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PCA CASE NO. 2017-16

IN THE MATTER OF AN ARBITRATION BEFORE A TRIBUNAL CONSTITUTED
IN ACCORDANCE WITH

THE AGREEMENT BETWEEN THE GOVERNMENT OF THE RUSSIAN
FEDERATION AND THE CABINET OF MINISTERS OF UKRAINE
ON THE ENCOURAGEMENT AND MUTUAL PROTECTION OF INVESTMENTS
DATED 27 NOVEMBER 1998

-and-

THE ARBITRATION RULES OF THE UNITED NATIONS COMMISSION ON
INTERNATIONAL TRADE LAW, 1976

-between-

(i) NJSC NAFTOGAZ OF UKRAINE (UKRAINE), (ii) NATIONAL JOINT STOCK
COMPANY CHORNOMORNAFTOGAZ (UKRAINE), (iii) JSC UKRTRANSGAZ
(UKRAINE), (iv) JSC UKRGASVYDOBUVANNYA (UKRAINE),
(v) JSC UKRTRANSNAFTA (UKRAINE), (vi) SUBSIDIARY COMPANY GAZ
UKRAIINY (UKRAINE)

(the “Claimants”)

-and-

THE RUSSIAN FEDERATION

(the “Respondent,” and together with the Claimants, the “Parties”)

FINAL AWARD

The Arbitral Tribunal
Judge Ian Binnie, C.C., K.C. (Presiding Arbitrator)
Dr. Charles Poncet
Professor Dr. Maja Stanivuković

Registry
Dr. Levent Sabanogullari
Permanent Court of Arbitration

12 April 2023

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GLOSSARY OF DEFINED TERMS AND ABBREVIATIONS

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PART 1 - BACKGROUND

1. On 22 February 2019, the majority of the Arbitral Tribunal (Professor Maja Stanivuković dissenting) issued a partial award (the “Partial Award”) in this matter, which is brought under the Agreement Between the Government of the Russian Federation and the Cabinet of Ministers of Ukraine on the Encouragement and Mutual Protection of Investments, dated 27 November 1998 (the “Treaty” or the “BIT”). The dispositive part of the Partial Award reads as follows:

For the reasons set out above, the Tribunal by majority rules:
(a) that the Tribunal has jurisdiction over the claims:
(b) that the Claimants have established a violation of Article 5 (expropriation) and Article 2(1) (full and unconditional legal protection) and Article 3(1) (most favored nation treatment) of the BIT.
The Tribunal will therefore proceed to the quantum phase of the arbitration.

2. The Tribunal noted in paragraph 175 of the Partial Award that “[t]he Treaty [itself] is not without temporal limitations. Article 12 restricts protection to investments made ‘on or after January 1, 1992’.” Accordingly Procedural Order No. 8 stated “subject matter jurisdiction was affirmed only in respect of investments made after that date.” Thus, the Tribunal stated, “[t]he quantification phase will only deal with investments made after that date.”

3. The Respondent, the Russian Federation, which had until then declined to participate, sought (and was granted) leave to intervene in the subsequent arbitral proceedings concerning quantum. The Russian Federation then applied inter alia to submit a “full argument” on the jurisdictional issues. In light of the Russian Federation’s refusal to participate in the jurisdictional phase of the hearing, the request for “full argument” was denied by Procedural Order No. 7, dated 21 August 2019. However, the Russian Federation was invited to address any jurisdictional “issues not already dealt with in the Partial Award” and made relevant submissions dated 6 September 2019. Subsequently, by Procedural Order No. 8 dated 6 October 2019, the Tribunal held unanimously that the issues sought to be raised had already been canvassed by the Tribunal and dealt with in both the majority and dissenting opinions.

4. In its Amended Counter-Memorial on Quantum, dated 24 January 2020 (“Amended Counter-Memorial”), the Russian Federation emphasized that the Partial Award had already

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excluded investments made before 1 January 1992. The Russian Federation acknowledged that the Tribunal had addressed and had limited jurisdiction ratione temporis, as follows:

Moreover, as emphasized by the Tribunal in the Partial Award dated 22 February 2019 (the “Partial Award”) and reconfirmed by the Tribunal in Procedural Order No. 8, Article 12 of the BIT limits the temporal scope of application of the BIT to investments made or carried out “as of January 1, 1992.” The Claimants therefore bear the burden of proving that each and every alleged investment for which they are claiming compensation was carried out on or after 1 January 1992.¹

5. Concurrently with the application to the Tribunal, the Russian Federation on 21 June 2019 initiated “set aside” proceedings for annulment of the entire Partial Award before The Hague Court of Appeal. In its submissions to that Court, the Russian Federation took the contrary position that the Tribunal had not dealt with the 1 January 1992 issue. In its Judgment of 19 July 2022, The Hague Court of Appeal (“Judgment of The Hague Court of Appeal”) held that:

5.7.6 Since the consequences of Procedural Order No. 8 are not clear, to be certain the Partial Award will be set aside, but only to the extent that the Arbitral Tribunal has held that it has jurisdiction to adjudicate all claims, since it only has jurisdiction to adjudicate investments made on or after January 1, 1992.

The Court therefore

Annuls the Partial Award of February 22, 2019 insofar as the Arbitral Tribunal found that it had jurisdiction to adjudicate all claims, as it only had jurisdiction to adjudicate investments made on or after January 1, 1992;

Orders the Russian Federation, as the party mainly found against, to pay the costs of the proceedings... (emphasis added)

6. The Tribunal accepts, of course, the Court’s direction that it “only had jurisdiction to adjudicate investments made on or after 1 January 1992.” The merits hearing, which took place on 14-17 May 2018, was about jurisdiction and liability. No evidence was raised during that hearing about the assets themselves or when the investments were made. The parameters of

¹ Amended Counter-Memorial on Quantum, dated 24 January 2020 (hereinafter “AmCM”), ¶¶ 3, 302. ¶ 302 reads as follows: ↩

As correctly pointed out by the Tribunal in the Partial Award:
“The Treaty is not without temporal limitations. Article 12 restricts protection to investments made ‘on or after January 1, 1992’ being the date of the break-up of the Soviet Union”.

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jurisdiction having been settled, the Tribunal is in a position to determine what investments fall within the BIT’s scope of protection.

PART 2 - THE CLAIMANT INVESTORS

7. On the Valuation Date, namely 17/18 March 2014 (the “Valuation Date”), NJSC Naftogaz, CNG, UTG, UGV, UTN, and Gaz Ukraiiny (hereinafter sometimes collectively referred to as “Naftogaz” or the “Claimants”), and Likvo LLC were engaged in a range of oil and gas related activities in Crimea:

1. National Joint Stock Company Naftogaz of Ukraine (“NJSC Naftogaz”), registered at 6, B. Khmelnitskogo Str., Kyiv, Ukraine, 01601, is Ukraine’s national oil and gas company.² NJSC Naftogaz’s primary business involves importing gas into Ukraine, the wholesale trading of gas, and the supply of gas to consumers³ including investments in its subsidiaries, selling gas to consumers and local distribution companies,⁴ exploring prospects in the Black Sea under three Special Permits (the “Special Permits”),⁵ financing the construction of gas distribution pipelines⁶ and leasing gas distribution pipelines to PJSC Krymgaz;
2. National Joint Stock Company Chornomornaftogaz (“CNG”), registered at 26, B. Khmelnitskogo Str., office 505, Kyiv, Ukraine, 01030, is the primary wholly owned subsidiary of NJSC Naftogaz and, on the Valuation Date, it was a vertically integrated oil and gas company operating exclusively in Crimea. Its operations included gas, condensate and oil exploration and production, both onshore and offshore,⁷ direct gas sales to industrial customers and indirect sales to other consumers and local distribution companies via NJSC Naftogaz,⁸ direct sales of

² Cabinet of Ministers of Ukraine, Resolution No. 747, 25 May 1998 (CE-28). ↩
³ Naftogaz 2014 Annual Report, 64 (CE-145) (hereinafter “2014 Annual Report”). ↩
⁴ 2014 Annual Report, 64 (CE-145). ↩
⁵ See First Expert Report of Gaffney, Cline & Associates, dated 15 September 2017 (hereinafter “First GCA Report”), Table 7. ↩
⁶ See First GCA Report, Appendix IX.G. ↩
⁷ Naftogaz 2016 Annual Report, 97 (CE-366) (hereinafter “2016 Annual Report”). ↩
⁸ 2014 Annual Report, 77 (CE-145). ↩

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condensate and oil to refiners and trading companies, operating and maintaining high-pressure gas pipelines, and operating and maintaining a gas storage facility;

3. Joint Stock Company Ukrtransgaz (“UTG”), registered at 9/1, Kloskiy Uzviz, Kyiv, Ukraine, 01021, is a gas-transmission and storage company that operates 38,600 kilometers of pipeline and maintains a system of underground-gas-storage facilities.⁹ With respect to Crimea specifically, as of February 2014, UTG operated a 429-kilometer gas-transportation pipeline system in the region.¹⁰ This pipeline system was connected to a larger pipeline system that UTG operated in continental Ukraine;¹¹
4. Joint Stock Company Ukrgasvydobuvannya (“UGV”), registered at 26/28, Kudriavska Str., Kyiv, Ukraine, 04053, is a wholly owned subsidiary of NJSC Naftogaz. On the Valuation Date, UGV’s primary activity in Crimea was its participation in a joint activity agreement with Choronomornaftogaz to develop offshore gas condensate fields in the Black Sea and Sea of Azov;¹²
5. JSC Ukrtransnafta (“UTN”), registered at 18/7, Kutuzova Str., Kyiv, Ukraine, 01133, is a wholly owned subsidiary of NJSC Naftogaz and a gas-transmission and storage company. On the Valuation Date, UTG activities in Crimea consisted of operating, maintaining and building high-pressure gas pipelines and gas distribution pipelines;
6. Subsidiary Company Gaz Ukraiiny (“Gaz Ukraiiny”), registered at 1, Sholudenka Str., Kyiv, Ukraine, 04116, had been a gas-distribution company before being privatized by Ukraine in 2012.¹³ After 2012, its focus shifted to collecting debts

⁹ 2016 Annual Report, 174 (CE-366); 2014 Annual Report, 78 (CE-145); Charter of PJSC “Ukrtransgaz”, Art. 1.9, 25 December 2012 (CE-122). ↩
¹⁰ Witness Statement of Petr F. Slesar (hereinafter “WS Slesar”), ¶ 4; Agreement No 19/2 between Naftogaz and Ukrtransgaz, 17 June 1999 (transferring obligation to operate pipelines to UTG) (CE-34). ↩
¹¹ WS Slesar, ¶ 3. ↩
¹² Agreement No. 1 on the Joint Venture in the Sea of Azov Between Choronomornaftogaz and Ukrgasvydobuvannya, 20 October 2000 (CE-43). ↩
¹³ Charter of “Gaz Ukraiiny” Subsidiary Company of “Naftogaz of Ukraine”, 25 January 2011 (CE-85). ↩

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for Naftogaz and maintaining large-diameter gas-transport pipelines. It leased storage space for these assets, which included a tractor, an excavator, transport vehicles, and office equipment.¹⁴

7. Likvo Limited Liability Company (“Likvo”), which was terminated and merged into UBV effective 29 April 2020, provided emergency services such as firefighting for Naftogaz’s oil and gas operations.¹⁵ Likvo was registered in Kharkiv, in continental Ukraine, and in February 2014 maintained a branch office with 15 employees in the town of Chornomorske, on Crimea’s northwestern coast, as well as a gas-distribution station near the town’s harbor, where it stored emergency-response equipment.¹⁶ Likvo’s assets included specialized firefighting equipment, materials used in emergency-response operations and pipeline and well repairs, and vehicles that it used to provide these emergency services in the region, as well as a gas compressor and a vehicle that its affiliate Ukrgasvydobuvannya had transferred to it under a property management agreement;

8. NJSC Naftogaz, CNG, UTG and UGV held various assets in relation to these oil and gas related activities, which were expropriated by the Russian Federation. The oil and gas assets are divided into four categories:

1. Upstream Assets. These assets include CNG, UGV and NJSC Naftogaz’s interests in Special Permits under which CNG, UGV and NJSC Naftogaz were permitted to develop and exploit the underlying oil and gas fields and prospects (“Upstream Assets”);
2. Midstream Assets. These assets include CNG, UTG and NJSC Naftogaz’s interests in operating gas pipelines (including fill gas in those pipelines), a gas

¹⁴ Agreement No. 17/10-100 with the Municipal Public Utility Enterprise for Heat Networks of the City of Armiansk, as amended, 18 March 2010 (CE-80); Agreement No. 17-17/12-443 with N.V. Kolnoguz, 1 October 2012 (CE-119). ↩
¹⁵ Articles of Association of Likvo (Restated), 23 February 2016 (CE-370). ↩
¹⁶ Charter of Subsidiary Company “Paramilitary (Gas) Emergency Rescue Services ‘Likvo’ of Naftogaz of Ukraine”, 9 July 2012 (CE-112); Likvo Order No. 144-п, 22 September 2014 (CE-309); Witness Statement of Danylo V. Rymchuk (hereinafter “WS Rymchuk”), ¶¶ 3-4. ↩

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storage facility (including cushion gas stored in that facility) and associated equipment (“Midstream Assets”);

3. Service Assets. These assets include CNG’s four jack-up drilling rigs, 22 marine vessels and three helicopters, which were used to explore and develop offshore oil and gas resources (“Service Assets”);
4. Local Distribution Companies (the “LCDs”). These assets include NJSC Naftogaz and CNG’s minority shareholding in two local distribution companies (PJSC Krymgaz (“Krymgaz”) and PJSC Sevastopologaz (“Sevastopolgaz”)).

9. The following is the Claimants’ depiction of their investments in Crimea before the expropriation:¹⁷

Claimants’ Investments in Crimea

[Image of a map of Crimea showing locations of assets and a legend]

Map Title and Labels:

• Claimants' Investments in Crimea
• UKRAINE
• SEA OF AZOV
• BLACK SEA
• CHORNOMORSKE
• SHRIRMOVE
• OHLJOVSKE
• SIMFEROPOL
• SUDAK
• YALTA
• UTN's resort
• UTG's "Dolphin" resort
• UTG's Shtormove resort
• Pivdennyi resort and property
• Likvo's branch office and gas-distribution station
• NJSC Naftogaz's gas pipelines
• UTG's right to use gas pipeline system
• CNG's right to use gas pipeline system
• CNG's right to operate and use Hlibovske storage facility
• NJSC Naftogaz's gas stored in Hlibovske storage facility

Map Legend (Left):

• Underground storage facility
• NJSC Naftogaz special permits
• CNG special permits for subsoil use
• Fields subject to UGV's JAA W/ CNG
• CNG-operated pipeline
• UTG-operated pipeline
• CNG subsea pipelines

Map Legend (Right):

• NJSC Naftogaz:
  • Minority shareholdings in local gas-distribution companies Krymgaz and Sevastopolgaz
  • Loans to Krymgaz
  • Amounts outstanding for gas deliveries to Krymgaz
  • Offshore vessels
• CNG:
  • Offshore and onshore exploration and production equipment
  • Drilling rigs
  • Supply vessels
  • Minority shareholding in Krymgaz
• UTG:
  • Vehicles
• Likvo:
  • Equipment and vehicles
• UGV:
  • "Bavaria" motor boat
• Gas Ukraiiny:
  • Office equipment, machines, and vehicles

¹⁷ Claimants’ Opening Presentation, Hearing on Jurisdiction and Liability, slide 32. ↩

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10. In the current phase of the arbitration, the Claimants are represented by:

PART 3 - THE RESPONDENT

11. The Respondent in this arbitration is the Russian Federation, a sovereign State (“Russia” or the “Respondent” and together with the Claimants, the “Parties”).

