedings—and despite no ruling having been drawn in that first case—many lessons can be taken from this wave of arbitrations.

These various Investor-State Dispute Settlement (“ISDS”) claims against Russia have not only generated a sizeable body of case law but have also introduced new challenges in assessing the quantum of damages by quantum experts.

In this article we summarise the overarching issues discussed in publicly available awards from the Crimean cases and highlight the importance of five lessons for the future – and, in particular, the importance of knowing how to apply them in practice when facing these challenges in the complexity of real-world circumstances. 

Lesson 1: on evolving macroeconomic landscape

• A highly uncertain and rapidly changing geopolitical and macroeconomic environment can significantly affect an ex-ante damages valuation. What makes a quantum expert opinion robust and useful to the Tribunal is applying the highest standard of diligence and transparency when distinguishing historical and contemporaneous data from ex-post evidence that would not have been available at the time of valuation.

Lesson 2: on establishing an appropriate counterfactual scenario

• It is the responsibility of quantum experts to isolate the impact of the claimed measures (under the legal instructions) from other factors which affect value but are not directly caused by such measures. The skill of a quantum expert manifests in translating, within what can be an intricate factual background, the legal claims into sound actual and counterfactual scenarios which properly encapsulate the impact of the claimed measures.

Lesson 3: on overcoming data limitations

• Quantum experts should not be discouraged by the lack of data and instead deploy the entire cache of indirect and market evidence to provide the damages estimation to the best of their ability, so as to better aid the Tribunal in case it finds liability. It is critical to be transparent about the strengths and limitations of the approach taken.

Lesson 4: on dealing with the unknown

• When faced with uncertainty, a way for quantum experts to assist the Tribunal may be to provide multiple valuation approaches, clearly laying out their implications and potential limitations. Not only will this help a Tribunal make an informed decision but also offer flexibility and reduce the risk of computational errors in awards.

Lesson 5: on understanding and internalising legal scenarios

• The quantification of damages can be affected by legal matters outside the expertise of quantum experts. It is critical for quantum to coordinate between legal and economist teams to ensure the quantum analysis truly reflects the desired legal scenarios, so as to be useful to the Tribunal when resolving complex legal issues.

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