12. In the current phase of the arbitration, the Respondent is represented by:

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PART 4 - PROCEDURAL HISTORY

1. Constitution of the Tribunal and Communications From the Respondent

13. By letter dated 15 February 2016 (the “Notice of Dispute”), the Claimants notified the Respondent, pursuant to Article 9(1) of the Treaty, of the existence of a dispute between the Parties. The Respondent did not respond to the Claimants’ Notice of Dispute.

14. On 17 October 2016, the Claimants commenced these arbitral proceedings by serving on the Respondent the Notice of Arbitration, dated 14 October 2016, pursuant to Article 9(2)(c) of the Treaty and the United Nations Commission on International Trade Law, 1976 (the “UNCITRAL Rules”).

15. In their Notice of Arbitration, the Claimants appointed Dr. Charles Poncet, a Swiss national, as the first arbitrator in these proceedings pursuant to Article 7(1) of the UNCITRAL Rules. Dr. Poncet’s address is Rue Saint-Leger 6, P.O. Box 5271, 1211 Geneva 11, Switzerland.

16. On 22 November 2016, following the Respondent’s failure to appoint an arbitrator within 30 days of the Claimants’ notification of the appointment of the Claimants’ party-appointed arbitrator, the Claimants requested the Secretary-General of the Permanent Court of Arbitration (the “PCA”) to designate an appointing authority to appoint an arbitrator on behalf of the Respondent pursuant to Article 7(2) of the UNCITRAL Rules.

17. On 19 December 2016, in response to the Claimants’ request, and having sought comments from the Respondent but having received no reply, the Secretary-General of the PCA designated Dr. Michael Hwang SC as the Appointing Authority in these proceedings for all purposes under the UNCITRAL Rules.

18. By letter dated 22 January 2017, the Claimants requested Dr. Hwang to appoint an arbitrator on behalf of the Respondent, in accordance with Article 7(2)(b) of the UNCITRAL Rules, due to the Respondent’s failure to appoint an arbitrator.

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19. On 3 February 2017, the PCA received a letter dated 19 January 2017 from Ms. O.V. Zentsova, Deputy Director of the Department of International Law and Cooperation of the Ministry of Justice of the Russian Federation (the “Russian Objection”), objecting to the constitution of an arbitral tribunal to hear the present dispute, to the jurisdiction of the Tribunal, and to the admissibility of the Claimants’ claims.

20. In the Russian Objection, Ms. Zentsova stated:

According to item 1 of Article 1 of the [Treaty] the term “investments” shall mean any kind of tangible or intangible assets which are invested by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with its legislation. The property, which is the subject of the dispute, is located in the territory of the Republic of Crimea and the city of Sevastopol, which had previously been a part of the Ukraine. The assets of claimants are not investments, because they have not been made in the territory of the Russian Federation, and, if ever made, they have been made prior to the accession of the Republic of Crimea and the city of Sevastopol to the Russian Federation and not in accordance with the legislation of the Russian Federation. No taxes have been collected on these assets in accordance with the legislation of the Russian Federation and they have not contributed to the economic development of the Russian Federation.

On the basis of the foregoing, the Russian Federation does not recognize the jurisdiction of the international arbitration at the Permanent Court of Arbitration to hear the present dispute.¹⁸

21. By letter dated 8 February 2017, Dr. Hwang provided the Claimants with a copy of the Russian Objection and invited them to comment thereon.

22. By letter dated 13 February 2017, the Claimants disagreed with the contentions in the Russian Objection. The Claimants maintained that the Respondent’s jurisdictional objections could only be raised once the tribunal has been constituted and reiterated their request that Dr. Hwang appoint an arbitrator on behalf of the Respondent.

23. On 14 February 2017, Dr. Hwang, on behalf of the Respondent, appointed Professor Dr. Maja Stanivuković, a Serbian national, as the second arbitrator, pursuant to Article 7(2)(b) of the UNCITRAL Rules. Professor Stanivuković’s address is Radnička 26, 21000 Novi Sad, Republic of Serbia.

¹⁸ Letter No. 06-5928/17 from the Ministry of Justice of the Russian Federation to the Permanent Court of Arbitration, dated 19 January 2017 (CE-383). ↩

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24. On 13 April 2017, in response to a request from the Claimants, and having sought comments from the Respondent but having received no reply, Dr. Hwang appointed Judge Ian Binnie, C.C., K.C., a Canadian national, as the presiding arbitrator in these proceedings pursuant to Articles 7(3) and 6(3) of the UNCITRAL Rules. Judge Binnie’s address is c/o Lenczner Slaght, 130 Adelaide Street West, Suite 2600, Toronto, Ontario, Canada, M5H 3P5.

2. Fixing of the Procedural Timetable

25. By letter dated 1 May 2017, the Tribunal communicated draft Terms of Appointment and the draft Rules of Procedure to the Parties, inviting them to comment thereon. By letter dated 22 May 2017, the Claimants submitted their comments. The Respondent did not provide any comments.

26. On 19 July 2017, having considered the comments which it had received, the Tribunal issued the document previously circulated to the Parties under the title “Terms of Appointment” as its Procedural Order No. 1, in which the Tribunal, inter alia, appointed the PCA to act as registry in these arbitral proceedings.

27. On the same day, the Tribunal issued Procedural Order No. 2, in which it fixed The Hague, the Netherlands as the place of arbitration and established, in Section 2.1, a Procedural Timetable for the proceedings on the basis that all issues of jurisdiction, admissibility, liability, and quantum would be heard together. Pursuant to the timetable, the Claimants were required to file their Statement of Claim by 15 September 2017, after which the Respondent would have until 5 January 2018 to file a Statement of Defence or any objections to jurisdiction or admissibility. In the event the Respondent were to fail to file its Statement of Defence, Section 2.2 of Procedural Order No. 2 established an accelerated timetable.

28. By letter dated 11 August 2017, the Claimants requested the Tribunal to issue a confidentiality order, enclosing therewith a draft of its Proposed Confidentiality Order.

29. On 14 August 2017, the Tribunal circulated the Claimants’ Proposed Confidentiality Order and requested the Respondent to comment thereon by 21 August 2017. The Respondent did not submit any comments.

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30. By letter dated 30 August 2017, the Tribunal issued its Confidentiality Order to the Parties.

3. Filing of the Statement of Claim; Respondent’s Failure to Submit a Statement of Defence; Bifurcation; and Amendments to the Timetable

31. On 15 September 2017, in accordance with the timetable established in Procedural Order No. 2, the Claimants submitted their Statement of Claim, together with factual exhibits CE-1 to CE-605, legal authorities CLA-1 to CLA-103, eight witness statements, and three expert reports. Under separate cover, the Claimants also submitted a request for designation of certain exhibits as “Highly Confidential Information,” in accordance with the Tribunal’s Confidentiality Order.

32. On 25 September 2017, the Tribunal, having invited the Parties’ comments, issued Procedural Order No. 3, whereby the Tribunal amended the Procedural Timetable contained in Section 2.2 of Procedural Order No. 2, moving the date of the hearing on jurisdiction, admissibility, and merits (including quantum) to 14-18 May 2018.

33. On 31 October 2017, in response to the Claimants’ request to file “Highly Confidential” documents without disclosure to the Respondent, the Tribunal expressed “great concern receiving into the arbitral record documents relevant to issues before the Tribunal, which might potentially lead to an Award against the Respondent, while withholding disclosure of the documents to the Respondent.” As most documents sought to be classified as Highly Confidential related only to quantum, the Tribunal invited the Claimants to consider applying for bifurcation of the proceedings so that jurisdiction and liability would be dealt with first, and the Tribunal would only address quantum, if necessary, at a subsequent date.

34. By letter dated 9 November 2017, the Claimants requested the Tribunal to bifurcate the proceedings into two phases, i.e., jurisdiction and liability, on the one hand, and quantum, on the other hand.

35. On 8 December 2017, having sought the Respondent’s comments on the Claimants’ bifurcation request but having received no response, the Tribunal issued its Procedural Order No. 4, bifurcating jurisdiction and liability to be dealt with at a hearing on 14-18 May 2018, and quantum to be addressed, if necessary, at a subsequent date.

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36. By letter dated 12 December 2017, in accordance with Section 3.2 of Procedural Order No. 4, the Claimants withdrew from the record: (i) those sections of the Statement of Claim that address the Claimants’ quantum of loss; (ii) all exhibits and authorities submitted exclusively in support of the Claimants’ quantum of loss, including all exhibits designated as Highly Confidential Information; and (iii) the Expert Witness Statement of Gaffney, Cline & Associates (“GCA”). By the same letter, the Claimants submitted an Amended Statement of Claim, an Amended Exhibit Index, and an Amended Table of Authorities, deleting those sections of the three documents that pertained exclusively to quantum.

37. The Respondent failed to submit its Statement of Defence by 5 January 2018, the deadline fixed by the Tribunal in Section 2.1 of Procedural Order No. 2.

38. By letter dated 9 January 2018, after noting the Respondent’s failure to file its Statement of Defence, the Tribunal ordered the proceedings to continue pursuant to Article 28(1) of the UNCITRAL Rules.

39. On 12 January 2018, as a result of the Respondent’s failure to file its Statement of Defence, the Tribunal posed Questions to the Parties with respect to issues of jurisdiction and liability, in accordance with the timetable established in Section 2.2 of Procedural Order No. 2.

40. On 23 February 2018, the Claimants submitted their Answers to the Tribunal’s Questions (the “Claimants’ Answers”), together with factual exhibits CE-606 to CE-794, legal authorities CLA-104 to CLA-171, amendments of previously submitted factual exhibits and legal authorities, and two supplemental expert reports. The Respondent filed no responses to the Tribunal’s questions.

41. On 15 March 2018, the PCA informed the Parties that it had received copies of the following documents from the Embassy of Ukraine in The Hague: (i) Note Verbale from the Embassy of Ukraine to the PCA, dated 14 March 2018; (ii) a letter from the Ministry of Foreign Affairs of Ukraine to the Tribunal, dated 13 March 2018; and (iii) Submission of Ukraine as Non-Disputing Party to the Treaty, dated 13 March 2018 (the “Submission of Ukraine”). The PCA also provided the Parties and the Tribunal with copies of the first two items and, on behalf of the

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Tribunal, requested the Parties’ comments on whether the third item should be admitted into the record.

42. On 29 March 2018, the Claimants submitted their comments on Ukraine’s request to admit its Submission into the record in this arbitration. The Respondent filed no comments.

43. On 4 April 2018, the Tribunal convened a pre-hearing conference call with the Parties to discuss organizational matters related to the merits hearing, scheduled for 14-18 May 2018. The Claimants participated in the call. The Respondent did not participate despite having been duly notified.

44. On 5 April 2018, the Tribunal issued its Procedural Order No. 5, in which it, inter alia, admitted the Submission of Ukraine into the record and granted the Parties until 19 April 2018 to submit comments thereon. The Claimants submitted their comments on that date. The Respondent did not submit any comments.

45. By letter dated 7 May 2018, the Claimants advised the Tribunal “that Limited Liability Company Likvo ha[d] succeeded to the claims of Subsidiary Company Likvo asserted in this proceeding” and requested “that the Tribunal recognize Likvo LLC as a party in this arbitration, in place of Subsidiary Company Likvo.”

46. On 11 May 2018, the Claimants sought leave to submit into the record in this arbitration the award on the merits in Everest Estate LLC et al. v. The Russian Federation, PCA Case No. 2015-36. By letter of the same date, the Tribunal granted the Claimants’ request.

4. Hearing on Jurisdiction and Liability

47. The merits hearing, covering issues of jurisdiction and liability, was held on 14-17 May 2018 in The Hague, the Netherlands (“Hearing on Jurisdiction and Liability”). The Respondent, although duly notified of the schedule and having been invited to participate, did not take part in the hearing. The following individuals were in attendance:

Tribunal:
Judge Ian Binnie, C.C., K.C.
Dr. Charles Poncet

President
Arbitrator
Arbitrator

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Professor Dr. Maja Stanivuković

Fact Witnesses:
Ms. Svetlana V. Nezhnova
Mr. Andriy Kobolyev

Expert Witnesses:
Dr. Irina Paliashvili
Professor Paul B. Stephan

For the Permanent Court of Arbitration:
Dr. Levent Sabanogullari
Mr. Byron Perez
Ms. Willemijn van Banning

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Court Reporter:
Mr. Trevor McGowan

Interpreter:
Mr. Yuri Somov

48. On 15 May 2018, in accordance with Section 2.5 of Procedural Order No. 5, the Tribunal issued its Questions to the Parties for their respective closing statements.

49. On 17 May 2018, the Parties’ closing statements were delivered to the Tribunal.

50. An electronic transcript of the hearing was delivered to the Parties at the end of each hearing day. By letter dated 18 May 2018, the PCA circulated the audio recording of the hearing to the Parties and sent hard copies of the complete transcript to the Respondent. By the same letter the PCA, on behalf of the Tribunal, invited the Parties to propose any corrections. The Claimants submitted their proposed corrections by letter dated 8 June 2018. The Respondent submitted no comments on the transcript.

5. Post-Hearing Proceedings on Jurisdiction and Liability and Issuance of Partial Award

51. By letter dated 18 May 2018, the Tribunal granted the Claimants’ request that it recognize Likvo LLC as a party in this arbitration, in place of Subsidiary Company Likvo.¹⁹

52. By letter dated 22 May 2018, the Claimants requested that the Tribunal grant the Parties an opportunity to provide short written submission in response to a question posed by the Chairman during the Claimants’ closing statement at the Hearing on Jurisdiction and Liability.²⁰ By letter dated 25 May 2018, the Tribunal rejected the Claimants’ request, as it did not consider that further submissions on this question were required.

53. By letter dated 23 May 2018, the Claimants provided the Tribunal and the PCA with electronic copies of the following materials distributed in hard copies by the Claimants to the

¹⁹ Transcript of the Hearing (hereinafter “Tr.”), Hearing on Jurisdiction and Liability, 193:16-19. ↩
²⁰ Tr., Hearing on Jurisdiction and Liability, 374:19-375:2. ↩

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Tribunal at the hearing: (i) the award on the merits issued in Everest Estate LLC et al. v. Russian Federation, PCA Case No. 2015-36;²¹ (ii) an article titled “What Constitutes a Taking of Property under International Law” by Professor George C. Christie;²² (iii) an updated version of Annex C to the Claimants’ Answers to the Questions of the Tribunal, dated 23 February 2018;²³ and (iv) an Amended Exhibit Index, an Amended Table of Authorities, and errata sheets for typographical errors in the witness statements of Svetlana V. Nezhnova and the expert reports of Irina Paliashvili and Paul B. Stephan. On 25 May 2018, the Tribunal confirmed receipt of the enclosures and stated that the Claimants would provide the Respondent with hard copies of the enclosures if the Respondent so requested.

54. By letter dated 19 June 2018, enclosing factual exhibits CE-797 to CE-805, the Claimants informed the Tribunal that, due to recent amendments to the laws of Ukraine, the names of Claimants CNG, UTG, UTN, and UGV had changed, and requested that the Tribunal update the caption in this arbitration to take account of the above Claimants’ new names.

55. On 22 June 2018, the Tribunal invited the Respondent to provide any comments on this request. No comments were received from the Respondent within the time limit specified by the Tribunal.

56. By letter dated 10 July 2018, the Tribunal granted the Claimants’ request and changed the style of cause in this arbitration to reflect the above Claimants’ new names.

57. By letter dated 11 September 2018, the Claimants informed the Tribunal that one of the persons who submitted a witness statement in support of the Claimants’ claims, Ms. Anastasia Tsybulska, had pleaded guilty to criminal charges in her role to inflate the purchase price of two drilling rigs that Chornomornaftogaz purchased in 2011.²⁴ In the same letter, the Claimants

²¹ Everest Estate LLC et al. v. Russian Federation, PCA Case No. 2015-36, Award on the Merits, 2 May 2018 (CLA-174) (hereinafter “Everest Estate”). ↩
²² George C. Christie, What Constitutes a Taking of Property under International Law? 38 BRIT. Y.B. INT’L. L. 307 (1962) (CLA-175). ↩
²³ Revised Annex C to Claimants’ Answers to the Questions of the Tribunal, dated 23 February 2018 (hereinafter “Claimants’ Answers”) (CE-795). ↩
²⁴ Letter from the Claimants, dated 11 September 2018, referring to Sentence, Case No. 761/43004/17, Proceeding No. 1-кп/761/962/2018, 25 July 2018 (CE-807). ↩

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indicated that the charges “do not relate to the testimony Ms. Tsybulska provided in this arbitration.”

58. By letter dated 13 September 2018, the Tribunal invited the Respondent’s comments on the Claimants’ letter of 11 September 2018. The Respondent did not provide any comments.

59. By letter dated 5 October 2018, the Tribunal, noting the Respondent’s failure to provide any response to the Tribunal’s letter of 13 September 2018, admitted the Claimants’ correspondence of 11 September 2018 into the record.

60. On 8 November 2018, the Claimants sought leave from the Tribunal to submit two judgments and an accompanying press release issued by the Swiss Federal Supreme Court in connection with PJSC Ukrnafta v. Russian Federation, PCA Case No. 2015-34, and Stabil LLC et al. v. Russian Federation, PCA Case No. 2015-35, together with English translations, into the record of this arbitration. Alternatively, the Claimants requested that the Tribunal take judicial notice of these judgments.

61. By letter dated 23 November 2018, the Tribunal invited the Respondent to provide any comments on this request by 7 December 2018. The Respondent did not submit any comments.

62. By letter dated 18 December 2018, the Claimants noted that the Swiss Federal Supreme Court issued opinions explaining its full reasoning in reaching the aforementioned judgments and sought leave from the Tribunal to submit the opinions into the record, together with English translations. Alternatively, the Claimants requested that the Tribunal take judicial notice of these opinions.

63. On 7 January 2019, the Tribunal advised the Parties that it was in the final stage of its deliberations and, on this basis, declined to receive further submissions or case law, rejecting the Claimants’ request.

64. On 22 February 2019, the Tribunal rendered its Partial Award, accompanied by the Dissenting Opinion of Professor Dr. Maja Stanivuković, dated 13 February 2019.

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65. In its Partial Award the Tribunal by majority ruled:

(a) that the Tribunal has jurisdiction over the claims:
(b) that the Claimants have established a violation of Article 5 (expropriation) and Article 2(1) (full and unconditional legal protection) and Article 3(1) (most favored nation treatment) of the BIT.

66. In paragraph 275 of the Partial Award, the Tribunal also decided that it would proceed to the quantum phase of the arbitration.

6. The Respondent’s Request to Participate in the Proceedings; Amendments to the Timetable

67. By letter dated 10 July 2019, the Respondent addressed the Tribunal for the first time in this arbitration to express “its willingness to appear in this Arbitration,” and made three separate but connected requests, namely:

1. to permit the Respondent to present written and oral argument in support of its jurisdictional objections;
2. subject to (i), to order a stay of the Arbitration until the Dutch courts have irrevocably decided upon the Respondent’s request for setting aside the Partial Award; and
3. if jurisdiction were maintained subsequent to (i) or (ii), to grant the Respondent the opportunity to raise objections to the claim on the merits and in relation to quantum including a proper opportunity to challenge (via its own evidence and cross-examination) the Claimants’ factual and expert evidence.

68. By letter dated 11 July 2019, the Tribunal invited the Claimants to provide any comments in relation to the Respondent’s letter dated 10 July 2019.

69. By letter of 2 August 2019, the Claimants opposed the Respondent’s requests of 10 July 2019 in their entirety and requested that the Tribunal maintain the existing procedural timetable. The Claimants’ letter was accompanied by factual exhibits CE-1020 to CE-1021, and legal authorities CLA-197 to CLA-203.

70. By letter dated 8 August 2019, the Claimants requested that the Tribunal require the Respondent to pay its share of the deposit to the PCA in the amount of EUR 250,000.

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71. By letter of 13 August 2019, the Tribunal requested the Respondent to pay its share of the deposit that was previously paid by the Claimants, in the amount of EUR 250,000, as evidence of its “willingness to appear in the Arbitration.”

72. On 21 August 2019, the Tribunal issued Procedural Order No. 7, in which the Tribunal, inter alia, directed that the Respondent file a formal application by 6 September 2019 to address the Tribunal’s authority to entertain further submissions in respect of jurisdictional “issues not already dealt with in the Partial Award” if the Respondent wished to contest the issue of jurisdiction. Noting that “the merits stage of the arbitration was closed by the Partial Award”, the Tribunal also invited the Respondent to submit its Counter-Memorial by 18 October 2019 in accordance with Section 1.1 of Procedural Order No. 6. Lastly, the Tribunal rejected the Respondent’s request for a stay of the proceedings.

73. By letter dated 28 August 2019, the law firms Schellenberg Wittmer Ltd and Ivanyan & Partners informed the Tribunal that they had been instructed to represent the Respondent in these arbitral proceedings. In the same letter, the Respondent requested “a reasonable extension of time for the filing of the Counter-Memorial on Quantum” (the “First Extension Request”) and proposed a revised procedural timetable.

74. On 6 September 2019, as foreseen in Procedural Order No. 7, the Respondent filed its Request for the Tribunal to use its Authority to Entertain Further Submissions on Jurisdiction, together with legal authorities RLA-1 to RLA-32 (the “Request to Entertain Further Submissions”).

75. By letter dated 9 September 2019, arguing that the Request to Entertain Further Submissions contains “inappropriately submitted substantive arguments on matters on jurisdiction”, the Claimants requested that the Tribunal strike from the record of this proceeding Part III of the Request to Entertain Further Submissions and allow the Claimants to respond to the Request.

76. Also on 9 September 2019, the Tribunal granted the Respondent an opportunity to respond, by 13 September 2019, “very briefly” to the Claimants’ objections to Part III of the Request to Entertain Further Submissions. The Claimants were granted an opportunity to respond to the

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Request to Entertain Further Submission and any supplemental “very brief” comments from the Respondent on Part III of the Request to Entertain Further Submissions by 27 September 2019.

77. By letter dated 13 September 2019, the Respondent commented on the Claimants’ objection to Part III of the Request to Entertain Further Submissions and asked for an extension until 10 October 2019 to pay its share of the deposit.

78. On 13 September 2019, the Tribunal denied the Claimants’ request to strike Part III of the Request to Entertain Further Submissions and directed the Claimants to address the entirety of the Request. Moreover, the Tribunal invited the Claimants to submit their own proposed revised timetable in the event an extension for the filing of the Counter-Memorial on Quantum was granted. The Tribunal further granted the Respondent’s request for an extension until 10 October 2019 to pay its share of the deposit.

79. On 18 September 2019, the Claimants proposed a revised timetable.

80. On 26 September 2019, the Claimants submitted their response to the Request to Entertain Further Submissions, together with factual exhibit CE-1022, and legal authorities CLA-205 to CLA-215.

81. By letter of 27 September 2019, the Respondent provided its comments on the Claimants’ revised timetable.

82. By letter dated 1 October 2019, the Claimants provided their comments to the Respondent’s letter of 27 September 2019 with respect to the revised timetable.

83. On 2 October 2019, the Respondent submitted its comments on the Claimants’ letter of 1 October 2019.

84. On 6 October 2019, having considered the comments from the Parties with respect to the First Extension Request and the Request to Entertain Further Submissions, the Tribunal issued Procedural Order No. 8, rejecting the Request to Entertain Further Submissions on the basis that all of the issues addressed by the Respondent in the Request had “already been canvassed by the Tribunal and dealt with in both the majority and dissenting opinions.” The Tribunal further denied the Respondent’s request to reopen the hearing on jurisdictional objections and stated that it would

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proceed directly to the quantum phase. With respect to the First Extension Request, the Tribunal amended the procedural timetable for the quantum phase of the proceedings, modifying the time limits for the filing of the Parties’ written submissions.

85. By letter dated 10 October 2019, the Respondent requested a further extension, until 24 October 2020, to the deadline for the payment of its share of the deposit. On 13 October 2019, the Tribunal granted the request.

86. On 21 October 2019, the PCA acknowledged receipt of EUR 250,000 in payment of the Respondent’s share of the deposit.

7. Written Proceedings on Quantum; Removal of Likvo LLC as Claimant; Filing of Additional Documentary Evidence; and Appointment of Litigation Assistant

87. On 27 June 2019, the Claimants submitted their Memorial on Quantum (the “Memorial on Quantum”), together with an Expert Report on the Fair Market Value of Naftogaz’s Oil and Gas Assets by Gaffney, Cline & Associates, dated 27 June 2019 (the “First GCA Report”), factual exhibits CE-13-Am, CE-43-Am, CE-50-Am, CE-52-Am, CE-56-Am, CE-69-Am, CE-117-Am, CE-126-Am, CE-141-Am, CE-473-Am, CE-474-Am, CE-477-Am, CE-811 to CE-1019, and legal authorities CLA-160-Am, CLA-169-Am, CLA-176 to CLA-196.

88. On 6 December 2019, the Respondent filed its Counter-Memorial on Quantum (the “Counter-Memorial on Quantum”), together with an Expert Report of FTI Consulting (“FTI”), dated 6 December 2019 (the “First FTI Report”), factual exhibits RE-1 to RE-141, and legal authorities RLA-33 to RLA-92.

89. By letter dated 18 December 2019, arguing that the issues raised in Sections V to VIII of the Counter-Memorial on Quantum contained jurisdictional and liability arguments precluded by the Partial Award, the Claimants requested that the Tribunal strike Sections V to VIII of the Counter-Memorial on Quantum and the new legal authorities and exhibits that the Respondent cited therein, or, in the alternative, that the Tribunal order and declare that it would not adjudicate the issues raised in those sections (the “First Request to Strike”). The Claimants’ letter was accompanied by legal authority CLA-216.

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90. On 19 December 2019, the Tribunal invited the Respondent to provide, by 30 December 2019, any comments in response to the First Request to Strike.

91. On 30 December 2019, the Respondent provided its comments in response to the First Request to Strike, requesting that the Tribunal dismiss the Request. The Respondent’s letter was accompanied by legal authorities RLA-93 to RLA-94.

92. On 9 January 2020, the Tribunal issued Procedural Order No. 9, striking paragraphs in the Counter-Memorial on Quantum pertaining to “exceptional circumstances”²⁵ and principle of reciprocity.²⁶ The Tribunal, however, did not strike paragraphs relevant to the temporal limitation under the BIT, noting that “[t]he issue is an important one and will not be decided in a summary way.” In addition, the Tribunal did not strike paragraphs pertaining to the issue of illegality of certain assets on the ground that it was relevant to the determination of the specific assets eligible for compensation. Lastly, the Tribunal ordered that the Respondent file an amended Counter-Memorial taking into account the Tribunal’s aforementioned decisions.

93. On 24 January 2020, in accordance with Procedural Order No. 9, the Respondent submitted its Amended Counter-Memorial on Quantum with redactions as directed by the Tribunal, together with an amended list of exhibits and authorities, withdrawing the exhibits and authorities cited exclusively in the redacted paragraphs.

94. On 14 February 2020 the Claimants submitted their Reply on Quantum (the “Reply on Quantum”), together with the Second Expert Report on the Fair Market Value of Naftogaz’s Oil and Gas Assets by Gaffney, Cline & Associates, dated 14 February 2020 (the “Second GCA Report”) and an Expert Report of Evgeny Zhilin, dated 14 February 2020 (the “First Zhilin Report”), factual exhibits CE-7-Am, CE-52-Am, CE-71-Am, CE-1023 to CE-1129, and legal authorities CLA-183-Am, CLA-217 to CLA-251.

²⁵ Counter-Memorial on Quantum, dated 6 December 2019 (hereinafter “Counter-Memorial on Quantum”), ¶¶ 7, 17, 38, 276-299, 557. ↩
²⁶ Counter-Memorial on Quantum, ¶¶ 2, 16, 320-365, 556. ↩

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95. By letter dated 7 April 2020, the Respondent requested that the Tribunal extend the deadline for the filing of the Rejoinder on Quantum, from 17 April 2020 to 19 June 2020, on account of the COVID-19 pandemic (the “Second Extension Request”).

96. On 14 April 2020, at the Tribunal’s invitation, the Claimants requested that the Tribunal reject the Respondent’s application for a nine-week extension and order instead an extension not exceeding two and a half weeks, accompanied by factual exhibits CE-1130 to CE-1132.

97. By letter dated 16 April 2020, the Respondent, after being granted leave from the Tribunal to “file a very short response” on the Claimants’ letter dated 14 April 2020, submitted its comments on the Claimants’ objection to the Second Extension Request.

98. By letter dated 16 April 2020, the Claimants submitted their reply to the Respondent’s letter of the same date.

99. Also on 16 April 2020, the Tribunal, in light of the Claimants’ submission that “an extension of two and a half weeks would sufficiently account for” the impact of the COVID-19 pandemic on the Respondent’s work, granted the Second Extension Request on consent to that extent. The Tribunal further noted that it would deliberate on the manner of granting a longer extension once the submissions were complete.

100. By e-mail communication dated 17 April 2020, the Respondent requested leave to file brief comments to address one statement in the Claimants’ reply dated 16 April 2020.

101. Also on 17 April 2020, the Tribunal denied the Respondent’s request for leave to file comments on the Claimants’ letter of 16 April 2020, noting that it considered itself sufficiently briefed on the relevant issues.

102. On 22 April 2020, the Tribunal issued Procedural Order No. 10, extending the deadline for the filing of the Respondent’s Rejoinder on Quantum to 22 May 2020.

103. By letter dated 1 May 2020, the Claimants alleged that the Respondent breached the confidentiality obligations by disclosing the Expert Report of Dr. Irina Paliashvili, dated 14 September 2017 (the “First Paliashvili Report”) in a different Crimea-related arbitration, JSC DTEK Krymenergo v. The Russian Federation (the “DTEK Arbitration”) and in a set-aside

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proceeding of another Crimea-related case before the Court of Appeal in The Hague (the “Belbek Set-Aside Proceedings”). Accordingly, the Claimants requested that the Tribunal order the Respondent to immediately withdraw the First Paliashvili Report from the two proceedings and award the Claimants the cost of their application (the “Application on Confidentiality Breach”).

104. On 4 May 2020, the Tribunal invited the Respondent to provide, by 8 May 2020, any comments in response to the Claimants’ letter of 1 May 2020.

105. On the same date, the Respondent informed the Tribunal that, due to two public holidays in Russia, the 8 May 2020 time limit left the Respondent with only three working days to file its comments, which was “manifestly insufficient”. On 7 May 2020, the Respondent requested that the Tribunal extend the time limit to comment on the Claimants’ Application on Confidentiality Breach to 15 May 2020.

106. On 8 May 2020, the Tribunal, after receiving Claimants’ response that they would not object to an extension for the Respondent to file its comments by 13 May 2020, granted the Respondent’s request to extend the time limit to file its comments on the Claimants’ Application on Confidentiality Breach to 15 May 2020.

107. By letter dated 15 May 2020, the Respondent submitted its response to the Claimants’ Application on Confidentiality Breach.

108. On the same date, the Respondent filed an application to further extend the deadline for the filing of the Rejoinder on Quantum from 22 May 2020 to 10 June 2020 (the “Third Extension Request”).

109. Also on the same date, the Tribunal invited the Claimants to submit any comments on the Respondent’s Third Extension Request by 20 May 2020 and the Respondent’s response to the Claimants’ Application on Confidentiality Breach by 22 May 2020.

110. On 17 May 2020, the Respondent noted that the length of time given to the Claimants to prepare a reply on the Third Extension Request could create logistical problems for the Respondent, suggesting that the time permitted to the Claimants be abbreviated.

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111. On 18 May 2020, the Tribunal, while maintaining the time limit for the Claimants to file their response to the Third Extension Request by 20 May 2020, granted an interim extension of one week to the Respondent’s time limit to file its Rejoinder on Quantum to 29 May 2020.

112. By letter dated 19 May 2020, the Claimants submitted their comments in response to the Respondent’s Third Extension Request, enclosing factual exhibits CE-1133 to CE-1135 and legal authorities CLA-252 and CLA-253.

113. On 21 May 2020, the Tribunal issued Procedural Order No. 11, in which the Tribunal further extended the deadline for submission of the Respondent’s Rejoinder on Quantum to 3 June 2020.

114. By letter dated 22 May 2020, the Claimants submitted their comments on the Respondent’s letter of 15 May 2020 on the Claimants’ Application on Confidentiality Breach, along with legal authorities CLA-254 and CLA-255.

115. By letter dated 29 May 2020, the Respondent submitted its comments on the Claimants’ letter of 22 May 2020. The Respondent, inter alia, “without any acknowledgement or admission or wrongdoing” confirmed that it had filed (i) a letter from the Ukrainian Ministry of Foreign Affairs to the Tribunal requesting to file a Non-Disputing Party Submission in the Belbek Set-Aside Proceedings and in setting aside proceedings in relation to JSC CB PrivatBank v. The Russian Federation (the “PrivatBank Set-Aside Proceedings”), and (ii) the First Paliashvili Report in setting aside proceedings in relation to Everest Estate LLC et al. v. The Russian Federation (the “Everest Set-Aside Proceedings”).

116. On 3 June 2020, in accordance with Procedural Order No. 11, the Respondent submitted its Rejoinder on Quantum (the “Rejoinder on Quantum”), together with the Expert Report on Technical Analysis and Economic Assessment of the Upstream Assets by Vygon Consulting, dated 29 May 2020 (the “First Vygon Report”), the Expert Report of Professor Oleksandr Vygovskyy, dated 1 June 2020 (the “First Vygovskyy Report”), the Expert Report of Professor Vitaly D. Melgunov, dated 29 May 2020 (the “First Melgunov Report”), and the Second Expert Report of Dr. Stuart Amor, Matthias Cazier-Darmois, Carter Davis, and Dr. Boaz Moselle, dated 3 June 2020

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(the “Second FTI Report”), factual exhibits RE-142 to RE-169, and legal authorities RLA-95 to RLA-147.

117. On 10 June 2020, the Tribunal issued Procedural Order No. 12 on the Application on the Confidentiality Breach. The Tribunal, by majority, inter alia (i) acknowledged the Respondent's undertaking to withdraw the First Paliashvili Report from its submissions in the DTEK Arbitration and the Belbek Set-Aside Proceedings; (ii) ordered the Respondent to withdraw the First Paliashvili Report from its submissions in the Everest Set-Aside Proceedings and the letter from the Ukrainian Ministry of Foreign Affairs to the Tribunal requesting to file a Non-Disputing Party Submission from its submission in the Belbek Set-Aside Proceedings and the PrivatBank Set- Aside Proceedings; and (iii) awarded the Claimants the costs of the Application on the Confidentiality Breach.

118. By letter dated 18 June 2020, arguing that the Respondent introduced new arguments and evidence in the Rejoinder on Quantum that were not responsive to fresh matters raised in the Reply, the Claimants requested to strike from the record: “(1) the [First Vygon Report]; (2) the [First Vygovskyy Report]; (3) Sections III and V of the [First Melgunov Report];²⁷ and (4) the portions of the Rejoinder on Quantum²⁸ and of the [Second FTI Report],²⁹ [...] together with all of the new legal authorities and exhibits that Russia cites therein” (the “Second Request to Strike”). The Claimants' letter was accompanied by legal authority CLA-256.

²⁷ Together with certain portions of the Executive Summary; namely, First Expert Report of Professor Vitaly D. Melgunov (hereinafter “First Melgunov Report”), ¶¶ 19, 21. ↩

²⁸ Namely, Rejoinder on Quantum, dated 3 June 2020 (hereinafter “Rejoinder on Quantum"), ¶¶ 144-155, 211, 315-319, 598-605, 807 in full; all arguments and references in ¶¶ 16, 21, 352, 353, 483, 595, 811 pertaining to the Expert Report on Technical Analysis and Economic Assessment of the Upstream Assets by Vygon Consulting, dated 29 May 2020 (hereinafter “First Vygon Report”); ¶¶ 35-84, 89-90, 93, 102, 106-107, 112, 121-122, 211, 434, 448, 454-455, 461-463, 465-467 in full; all arguments and references in ¶¶ 16, 29 (footnote 15), 30 (footnote 17), 32 (footnote 18), 104, 111, 123, 126, 136, 437, 447, 456, 470 pertaining to the Expert Report of Professor Oleksandr Vygovskyy, dated 1 June 2020 (hereinafter “First Vygovskyy Report”); and ¶ 647 pertaining to certain portions of the First Melgunov Report. ↩

²⁹ Namely, Second Expert Report of Dr. Stuart Amor, Matthias Cazier-Darmois, Carter Davis, and Dr. Boaz Moselle, dated 3 June 2020 (hereinafter "Second FTI Report"), ¶¶ 2.38, 3.79, 5.9, 5.13(1), 5.15-5.19, 5.24 in full, as well as all arguments and references in ¶¶ 2.46(1), 3.80, 5.10, 5.22, 5.27(3), 5.41, 5.55(1) pertaining to certain portions of the First Melgunov Report. ↩

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119. On the same date, the Tribunal invited the Respondent to provide, by 3 July 2020, any comments in response to the Second Request to Strike.

120. By letter dated 22 June 2020, enclosing factual exhibits CE-1136 to CE-1141, the Claimants informed the Tribunal that the Claimant, Likvo LLC, had been terminated and merged into another Claimant, JSC Ukrgasvydobuvannya, effective 29 April 2020. The Claimants accordingly requested that the Tribunal remove Likvo LLC as a claimant in this arbitration and from the case caption, and recognize JSC Ukrgasvydobuvannya as the legal successor to Likvo LLC with the right to pursue the claims of that entity in this arbitration.

121. On 23 June 2020, the Tribunal invited the Respondent to submit any comments in respect of the Claimants' letter of 22 June 2020 by 30 June 2020.

122. On 1 July 2020, following the Respondent's confirmation on 30 June 2020 that it had no comment on the Claimants' request to remove Livko LLC as claimant from the arbitration, the Tribunal granted the Claimants' request to remove Likvo LLC as a claimant in this arbitration and updated the case caption accordingly.

123. By letter dated 3 July 2020, the Respondent submitted its comments on the Second Request to Strike, enclosing legal authorities RLA-148 to RLA-152.

124. By letter dated 7 July 2020, the Claimants submitted an accounting of the costs the Claimants incurred in connection with its Application on the Confidentiality Breach and requested that the Tribunal order the Respondent to immediately pay the costs in the amount of U.S. dollar (“USD”) 30,164.95 in satisfaction of Procedural Order No. 12.

125. On 8 July 2020, the Tribunal invited the Respondent to provide any comments in respect of the Claimants' application on costs by 15 July 2020.

126. On 9 July 2020, the Respondent requested an extension of the deadline for the filing its comments on the Claimants' application on costs dated 7 July 2020.

127. On the same date, the Tribunal granted the Respondent's request and extended the deadline for its response on the Claimants' application on costs to 22 July 2020.

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128. By letter dated 15 July 2020, the Claimants submitted their reply comments on the Respondent's letter of 3 July 2020. The Claimants' letter was accompanied by legal authority CLA-257.

129. By letter dated 22 July 2020, the Respondent submitted its comments on the Claimants' submission on costs, enclosing legal authorities RLA-150-Am and RLA-153. In the same letter, the Respondent confirmed that it had complied with the directions of the Tribunal majority in Procedural Order No. 12 and had withdrawn (i) the First Paliashvili Report from its submissions in the Everest Set-Aside Proceedings, Belbek Set-Aside Proceedings, and the DTEK Arbitration; (ii) the letter from the Ukrainian Ministry of Foreign Affairs to the Tribunal requesting to file a Non-Disputing Party Submission from the PrivatBank Set-Aside Proceedings, the Belbek Set- Aside Proceedings, and the DTEK Arbitration; and (iii) Ukraine's Non-Disputing Party Submission from the DTEK Arbitration. The Respondent further confirmed that it had not filed any other confidential documents from the record in this arbitration in any other proceedings.

130. On 27 July 2020, the Respondent submitted its rejoinder comments on the Claimants' letter of 15 July 2020 inter alia requesting that the Tribunal grant the Respondent a right to file additional evidence and comments, should the Claimants be allowed to do so themselves.

131. By letter dated 29 July 2020, the Claimants submitted their reply comments on the Respondent's letter of 22 July 2020, enclosing legal authorities CLA-256-Am, CLA-258 to CLA- 261.

132. By letter dated 5 August 2020, the Respondent submitted its rejoinder comments on the Claimants' reply letter on costs of 29 July 2020, enclosing legal authorities RLA-93-Am, RLA- 150-Am, RLA-151-Am, and RLA-154 to RLA-157.

133. On 10 August 2020, the Tribunal, having considered the Parties' submissions on the Claimants' application on costs dated 7 July 2020, deferred the bill of costs for USD 30,164.92, together with the Parties' respective submissions on its reasonableness, until the Tribunal issued its award.

134. Also on 10 August 2020, the Tribunal by majority issued Procedural Order No. 13 concerning the Claimants' Second Request to Strike, (i) determining that there was no need to

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consider striking out portions of the Respondent's Rejoinder on Quantum and (ii) granting the Respondent's request that it be given an opportunity to file a “surrebuttal” in the event the Claimants were given opportunity to file responsive evidence and submissions. Accordingly, the Claimants were ordered to submit their response limited to matters raised in the Rejoinder by 7 September 2020, while the Respondent was ordered to file its “surrebuttal” limited to matters raised by the Claimants in their reply to the Respondent's Rejoinder on Quantum by 5 October 2020.

135. On 11 August 2020, the Tribunal requested a supplementary deposit in the amount of EUR 250,000 (i.e., EUR 125,000 from each side) in accordance with Article 41(2) of the UNCITRAL Rules.

136. By letter dated 13 August 2020, the Respondent inter alia requested that the Tribunal reconsider Procedural Order No. 13, grant the Respondent an extension until 11 December 2020 to file its surrebutal.

137. On 14 August 2020, the Claimants, noting the possible logistical difficulties arising due to 7 September 2020 being a federal holiday, sought a two-day postponement of the Claimants' deadline to file a response to matters raised in the Rejoinder on Quantum. The Tribunal denied the Claimants' request on the same date.

138. On 19 August 2020, the Claimants submitted their comments on the Respondent's request for consideration dated 13 August 2020.

139. On 2 September 2020, the Tribunal issued Procedural Order No. 14, whereby the Tribunal deferred the Respondent's request for additional time to file its third submission until after the Claimants filed their material on or before 7 September 2020.

140. On 7 September 2020, the Claimants submitted the Claimants' Response to Matters Raised in the Rejoinder on Quantum (the “Response to Matters Raised in the Rejoinder”), along with the Third Expert Report of Dr. Irina Paliashvil, dated 7 September 2020 (the “Third Paliashvili Report”), the Third Expert Report in Response to the Expert Report of Vygon Consulting on Technical Analysis and Economic Assessment of the Upstream Assets by Gaffney, Cline & Associates, dated 7 September 2020 (the “Third GCA Report”), the Second Expert

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Report of Evgeny Zhilin, dated 7 September 2020 (the “Second Zhilin Report”), factual exhibits CE-7-Am, CE-53-Am, CE-54-Am, CE-71-Am, CE-123-Am, CE-128-Am, CE-239-Am, CE- 1024-Am, CE-1060-Am, CE-1142 to CE-1286, and legal authority CLA-262.

141. By letter dated 16 September 2020, the Respondent requested an extension, to 30 September 2020, to the deadline for the payment of its share of the supplementary deposit. On the same date, the Tribunal granted the Respondent's request.

142. Also on 16 September 2020, the PCA acknowledged receipt of EUR 125,000 in payment of the Claimants' share of the supplementary deposit.

143. By letters dated 17 September 2020, the Respondent requested (i) leave to submit into the record a letter from Public Joint-Stock Company “Gazprom” (“Gazprom”), dated 15 July 2020 (the “Gazprom letter”) and (ii) an extension of the deadline to file its surrebuttal to 11 December 2020.

144. On 21 September 2020, at the Tribunal's invitation, the Claimants submitted their comments on the Respondent's requests of 17 September 2020.

145. On 25 September 2020, the Tribunal notified the Parties of its view that it would determine the status of the Gazprom letter and, in particular, whether it could be taken as evidence to establish the truth of its contents in the absence of a witness statement from someone with knowledge of the facts, once the Tribunal has had the opportunity to review the Gazprom letter itself. The Tribunal also invited the Claimants to advise, by 2 October 2020, whether they wished to respond to the Respondent's submission of the Gazprom letter, and, if so in what way.

146. On 27 September 2020, the Tribunal extended the deadline for the Respondent's filing of its surrebuttal to 16 November 2020.

147. On 30 September 2020, the Respondent filed the Gazprom letter into the record as factual exhibit RE-170.

148. On 2 October 2020, the PCA acknowledged receipt of EUR 125,000 in payment of the Respondent's share of the supplementary deposit.

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149. By letter dated 2 October 2020, the Claimants informed the Tribunal of their intention to address the Gazprom letter at the hearing on quantum.

150. On 7 October 2020, the Tribunal admitted the Gazprom letter into the record as an addition to the Respondent's document production.

151. On 21 October 2020, the Tribunal issued Procedural Order No. 15, in which the Tribunal inter alia extended the time limit for the Respondent to file its surrebuttal until 16 November 2020.

152. On 16 November 2020, in accordance with Procedural Order No. 15, the Respondent submitted its Sur-Rebuttal on Quantum (the “Sur-Rebuttal on Quantum”), together with the Second Expert Report of Professor Vitaly D. Melgunov, dated 16 November 2020 (the “Second Melgunov Report”), the Second Expert Report on Technical Analysis and Economic Assessment of the Upstream Assets by Vygon Consulting, dated 16 November 2020 (the “Second Vygon Report"), the Second Expert Report of Professor Oleksandr Vygovskyy, dated 16 November 2020 (the “Second Vygovskyy Report”), factual exhibit RE-170, and legal authorities RLA-158 to RLA-165.

153. By letter dated 5 March 2021, the Respondent informed the Tribunal that Schellenberg Wittmer Ltd no longer acted as its co-counsel and requested that Schellenberg Wittmer Ltd be removed from the record and not included in any further correspondence in this matter.

154. On 12 March 2021, the Tribunal, taking note of the Respondent's letter of 5 March 2021, removed Schellenberg Wittmer from the record and distribution list.

155. On 23 April 2021, the Respondent requested the Tribunal's leave to introduce into the record the English translation and the French original of the Paris Court of Appeal's judgment of 30 March 2021 in set aside proceedings between the Russian Federation and JSC Oschadbank (the “Oschadbank Set Aside Judgment”), indicating that the Claimants had consented to the addition of that Judgment into the record.

156. On 25 April 2021, the Tribunal, upon the Claimants' confirmation of their agreement, admitted the Oschadbank Set Aside Judgment into the record. The Respondent submitted the Oschadbank Set Aside Judgment as RLA-166 on the following day.

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157. By e-mail dated 23 July 2021, the Respondent informed the Tribunal that, as of 1 July 2021, the Russian Federation had transferred the authority regarding its legal representation from the Ministry of Justice to the Prosecutor's General Office. The Respondent also informed the Tribunal that, effective from 23 July 2021, Schellenberg Wittmer Ltd would be representing the Respondent in the present proceedings, whilst Ivanyan & Partners no longer acted as its counsel.

158. On 13 August 2021, the Tribunal invited the Parties' comments on its proposal to retain Mr. David Campbell of Arbitration Place, Toronto, as a litigation assistant in this arbitration in the interest of reducing the overall cost of proceedings and increased efficiency in the document organization and technical support in the quantum phase of these proceedings.

159. By letter dated 27 August 2021, the Claimants confirmed their agreement to Mr. Campbell's appointment as a litigation assistant in this arbitration. By letter of the same date, the Respondent submitted that it had no objection to the Tribunal's proposal as a matter of principle, subject to (i) certain clarifications as to the exact role and status of the proposed litigation assistant and (ii) any necessary disclosures by Mr. Campbell.

160. On 6 September 2021, the Tribunal provided the requested clarifications and disclosures to the Parties.

161. On 15 September 2021, the Respondent confirmed that it did not object to the proposed appointment of Mr. David Campbell as a litigation assistant in this arbitration.

162. On 12 October 2021, the Tribunal circulated Mr. Campbell's signed statement of impartiality and independence and declaration of confidentiality.

8. Hearing on Quantum

163. By letter dated 27 February 2019, at which point the Respondent was yet to request to participate in these proceedings, the Tribunal invited the Parties to comment on the schedule for the quantum phase of the proceedings.

164. On 13 March 2019, the Claimants provided their comments on the schedule for the quantum phase of the proceedings, including a proposed procedural timetable. The Respondent did not provide any comments.

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165. By letter dated 29 March 2019, the Tribunal informed the Parties that it intended to adopt certain amendments to the procedural timetable proposed by the Claimants, subject to any comments that the Parties may have on the Tribunal's amendments.

166. On 12 April 2019, the Claimants submitted their comments on the Tribunal's amendments to the procedural timetable. The Respondent did not submit any comments.

167. On 16 April 2019, having sought the Parties' views but having received no response from the Respondent, the Tribunal issued Procedural Order No. 6, establishing the procedural timetable for the quantum phase of the arbitration. In the event the Respondent failed to state by 2 August 2019 that it intended to submit its Counter-Memorial on Quantum, Section 1.2 of Procedural Order No. 6 foresaw an accelerated procedural timetable.

168. By letter dated 18 June 2019, the Claimants, due to an unforeseen scheduling conflict, requested that the Tribunal, after consultation of the Respondent, amend the dates for the hearing on quantum set forth in Section 1.1 of Procedural Order No. 6 in the event the Respondent participated in the quantum phase of the proceedings.

169. By letter of 20 June 2019, the Tribunal confirmed its availability to hear the quantum evidence in this arbitration on 8-10 April 2020 and invited the Respondent's comments on the proposed dates for the hearing.

170. Also on 20 June 2019, the Claimants indicated that they were unavailable to proceed with a hearing on quantum on 8-10 April 2020.

171. By letter dated 26 June 2019, the Tribunal proposed 11-13 May 2020 and, alternatively, 14 and 15 May 2020 as the dates of the hearing on quantum and invited the Parties to confirm their availability.

172. By letter dated 8 July 2019, the Claimants confirmed their availability for a hearing on quantum on 12-14 May 2020.

173. By correspondence dated 10 July 2019, the Respondent also confirmed its availability for a hearing on quantum from 11-15 May 2020.

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174. By letter dated 11 July 2019, at which point the Respondent had requested to participate in these proceedings, the Tribunal, noting that the Parties had confirmed their availability, fixed 12- 14 May 2020 for an oral hearing on quantum at The Hague, the Netherlands.

175. By e-mail communication dated 31 March 2020, the Respondent, writing on behalf of both Parties, informed the Tribunal that the Parties were in consultation with regard to the postponement of the hearing on quantum scheduled for 12-14 May 2020 in light of the COVID-19 pandemic. On the same day, the Claimants confirmed their agreement with the Respondent's e-mail communication.

176. By e-mail communication dated 5 April 2020, the Respondent, writing on behalf of both Parties, informed the Tribunal of the Parties' joint request to postpone the hearing on quantum to 9-13 November or 16-20 November 2020 and asked the Tribunal to confirm its availabilities.

177. On 9 April 2020, at the Parties' joint request, the Tribunal postponed the hearing to 16- 20 November 2020.

178. On 11 August 2020, the Tribunal, noting its preference not to further delay the hearing on quantum, then scheduled for 16-20 November 2020, invited the Parties to confer and revert to the Tribunal with possible alternative arrangements for the hearing in view of directions in Procedural Order No. 13.

179. By letter dated 13 August 2020, the Respondent requested that the Tribunal reconsider Procedural Order No. 13 and postpone the hearing scheduled for 16-20 November 2020 to a later date.

180. On 14 August 2020, the Claimants sought a two-day postponement of the Claimants' deadline to file a response to matters raised in the Rejoinder on Quantum.

181. On the same date, the Tribunal denied the Claimants' request for a two-day postponement.

182. On 19 August 2020, the Claimants requested that the Tribunal maintain the filing schedule set out in Procedural Order No. 13, and maintain the 16-20 November 2020 hearing dates.

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183. By letters dated 21 September 2020, pursuant to the Tribunal's directions, the Parties respectively submitted their notifications of witnesses and experts that they intended to call for cross-examination at the hearing on quantum.

184. On 25 September 2020, the Tribunal, given the Respondent's request of 13 August 2020 to postpone the quantum hearing and subsequent communications from the Tribunal, including Procedural Order No. 14, notified the Parties of its view that it would no longer be practicable to hold the hearing on quantum as scheduled on 16-20 November 2020, proposing an adjournment to the weeks commencing 1 February 2021 or 12 April 2021.

185. By letter dated 9 October 2020, the Claimants informed the Tribunal of their availability for the hearing on quantum during the weeks commencing 1 February 2021 or 12 April 2021.

186. On the same date, the Respondent requested that the Tribunal grant an extension, until 13 October 2020, to allow the Parties to discuss dates for the quantum hearing.

187. On 11 October 2020, the Tribunal granted an extension until 13 October 2020.

188. On 13 October 2020, the Tribunal granted a joint request from the Parties for a further extension to 16 October 2020 to provide the Tribunal with a report on the outcome of the Parties' discussions regarding the hearing dates.

189. On 14 October 2020, the Parties inquired as to whether the Tribunal would be available during the week of 21 June 2021 for a five-day hearing.

190. On 15 and 16 October 2020, the Tribunal consulted the Parties in respect of a five-day hearing in the week of 21 June 2021.

191. On 21 October 2020, the Tribunal issued Procedural Order No. 15, in which the Tribunal inter alia adjourned the hearing on quantum to the week commencing 21 June 2021 as agreed by the Parties.

192. By letter dated 2 March 2021, the Claimants requested that the Tribunal direct the PCA, in consultation with the Parties, to make contingency plans for a hybrid or virtual hearing and instruct the Parties to reserve the weekend days surrounding the hearing as potential hearing days.

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193. On 9 March 2021, at the Tribunal's invitation, the Respondent provided comments on the Claimants' letter of 2 March 2021, asking the Tribunal to reject the Claimants' requests as premature and proposing that the Tribunal seek the Parties' views on the hearing format during the first full week of May 2021 and render its decision thereafter.

194. On 12 March 2021, with leave from the Tribunal, the Claimants provided a response to the Respondent's letter of 9 March 2021.

195. By joint letter dated 29 April 2021, the Parties requested that the Tribunal proceed with an in-person hearing from 21-25 June 2021 in The Hague. The Respondent suggested that the Tribunal consider London as an alternative venue if it became apparent that an in-person hearing in The Hague was not feasible.

196. On 5 May 2021, the Tribunal confirmed its availability for a remote or “virtual” hearing from 21-25 June 2021. The Tribunal also noted the possibility of a “hybrid hearing” and requested the Parties to confer and revert.

197. By letter dated 7 May 2021, the Respondent proposed that the Tribunal adjourn the hearing on quantum to a later date in the window of October to December 2021.

198. By letter dated 13 May 2021, the Claimants opposed the Respondent's proposal to postpone the hearing on quantum, enclosing factual exhibits CE-1287 and CE-1288, and legal authorities CLA-210-AM and CLA-263.

199. On 14 and 15 May 2021, the Respondent and the Claimant provided further comments in respect of the potential postponement of the hearing.

200. On 19 May 2021, the Tribunal issued Procedural Order No. 16, adjourning the hearing on quantum from 21-25 June 2021 to the first available date after the beginning of October 2021, to be determined in consultation with the Parties on the explicit condition that, if an in-person hearing proved not to be practicable on the adjourned date, the hearing would nevertheless proceed "virtually" at that time.

201. By letter dated 22 May 2021, the Claimants inquired as to the Tribunal's availability between the months of October to December 2021, such that the hearing on quantum could be held

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as soon as possible, noting that, as a backup, they would in parallel confer with the Respondent about potential dates in early 2022.

202. By letter dated 28 May 2021, at the Tribunal's invitation, the Respondent provided its comments on the Claimants' letter of 22 May 2021 and informed the Tribunal that both Parties would be available during the weeks of 7, 14 and 28 February 2022. On the same date, the Claimants confirmed that they would be available during the weeks of 21 and 28 February 2022, while indicating a preference for the earlier weeks in February.

203. By letter dated 30 May 2021, the Tribunal ordered that the hearing on quantum be held in the week commencing 21 February 2022 and hold itself available on 28 February and 1 March 2022.

204. On 8 June 2021, the Tribunal issued Procedural Order No. 17, recording the dates of the hearing on quantum as 21-25 February 2022 and holding 28 February to 3 March 2022 in reserve. The Tribunal indicated that whether the hearing would be held “virtually” would be decided no later than the pre-hearing conference, scheduled to take place during the week of 24 January 2022.

205. On 10 January 2022, the Tribunal invited the Parties' response on (i) their availability, joint agenda and a list of expected attendees for a pre-hearing conference which was to be held in the week of 24 January 2022, and (ii) some outstanding issues in respect of the hearing format.

206. On 16 January 2022, the Tribunal circulated the draft Health Protocol to the Parties and invited their comments by 24 January 2022.

207. On 19 January 2022, the Parties confirmed their availability to hold the pre-hearing conference on 26 January 2022 and provided their list of attendees for the conference.

208. On 21 January 2022, the Tribunal acknowledged the Parties' availability for the pre- hearing conference and informed the Parties that the conference was scheduled for 26 January 2022.

209. On the same date, the Tribunal invited the Parties' comments on certain administrative and logistical arrangements for the hearing. The Parties submitted their respective comments on 25 January 2022.

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210. On 25 January 2022, the Tribunal circulated certain technical details for the pre-hearing conference.

211. On the same date, the Parties submitted the joint agenda for the pre-hearing conference, as well as their comments on the draft hearing protocols and the draft Health Protocol.

212. On 26 January 2022, the pre-hearing conference was held via videoconference.

213. On 28 January 2022, the Tribunal issued Procedural Order No. 18, in which it provided directions as to the outstanding issues concerning hearing arrangements, invited the Parties to confer and seek agreement on a hearing schedule, and adopted the Health Protocol.

214. On the same date, the Tribunal requested a supplementary deposit in the amount of EUR 300,000 (i.e., EUR 150,000 from each side) in accordance with Article 41(2) of the UNCITRAL Rules.

215. On 1 February 2022, the Tribunal circulated certain administrative and logistical arrangements for the hearing to the Parties and invited their comments by 14 February 2022.

216. On 1 February 2022, the Claimants sought the Tribunal's leave to introduce additional documents into the record in support of expert testimony to be provided at the hearing, in accordance with paragraph 7.2 of Procedural Order No. 2 and paragraph 5.1 of Procedural Order No. 18.

217. On 2 February 2022, the Tribunal invited the Respondent to provide its comments on the Claimants' letter of 1 February 2022 by 8 February 2022.

218. On 4 February 2022, the Respondent informed the Tribunal that it required additional time to effect the supplementary deposit requested in the Tribunal's letter of 28 January 2022 and requested permission to pay its share of the supplementary deposit by 15 April 2022. The Tribunal granted this extension request on 7 February 2022.

219. On 7 February 2022, the Respondent submitted its comments on the Claimants' letter of 1 February 2022, objecting to the Claimants' request to introduce additional documents into the record.

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220. On the same date, the Parties submitted to the Tribunal an indicative hearing schedule and provided responses to several logistical matters indicated in the Tribunal's letter of 1 February 2022.

221. On 9 February 2022, the Tribunal endorsed the Parties' agreed indicative hearing schedule.

222. On 10 February 2022, the Tribunal issued Procedural Order No. 19, dismissing the Claimants' application to admit the additional documents into the record.

223. On 14 February 2022, the Claimants submitted their comments on certain administrative and logistical arrangements for the hearing, as per the Tribunal's letter of 1 February 2022.

224. On 15 February 2022, the Respondent submitted its comments on certain administrative and logistical arrangements for the hearing, as per the Tribunal's letter of 1 February 2022.

225. On 16 February 2022, the Tribunal acknowledged receipt of the Parties' correspondence regarding certain administrative and logistical arrangements for the hearing. By the same letter, the Tribunal noted that, pursuant to paragraph 2.5 of Procedural Order No. 18, each side has made an application for the remote participation of some of the members of its delegation, which the Tribunal would authorize, in the absence of the reasoned objection on the part of the other side, within the two days that followed the issuance of the Tribunal's letter.

226. On 18 February 2022, the Tribunal circulated further administrative and logistical arrangements for the hearing to the Parties and invited their comments by the close of business of that same day.

227. On 19 February 2022, the Tribunal circulated certain technical details concerning the hearing. By the same letter, the Tribunal noted that neither side had objected to the remote participation of certain members of the other side's delegation and that the Parties were therefore authorized to share the technical details with their remote participants.

228. On 21 February to 2 March 2022, a hearing was held at the premises of the PCA in The Hague, the Netherlands (the “Hearing on Quantum”). The following persons were present or participated remotely via videoconference:

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Tribunal:

Litigation Assistant to the Tribunal:

Mr. David Campbell

Claimants:

Counsel for the Claimants:

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Respondent:

Mr. Mikhail Vinogradov
Mr. Andrey Kondakov
Mr. Denis Grunis
Mr. Sergey Morozov
Mr. Oleg Afanasyev
Ms. Zoya Usoltseva
Mr. Konstantin Ksenofontov

Counsel for the Respondent:

Expert Witnesses:

Mr. Evgeny Zhilin
Mr. Maxim Mezentsev
Dr. Irina Paliashvili
Mr. William Cline
Mr. Robert George
Mr. Stuart Traver
Mr. Rawdon Seager
Dr. Oleksandr Vygovskyy
Dr. Grigorii Vygon
Prof. Vitalii Melgunov
Mr. Carter Davis
Dr. Boaz Moselle
Dr. Stuart Amor
Mr. Sanjeev Bahl
Mr. Matthew Burt
Mr. Daniel George
Dr. Maria Belova
Dr. Sergey Klubkov
Dr. Sergey Ezhov

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For the Permanent Court of Arbitration:

Dr. Levent Sabanogullari
Ms. Jinyoung Seok
Ms. Bojana Ristić
Ms. Willemijn van Banning

Court Reporter:

Mr. Trevor McGowan
Ms. Anne-Marie Stallard

Interpreters:

Ms. Irina van Erkel
Mr. Hildo Bos

229. On 27 February 2022, the Tribunal circulated to the Parties a list of questions to assist counsel in preparing post-hearing submissions.

230. On the same date, the Claimants informed the Tribunal that they would not be able to complete the payment of their share of the supplementary deposit requested in the Tribunal's letter of 28 January 2022 by 28 February 2022, due to restrictions on cross-border money transfers and foreign currency payments imposed by the Board of the National Bank of Ukraine. The Claimants, therefore, requested permission to pay their share of the supplementary deposit by 15 April 2022. The Tribunal granted this extension request on 28 February 2022.

9. Post-Hearing Proceedings

231. On 3 March 2022, the Tribunal circulated a revised version of the questions submitted to the Parties on 27 February 2022 and invited the Parties to propose any corrections to the hearing transcript. By the same letter, the Tribunal noted that the Parties should file two rounds of simultaneous post-hearing briefs and issued a schedule for their submission.

232. On 18 March 2022, the Parties requested an extension of the deadline for submission of proposed transcript corrections to 25 March 2022. The Tribunal granted the request on consent on 19 March 2022.

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233. On 23 March 2022, the Claimants requested an extension of the deadline for payment of their share of the supplementary deposit to 15 May 2022, due to the extension of the restrictions on cross-border money transfers and foreign currency payments imposed by the Board of the National Bank of Ukraine. The Tribunal granted their request for such an extension on 24 March 2022.

234. On 25 March 2022, the Claimants circulated the Parties' agreed transcript corrections. The Respondent confirmed its agreement with the Claimants' communication on 28 March 2022.

235. On 11 April 2022, the law firm Schellenberg Wittmer Ltd informed the Tribunal that it no longer represented the Respondent in the present case and circulated the e-mail addresses of the Respondent for future correspondence.

236. On 12 April 2022, the Tribunal acknowledged receipt of Schellenberg Wittmer Ltd's letter of 11 April 2022 and invited the Claimants to provide any comments on the letter by 18 April 2022. By the same letter, the Tribunal invited the Respondent to respond to any comments provided by the Claimants by 22 April 2022.

237. On 18 April 2022, the Claimants submitted their comments on Schellenberg Wittmer Ltd's letter of 11 April 2022, noting that the schedule for submission of post-hearing briefs as per the Tribunal's letter of 3 March 2022 should be maintained. The Claimants also enclosed factual exhibits CE-1289 to CE-1292.

238. On 22 April 2022, the Respondent submitted its comments on the Claimants' letter of 18 April 2022, requesting an extension of the deadline for the submission of both rounds of the Parties' post-hearing briefs to 30 September 2022 and 27 November 2022 respectively. The Respondent also enclosed legal authorities RLA-167 to RLA-170.

239. On 25 April 2022, the Claimants objected to the Respondent's request for an extension of the deadline for the submission of the Parties' post-hearing briefs and requested the Tribunal's leave to provide comments, by 27 April 2022, on the Respondent's letter of 22 April 2022.

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240. On 26 April 2022, the Respondent asserted that if the Tribunal granted the Claimants' request for leave submitted on 25 April 2022, the Respondent would request the Tribunal's leave to provide its own further comments by 29 April 2022.

241. On the same date, the Tribunal granted the Claimants' request to respond to the Respondent's letter by 27 April 2022, as well as the Respondent's request to submit any further comments by 29 April 2022. By the same letter, the Tribunal noted that the deadlines for post- hearing submissions would be suspended, pending the Tribunal's decision on the Respondent's application for an extension of the deadline for post-hearing submissions.

242. On 27 April 2022, the Claimants provided their comments on the Respondent's letter of 22 April 2022, inter alia, requesting that the Tribunal dispense with the post-hearing submissions. The Claimants also enclosed factual exhibits CE-1293 to CE-1304, and legal authority CLA-264.

243. On 28 April 2022, the Tribunal acknowledged receipt of the Claimants' letter of 27 April 2022 and invited the Respondent to address the Claimants' suggestion that the Tribunal should dispense with the post-hearing submissions.

244. On 29 April 2022, the Respondent provided its comments on the Claimants' letter of 27 April 2022, noting that it did not object to dispensing with the post-hearing submissions.

245. On 10 May 2022, the Tribunal issued Procedural Order No. 20, in which it ordered the deletion of the post-hearing submissions and all associated steps and procedures. The Tribunal also invited the Parties to confer and seek agreement on the format and timing of submissions on costs and to inform the Tribunal of the outcome of their discussions by 24 May 2022.

246. On 12 May 2022, the Claimants requested an extension of the deadline for payment of their share of the supplementary deposit to 15 July 2022, due to the extension of the restrictions on cross-border money transfers and foreign currency payments imposed by the Board of the National Bank of Ukraine. The Tribunal granted the request for extension on 13 May 2022.

247. On 24 May 2022, the Claimants informed the Tribunal that the Parties had agreed on a deadline of 17 June 2022 on a single round of simultaneous submissions on costs, and to the provision, by each party, of an affidavit or equivalent attestation that their respective costs are

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accurate. By the same e-mail, the Claimants informed the Tribunal that the Parties were unable to agree on a common format for the breakdown of costs, noting that each party would submit its own breakdown of costs, and leave it to the Tribunal to decide whether it needed further clarifications.

248. By letter dated 27 May 2022, the PCA acknowledged receipt, on 26 May 2022, of EUR 150,000 from the Claimants, representing their share of the supplementary deposit requested by the Tribunal on 28 January 2022.

249. On 28 May 2022, the Tribunal acknowledged receipt of the Claimants' e-mail of 24 May 2022 regarding the Parties' agreement on the timing and format of submissions on costs and invited the Respondent to confirm its agreement by 31 May 2022.

250. On 31 May 2022, the Respondent confirmed its agreement on the timing and format of submissions on costs.

251. On the same date, the Tribunal approved the Parties' agreement on the timing and format of submissions on costs.

252. On 17 June 2022, the Parties simultaneously submitted their respective submissions on costs. The Claimants enclosed legal authorities CLA-265 to CLA-272.

253. By letter dated 30 June 2022, the PCA acknowledged receipt, on 29 June 2022, of EUR 150,000 from the Respondent, representing its share of the supplementary deposit requested by the Tribunal on 28 January 2022.

254. On 6 July 2022, the Claimants requested the Tribunal to invite the Respondent to confirm whether its submission on costs excluded certain costs allocated by the Tribunal in Procedural Orders Nos. 9, 13, 14, and 15.

255. On 13 July 2022, the Tribunal invited the Respondent to confirm, by 20 July 2022, that certain costs allocated by the Tribunal in Procedural Orders Nos. 9, 13, 14, and 15 were excluded from its submission on costs, or alternatively to indicate what portion of the costs claimed were attributable to (i) the Claimants' motion to strike parts of Russia's Counter-Memorial on Quantum that dealt with issues resolved by the Tribunal in the Partial Award (Procedural Order No. 9);

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(ii) the Claimants' motion to strike parts of Russia's Rejoinder on Quantum that dealt with issues resolved by the Tribunal in the Partial Award (Procedural Order No. 13); and (iii) the Respondent's requests for extension for the filing of its sur-rebuttal submission on quantum and adjournment of the quantum hearing (Procedural Orders Nos. 14 and 15).

256. On 19 July 2022, the Claimants informed the Tribunal that a Judgment of The Hague Court of Appeal had been issued in annulment proceedings initiated by the Respondent against the Partial Award, partially setting aside the Partial Award. The Claimants also requested leave to submit an English translation of the Judgment of The Hague Court of Appeal, together with brief comments, by 26 July 2022.

257. On the same date, the Tribunal invited the Parties to submit an agreed translation of the Judgment of The Hague Court of Appeal and any comments they may wish to make thereon by 5 August 2022.

258. On 20 July 2022, the Respondent provided its comments on the exclusion of certain costs allocated by the Tribunal in Procedural Orders Nos. 9, 13, 14, and 15.

259. On 27 July 2022, the Respondent requested an extension until 31 August 2022 to submit its comments on the Judgment of The Hague Court of Appeal.

260. On the same date, the Tribunal invited the Claimants to provide, by 3 August 2022, any comments they might have on the Respondent's request of 27 July 2022.

261. On 2 August 2022, the Claimants informed the Tribunal that they did not object to the Respondent's request for an extension to 31 August 2022 on the understanding that the Respondent's request left in place the 5 August 2022 deadline for the submission of an agreed translation of the Judgment of The Hague Court of Appeal.

262. On 4 August 2022, the Tribunal confirmed its preference to receive the agreed translation of the Judgment of The Hague Court of Appeal by 5 August 2022, extending the time limit for the filing of the Parties' comments on the Judgment to 31 August 2022.

263. On 6 August 2022, the Claimants submitted the Parties' agreed translation of the judgment of The Hague Court of Appeal.

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264. On 8 August 2022, the Tribunal invited the Respondent to confirm, by 12 August 2022, that the translation was agreed by the Parties.

265. On 11 August 2022, the Respondent confirmed that the Parties agreed on the English translation of the judgment of The Hague Court of Appeal.

266. On 31 August 2022, the Parties submitted their respective comments on the judgment of The Hague Court of Appeal. In its comments, the Respondent inter alia requested that the Tribunal reopen the jurisdictional phase of the arbitration, adopt a new procedural schedule for further submissions from the Parties on this issue, and grant the Respondent leave to file additional comments on Dutch law by 30 September 2022.

267. On 1 September 2022, the Tribunal invited the Claimants to provide, by 8 September 2022, any comments on the Respondent's requests.

268. On 8 September 2022, the Claimants submitted their comments on the Respondent's requests of 31 August 2022. In their comments, the Claimants inter alia stated that they did not object to the Respondent's request to file additional comments on Dutch law, if the Tribunal considered that such comments would be helpful and the Claimant were granted an equal opportunity to reply to the Respondent's additional comments.

269. On 13 September 2022, the Respondent requested that the Tribunal confirm that it had no objection to the submission of additional comments on Dutch law by the Respondent.

270. On the same date, the Claimants clarified their position with regard to the submission of additional comments on Dutch law from the Respondent as set out above.

271. On 14 September 2022, the Tribunal granted the Respondent an opportunity to file additional comments on Dutch law by 30 September 2022 and the Claimants to respond to the Respondent's comments by 14 October 2022.

272. On 30 September 2022, the Respondent submitted its additional comments.

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273. On 14 October 2022, the Claimants submitted their comments on the Respondent's additional comments, accompanied by an affidavit of the Claimants' Dutch counsel, Ms. Mirjam van de Hel-Koedoot.

274. On 5 December 2022, the Tribunal issued Procedural Order No. 21, by which it dismissed the Respondent's application for a re-hearing of its jurisdictional objections without prejudice to the entitlement of the Respondent to have the impact of the Article 12 of the BIT limitations considered by the Tribunal in all relevant aspects of its consideration of its determination of the proper quantum of compensation.

275. On the same date, the Claimants requested that the Tribunal grant them leave to file a supplemental submission on costs by 12 December 2022 to include costs of legal representation and assistance incurred since June 2022.

276. On 6 December 2022, the Tribunal granted the Claimants' request for the Parties to file a supplemental submission on costs and invited the Parties to supplement their submissions on costs by 12 December 2022.

277. On 12 December 2022, the Parties simultaneously submitted their respective supplemental submissions on costs.

278. By letter dated 23 December 2022, the Tribunal requested the Parties to establish a supplementary deposit in the amount of EUR 100,000 (i.e., EUR 50,000 from each side) in accordance with Article 41(2) of the UNCITRAL Rules.

279. On 18 January 2023, further to paragraph 9.5 of Procedural Order No. 1, the Claimants notified the Tribunal that the Aequo firm was no longer serving as representatives of the Claimants.

280. On 20 January 2023, the Tribunal acknowledged receipt of the Claimants' notification.

281. Also on 20 January 2023, the PCA acknowledged receipt of EUR 50,000 in payment of the Claimants' share of the supplementary deposit.

282. On 28 March 2023, the PCA acknowledged receipt of EUR 50,000 in payment of the Respondent's share of the supplementary deposit.

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PART 5 - THE QUANTUM CLAIM

283. The Parties agree that:

1. the standard of compensation is “full reparation” under the principle articulated in the Chorzów Factory case;³⁰
2. Fair Market Value (“FMV”) contemplates a hypothetical transaction between a willing buyer (the “Willing Buyer”) and a willing seller (the “Willing Seller") even where no actual market exists because “market value is not an existing fact, but instead a legal construct.”³¹ More particularly,

   ...the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.³²

3. the Valuation Date is 17 March 2014 or early in the day on 18 March 2014,³³ being the day before the expropriation.³⁴ This was about a month after the Russian invasion of Crimea in February 2014 (although the Claimants say the Tribunal is nevertheless required to exclude any diminution of value between mid-February 2014 and 17 March 2014 caused by Russia's “unlawful" military action).³⁵

³⁰ Case Concerning the Factory at Chorzów (Germany v. Poland), P.C.I.J., Series A, No 17, Judgment (Merits), 13 September 1928, 47 ("...reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.”) (hereinafter “Chorzów Factory”) (CLA-191). See also Rejoinder on Quantum, dated 3 June 2020 (hereinafter “Rejoinder on Quantum"), ¶ 509 (“that being said, the Respondent does not dispute that, in case of an unlawful expropriation, the applicable standard of compensation is that of full reparation.”); AmCM, ¶ 399 (“The Respondent does not dispute, in principle, the applicability of the concepts of "full reparation” and “fair market value."); Respondent's Opening Presentation, Hearing on Quantum, slides 34, 60; Claimants' Opening Presentation, Hearing on Quantum, slides 55- 59. ↩

³¹ Claimants' Opening Presentation, Hearing on Quantum, slide 75, referring to Rejoinder on Quantum, ¶ 534. ↩

³² First GCA Report, 4; American Society of Appraisers, International Glossary of Business Valuation Terms, "Fair Market Value”, 44 (CE-912). ↩

³³ Claimants' Opening Presentation, Hearing on Quantum, slide 60. ↩

³⁴ AmCM, ¶ 407. ↩

³⁵ Claimants' Opening Presentation, Hearing on Quantum, slides 67-69. ↩

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284. According to the Claimants, the “value” was lost on the following dates in the following percentages:

1. 18 March 2014, through the Annexation Treaty between the Russian Federation and the Autonomous Republic of Crimea (the “Annexation Treaty”) (giving effect to the Nationalization Resolution 1758), which took approximately 89 percent of the value of the Claimants' damages;³⁶
2. 11 April 2014, through Resolutions 2032, 2033 and 2034, which took approximately 10 percent of the value of the Claimants' damages; and
3. 30 April 2014, through Resolution 2085, which took approximately 1 percent of the value of the Claimants' damages.

285. The Claimants filed the following demonstrative exhibit showing the staging of the expropriations and the assets involved:³⁷

³⁶ State Council of Republic of Crimea, Resolution No. 1758-6/14, Art. 1, 17 March 2014 (CE-202) (hereinafter "Nationalization Resolution"). ↩

³⁷ See Claimants' Opening Presentation, Hearing on Quantum, slide 66. ↩

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286. The main areas of disagreement between the Parties (and within the Tribunal) are:

1. the effect of Article 12 of the BIT on the scope of protected investments and in particular the level of “activity” required to “make” an investment;
2. whether Naftogaz actively “made” investments on Russian soil (the passive investment issue) and if so, when;
3. whether the Claimants could have made “investments” before their incorporation in 1998, i.e., the corporate personality issue;
4. whether compensation in respect of assets acquired by the Claimants by “legal succession" from the state through the Charter capital or otherwise, must be discounted by:
   1. the Respondent's theory that the transfer of state assets was not a transfer of the property in such assets but just a transfer of operating authority (the "legal succession” issue);

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2. the estimated expenditures by predecessors in title prior to 1 January 1992 (the "historical contribution" issue);

5. as to the Upstream Assets, viewed from the perspective of the hypothetical "Willing Buyer":
   1. whether during the “Transition Period" between 18 March 2014 and 31 December 2014 and thereafter, it is probable (or not) that operations would be governed by Ukrainian law (the “Ukrainian Scenario") or, instead, whether the Willing Buyer would have expected Russian law to govern all matters after 18 March 2014 (the “Russian Scenario”);
   2. whether, to the extent Naftogaz “made” the expropriated investments, they should (or not) be valued according to the Ukrainian Scenario or the Russian Scenario;
   3. whether the Russian Federation is entitled to have compensation with respect to Upstream Assets discounted because of the risk of non-renewal of permits, competition law complications or designation of Subsurface Plots of Federal Importance (“SPFI”);
   4. whether the Willing Buyer would reasonably expect that after 18 March 2014 it could:
      1. sell gas at or approaching international prices; and
      2. decline to sell gas to local Crimean households, or obtain subsidies to do so?
6. with respect to Midstream Assets, the key issue is whether the loss-making domestic pipelines should be valued at zero, based on:
   1. a Discounted Cash Flow (“DCF”) Value (as FTI says); or
   2. according to the “income approach”; or

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3. their Depreciated Replacement Cost (“DRC”) (as GCA says);

7. with respect to the Service Assets, which involve dozens of “market valuations", whether GCA's values should be accepted despite deficiencies in GCA's data, as alleged by FTI, who, however, does not provide its own alternatives;
8. with respect to the LDCs, whether they are worth little (FTI says “a small amount”) or, as GCA argues, substantial compensation based on the respective audited financial statements;
9. with respect to Krymgaz's debts owed to Naftogaz;
10. with respect to non-oil and gas assets [book value]; and
11. finally, with respect to the Claimants' alleged consequential losses (Gazprom gas).

287. In their Memorial on Quantum, the Claimants contend that:

1. Naftogaz's expropriated oil and gas investments should be assessed at USD 4.793 billion as of the Valuation Date;
2. based on historic records and accounting data, Naftogaz is also owed compensation in the amount of USD 24,919,342 for debts owed to Naftogaz that were cancelled by the Russia Federation;
3. in addition, Naftogaz has valued its expropriated investments not directly related to its oil and gas activities at USD 6,364,019 as of the Valuation Date; and
4. compensation is finally owed for consequential losses reasonably caused by Russia's unlawful actions including the stored gas in Crimea, which required NJSC Naftogaz to purchase replacement gas that it would not have otherwise purchased. In total, these consequential losses amount to USD 331 million.

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288. Naftogaz alleges, and the Russian Federation denies, that the FMV of the above expropriated assets and consequential losses, justifies an award in their favour against the Russian Federation of USD 5,185,687,450:³⁸

289. In addition, the Claimants seek compound interest at a rate at least equal to Naftogaz's cost of borrowing. At the Valuation Date, Naftogaz contends that it paid a weighted-average rate of interest of 9 percent, compounded at monthly intervals. The Russian Federation argues that if interest is to be awarded, it should be based on appropriate international measures (such as the London Interbank Offered Rate (“LIBOR”)).

290. In its opening presentation slide, the Russian Federation depicted the “inflated claims” as follows:⁴¹

³⁸ This figure is showing as amended at Reply on Quantum, dated 14 February 2020 (hereinafter “Reply on Quantum"), ¶¶ 202, 261; Memorial on Quantum, dated 27 June 2019 (hereinafter “Memorial on Quantum"), ¶ 27. ↩

³⁹ Second Expert Report of Gaffney, Cline & Associates, dated 14 February 2020 (hereinafter “Second GCA Report"), ¶ 33 (amending GCA's Ukrainian valuation from USD 4,793.5 million to USD 4,822.5 million). ↩

⁴⁰ Reply on Quantum, ¶ 180 (amending the pleading for this head of damages from USD 327,406,854 to USD 331,904,089). ↩

⁴¹ Respondent's Opening Presentation, Hearing on Quantum, slide 55. ↩

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Russian scenario (USD 4,810m)

[Image of a pie chart]

• Upstream Assets (67.2%)
• Midstream Assets (14.1%)
• Service Assets (11%)
• LDCs (0.2%)
• Debts (0.5%)
• Non-Oil & Gas (0.1%)
• Consequential losses (6.9%)

Ukrainian scenario (USD 5,185m)

[Image of a pie chart]

• Upstream Assets (69.5%)
• Midstream Assets (13.1%)
• Service Assets (10.2%)
• LDCs (0.2%)
• Debts (0.5%)
• Non-Oil & Gas (0.1%)
• Consequential losses (6.4%)

PART 6 - THE PARTIES' REQUESTS FOR RELIEF

The Claimants' Request for Relief

291. In the Memorial on Quantum, the Claimants request that the Tribunal render an award:

(a) Ordering the Russian Federation to pay compensation for the injury to Naftogaz equal to USD 5,152,190,215, payable to each Claimant in the amount specified at paragraph 110 [of the Memorial on Quantum];

(b) Ordering the Russian Federation to pay interest on any amount awarded at 9 percent, compounding monthly, from 18 March 2014 until the date of payment;

(c) Ordering the Russian Federation to pay Naftogaz's costs in these arbitration proceedings, including all attorneys' fees and expert witness fees, in an amount to be specified at a later date, together with interest thereon;

(d) Ordering the Russian Federation alone to bear the responsibility for compensating the Tribunal, the Appointing Authority, and the Permanent Court of Arbitration, and reimburse Naftogaz for any compensation that it has advanced to the Tribunal, the Appointing Authority, and/or the Permanent Court of Arbitration, with interest thereon; and

(e) Ordering any other relief that the Tribunal may deem appropriate, including, but not limited to, any additional consequential losses for which Naftogaz in this

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submission has reserved the right to claim and arising as a result of the Russian Federation's unlawful expropriation of Claimants' investments.⁴²

292. In both the Reply on Quantum and the Response to Matters Raised in the Rejoinder, the Claimants request that the Tribunal render an award:

(a) Ordering the Russian Federation to pay USD 5.185 billion to fully compensate Naftogaz for its loss;

(b) Ordering the Russian Federation to pay interest on this amount at a rate of 9 percent compounded monthly from 18 March 2014 (the expropriation date) until payment is made;

(c) Ordering the Russian Federation to pay Naftogaz's costs in the arbitration, including attorneys' fees, expert witness fees, the Tribunal's fees, the appointing authority's fees, and the PCA fees; and

(d) [Ordering] any additional relief that the Tribunal finds appropriate.⁴³

The Respondent's Request for Relief

293. In the Amended Counter-Memorial, the Rejoinder on Quantum, and the Sur-Rebuttal on Quantum the Respondent requests that the Tribunal render an award:

(a) Dismissing the Claimants' claims; and

(b) Ordering the Claimants to pay all costs incurred in connection with this arbitration including their own costs, the fees and expenses of the Tribunal and of the Permanent Court of Arbitration, along with all costs and expenses incurred by the Russian Federation including the fees and expenses of its legal counsel, experts and consultants, plus interest thereon as of the date of the final award at such commercial rate as the Tribunal thinks fit and on a compound basis.⁴⁴

PART 7 - DEFINITION OF INVESTMENT

294. The BIT provides the following definition for the term “investment”:⁴⁵

For the purposes of this Agreement:

1. The term "investments” means any kind of tangible and intangible assets which are invested by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with its legislation, including:

⁴² Memorial on Quantum, ¶ 112. ↩

⁴³ Reply on Quantum, ¶ 261; Claimants' Response to Matters Raised in the Rejoinder, dated 7 September 2020 (hereinafter “Response to Matters Raised in the Rejoinder”), ¶ 72. ↩

⁴⁴ AmCM, ¶ 563; Rejoinder on Quantum, ¶ 866; Sur-Rebuttal on Quantum, dated 16 November 2020 (hereinafter "Sur-Rebuttal on Quantum”), ¶ 202. ↩

⁴⁵ Agreement between the Russian Federation and the Cabinet of Ministers of Ukraine on the Encouragement and Mutual Protection of Investments, Art. 1(1), 27 November 1998 (CLA-99/CLA-169) (hereinafter “BIT”). ↩

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a) movable and immovable property, as well as any other related property rights;

b) monetary funds, as well as securities, commitments, stock and other forms of participation;

c) intellectual property rights, including copyrights and related rights, trademarks, rights to inventions, industrial designs, models, as well as technical processes and knowhow;

d) rights to engage in commercial activity, including rights to the exploration, development and exploitation of natural resources.

Any alteration of the type of investments in which the assets are invested shall not affect their nature as investments, provided that such alteration is not contrary to legislation of a Contracting Party in the territory of which the investments were made. (emphasis added)

295. Thus, “investments” are defined as “assets” (of which a non-exhaustive list of examples is given after the key word "including") but subject to Article 12 of the BIT which reads as follows:⁴⁶

Article 12

Application of the Agreement

This Agreement shall apply to all investments made by investors of one Contracting Party in the territory of the other Contracting Party, on or after January 1, 1992.

Thus, protection is given only to:

1. those assets which are invested by an investor of a Contracting Party;
2. in the territory of the other Contracting Party;
3. in accordance with the legislation of the other Contracting Party;
4. after 1 January 1992.

296. The Hague Court of Appeal determined that assets had indeed been invested by the Claimants being investors of a Contracting Party, in the territory of the other Contracting Party in

⁴⁶ BIT, Art. 12 (CLA-99/CLA-169). ↩

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accordance with the legislation of the other Contracting Party⁴⁷ without, as stated, “passing judgment on the issue of which investments are eligible for protection.”⁴⁸

⁴⁷ Judgment of The Hague Court of Appeal, dated 19 July 2022 (hereinafter “Judgment of The Hague Court of Appeal"), which concluded that: ↩

5.8.8. The investments of Naftogaz et al., even though they were initially made in Ukraine, fall within the notion of investments as defined in Article 1 paragraph 1 of the [BIT].

5.8.8.2 In the opinion of the Court of Appeal, Fortuin's expert opinion shows that it does not follow from the wording of the authentic language versions, grammatically and/or syntactically, that the investment made on the territory of the other contracting party should take place simultaneously with the initial investment act;

5.8.8.3 That the investments made before January 1, 1992, do not fall under the protection of the treaty seems obvious to the extent that both Ukraine and the Russian Federation were part of the Soviet Union until January 1, 1992. The treaty thus contains a "hard" limit, a backstop, in time: investments made before that date do not qualify for protection. The fact that the treaty does not speak of the mere “holding or possessing of investments" is in line with the intention that properly acquired during the Soviet period should fall outside the scope of the treaty, which intention, in the Court of Appeal's opinion, is embodied in the BIT.

(a) The Hague Court of Appeal concluded that Naftogaz was an "Investor” within the scope of Article 1(2) of the BIT:

5.9.6 The requirement in Article 1(2) of the [BIT] that the natural person or the legal entity is competent in accordance with its legislation to make investments in the territory of the other Contracting Party means (only) that the investor must be competent under the laws of its own country to make investments in the territory of the other Contracting Party. That Naftogaz et al. were entitled to do so is not in dispute. Furthermore, the Court is of the opinion that holding the investments in Crimea after the incorporation of Crimea is not contrary to regulations of Ukraine. The fact that Ukraine does not formally consider these investments to be foreign investments does not make Naftogaz et al. unauthorized to hold these investments. As discussed above, Ukraine recognizes that the Russian Federation exercises de facto control over Crimea and, in that regard, Ukraine assumes that it is the Russian Federation that bears responsibility for these investments in the sense that the obligation - for example - not to proceed to expropriation without adequate compensation now rests with the Russian Federation.

(c) Did Naftogaz Act Illegally in Making Their Investments?

5.10.1 The Russian Federation withdrew its appeal to the lack of jurisdiction of the Arbitral Tribunal on account of the illegality of some of the investments made by Naftogaz et al. at the pleading stage (pleading note, nr. 22). Therefore, this part does not require further consideration.

The Partial Award, 22 February 2019, held in part as follows:

*****

182. Accordingly, the Claimants are entitled to invoke the protection of the BIT (jurisdiction ratione personae) as legally constituted corporate entities under Ukrainian law legally authorized under Ukrainian law to invest both in Ukraine and Russia and at the time of the seizure effective 18 March 2014 they all held assets in the territory of Russia.

*****

The uncontradicted evidence of Dr. Palishvili [sic], the Claimants' expert on Ukrainian law, is that the investments were in accordance with Ukrainian legislation when they were originally made, and thereafter so long as Ukraine controlled Crimea; and the investments were made in accordance with Russian legislation applicable to Crimea when Russia annexed Crimea effective 18 March 2014.

⁴⁸ Judgment of The Hague Court of Appeal, ¶ 5.7.7. ↩

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PART 8 - THE EFFECT OF ARTICLE 12 OF THE BIT ON THE SCOPE OF THE PROTECTED INVESTMENTS

297. The principal battleground in relation to the protection (or lack thereof) of the Claimants' assets turns on Article 12 of the BIT which for convenience is reproduced below:

Article 12

Application of the Agreement

This Agreement shall apply to all investments made by investors of one Contracting Party in the territory of the other Contracting Party, on or after January 1, 1992.

298. The Hague Court of Appeal ruled:

5.7.5.1 The Court of Appeal is of the opinion that Article 12 [BIT] should be interpreted in such a way that only investments made on or after 1 January 1992 fall within the scope of protection of the [BIT].

299. As stated, the Tribunal's earlier Partial Award held that:

141. Article 12 of the BIT limits protection to “investments” made by investors of one Contracting Party in the territory of the other Contracting Party, on or after 1 January 1992.⁴⁹

300. By way of further elaboration, the Judgment of The Hague Court of Appeal summarised the opposing positions of the Claimants and the Russian Federation in part as follows:

The Position of the Russian Federation

5.7.2 The Russian Federation considers that the correct interpretation of Article 12 [BIT] is to protect only investments actively made on or after

⁴⁹ The Partial Award by majority also held: ↩

175. The Treaty is not without temporal limitations. Article 12 restricts protection to investments made "on or after January 1, 1992," being date of the breakup of the Soviet Union. Other than 1 January 1992, the parties chose not to impose any further temporal limit on protected investments, leaving it to a claimant to establish that Crimea was Russian “territory” at the time of the alleged treaty breach by Russia and at the time of the initiation of arbitration.

*****

199. Moreover, to hold that the circumstances of the original investment control the application of the BIT undermines the purpose of the Treaty which is not only to attract foreign investments but to protect existing investments which, at the time of seizure, our “foreign investments" at the mercy of the state which effects the compulsory acquisition.

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January 1, 1992, and thus not investments that simply existed at the time of a violation of the [BIT] committed on or after January 1, 1992, and an arbitration commenced after that date. In doing so, the Russian Federation takes the position that Article 12 [BIT] must also be interpreted pursuant to Article 31 VCLT on the basis of (i) the ordinary meaning and context of Article 12 and (ii) the object and purpose of the [BIT] and the good faith interpretation.

The Position of Naftogaz

5.7.3 Naftogaz et al. took the position that their investments were made on the territory of the Russian Federation on March 18, 2014, and thus after January 1, 1992;

5.7.3.2 The fact that assets forming the basis of the investments were created, discovered or acquired before January 1, 1992 does not mean that there was already an investment [in the territory of the other contracting party] at that point in time. The Russian Federation's assertion that there must be a capital injection before there can be an investment finds no support in the broad asset-based definition of the [BIT], nor does the requirement that there be an active investment.

5.7.3.3 Prior to 1 January 1992, there could be no Ukrainian or Russian investors or investments in the territory of either the Russian Federation or Ukraine.

5.7.3.4 The Russian Federation's interpretation would result in Soviet-era assets not being protected by the [BIT]. This "would dramatically narrow the BIT's application" and also contradicts the position taken by Russian state-owned enterprises and state bodies in other arbitrations, such as Gazprom and Tatneft, Russian state energy companies. (emphasis added)

301. The Hague Court of Appeal then stated its opinion:

5.7.5.7 In light of the intention of the parties and the background to the provision, the text of Article 12 [BIT] should be interpreted to mean that only investments actually made after January 1, 1992 are subject to the scope of the [BIT]. The interpretation favoured by Naftogaz c.s., which protects investments regardless of when they are made once they meet all the requirements, makes the provision redundant, and cannot have been the intention.

5.7.5.8 Therefore, the [BIT] does not apply to investments made before 1 January 1992, meaning that Naftogaz et al. cannot obtain protection under the [BIT] if they [i.e., the Claimant Naftogaz, et al.] made their investments before that date. It should be borne in mind, however, that investments may count as having been made after 1 January 1992 if after 1992 Naftogaz c.s. bought (parts of) investments made by others or if after January 1, 1992 they made an expansion to investments made by others. In the latter case, [BIT] applies only to the expansion made after 1 January 1992.

302. In the result, The Hague Court of Appeal rejected both the initial position of Naftogaz that “investments” are “made” only when all BIT requirements were met (which could not have been

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before annexation on 18 March 2014),⁵⁰ as well as the Russian Federation's position that investments originally made in Ukraine as “domestic” could not qualify as “foreign” investments under the BIT.⁵¹ Moreover, according to the Russian Federation, assets developed in the Soviet-

⁵⁰ The Hague Court of Appeal stated: ↩

5.7.5.5 In the interpretation favoured by Naftogaz et al. in which investments are only "made" when all the requirements for “investments" are met, including therefore possibly investments for which actions have already been taken before 1992, but which at that time did not yet meet other requirements (such as on the "territory" of the other state), the backstop in Article 12 would become meaningless (no effet utile), because in this way all “old” investments can eventually come under the scope of protection.

5.7.5.6 The described background to Article 12 is also evident from the travaux préparatoires, as outlined by the Russian Federation and as such not contradicted by Naftogaz et al. and as confirmed by the non- disputing party submission of Ukraine. The letter of 11 July 2008 on the BIT with Azerbaijan cited by the Russian Federation states, inter alia:

"Russia presumes it is more reasonable to apply the treaty only to those investments of investors of both countries which had been carried out on the territory of Russia and Azerbaijan since these countries gained their sovereignty after the dissolution of the USSR, i.e. since their emergence on the international stage as new subjects of international law. To this end, we have suggested a specific date - 1 January 1992 (...)."

In the same manner, Ukraine expressed itself in its non-disputing party submission in the arbitration proceedings that are the subject of these setting aside and revocation proceedings. Ukraine there states (RF 10 (N), para. 36):

"Like most bilateral investment treaties of its era, the Treaty was written to protect pre-existing investments (covering the period from 1992, shortly after the dissolution of the USSR, to 1998, when the Treaty was concluded. (...) Under the Treaty, so long as the investment was made after 1 January 1992, it is irrelevant whether the Treaty applied at the time."

⁵¹ The Hague Court of Appeal held: ↩

5.8.8.5 Thus, although investments made before January 1, 1992, are excluded from the treaty, the wording of the treaty does not allow to read into it any temporal requirements for investments made after that date. In other words, it does not follow from the literal wording of the treaty that, in order to qualify for protection, investments must already have been in the territory of the other contracting state at the time of the investment.

*****

5.8.9 Given the object and purpose of the 1998 BIT as discussed above, the fact that the investments must have been made in accordance with the legislation of the host state does not entail a requirement of simultaneity. The determination of whether the investments comply with Russian legislation can be made with the date of incorporation of Crimea by the Russian Federation as the time of assessment. This assessment was also made by the majority of the Arbitral Tribunal as per this date in its Partial Award of February 22, 2019, guided by the expert opinions of Dr. Paliashvili and Prof. Paul B. Stephan. Prof. Stephan indicated - in brief - that permits granted under Ukrainian law remained valid in Crimea after Russia annexed that territory. Russian law further required Ukrainian firms to eventually organize as Russian entities or register as branches of foreign firms operating on Russian territory.

5.8.10 The Court of Appeal agrees with the judgments of the Swiss Federal Supreme Court of 16 October 2018 which held:

"We cannot concur with the appellant when it argues that the very wording of Art. 1(1) IPA 1998 indicates that the agreement only protects investments that, at the time of their making, were made

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era but not acquired by the Claimants until after 1 January 1992 could not be the subject of compensation.

303. It is significant, in the majority view, that The Hague Court of Appeal said “Naftogaz cannot obtain protection under the BIT if they made their investments before that date."⁵² The focus is on acquisition by the Claimants (none of which were incorporated before 1998), not the preceding history of owners and licenses.

304. It is significant, in the majority view, that The Hague Court of Appeal refers in paragraph 5.7.5.1 to “investments made” not “assets created” or “assets developed".

305. Following its general discussion of jurisdiction, The Hague Court of Appeal identified the task now before this Tribunal:

5.7.7 Naftogaz et al. argued in the alternative that all investments were made after 1992. This was disputed by the Russian Federation. In the course of the oral argument the Russian Federation invoked the principle of unity of investment which would mean that the entire investment of Naftogaz et al. in the gas and oil group had been made before January 1, 1992. Both parties submitted documents from the quantum phase of the arbitration in support of their positions.

Since this shows that the discussion of when the investments were made is still being conducted in the arbitration proceedings, the court will refrain from passing judgment on the issue of which investments are eligible for protection. (emphasis added)

306. The Hague Court of Appeal thus confirmed the Tribunal's jurisdiction to determine which assets are “protected investments” and which are not. Our colleague, Professor Stanivuković, perceives jurisdictional issues at every step of the inquiry into quantum, but the majority view is that what is involved at this stage is the exercise of the Tribunal's jurisdiction not its existence.

by an investor from one Contracting State on the territory of another Contracting State: while by contrast, investments that were originally made in the investor's home country and “are located in the territory of the host country at a later time only due to a boundary change” do not fall under the protection of the 1998 Investment Protection Agreement."

5.8.11 The cases that do contain a direct analogy with the present case are the arbitrations instituted by other Ukrainian investors as a result of the events in Crimea. In those cases, arbitral tribunals with different compositions have, without exception, held that the [BIT] applies to (originally domestic) Ukrainian investments that, due to the incorporation of Crimea have come to lie within the territory of the Russian Federation.

⁵² Judgment of The Hague Court of Appeal, ¶ 5.7.5.8. ↩

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307. In Procedural Order No. 21, dated 5 December 2022, the majority of the Tribunal held:

4.4 ...the bifurcation of the arbitral proceedings ensured that the Partial Award dealt with Article 12 in terms of jurisdiction and did not discuss Article 12 in terms of quantum because quantum issues had been excluded from that stage of the proceedings. Professor Stanivuković indicates at paragraph 1.3 of her concurring reasons that [...] in its quantum award, the Tribunal must “decide which assets are eligible for protection." We are all agreed on that point.

If an asset does not meet the definition of a protected investment within the scope of Articles 1 and 12 of the BIT, it is non-compensable.

308. Accordingly, the principal Article 12 issues are:

1. whether the Claimants could have “made” investments before 1 January 1992 if the Claimants themselves did not exist until 1998;
2. whether the Claimants simply "acquired" assets by inheritance rather than "making" investments;
3. whether the Russian Federation is correct that Article 12 excludes the Upstream Assets discovered or initiated in the Soviet-era by Soviet entities;
4. whether it is correct that the “corporatization” of the Claimants as State-owned companies left the beneficial ownership of the transferred assets with the State, rather than with the joint stock companies themselves;
5. whether the FMV of the Claimants' corporate assets must be apportioned between the Claimants and their predecessors in title, and, if so, whether only the portion allocated to the Claimants should be awarded.

1. The Claimants Could Not Have “Made” Investments Before 1 January 1992 Since None of Them Existed Before 1998

309. The Claimants argue that they necessarily made all the expropriated investments after they came into existence in 1998. As stated in their Reply on Quantum:

229. Logically, the Claimants, as investors, could not have made their investments before their formation. To the extent that any of the assets underlying Naftogaz's

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expropriated investments existed before the Claimants' formation, they were owned by different legal entities. As a result, such assets could not be regarded as the Claimants' "investments,” since before 1998, the Claimants simply did not exist."⁵³ (emphasis added)

310. The Claimants are joint-stock companies created no earlier than 1998 to develop businesses formerly operated by Soviet-era State entities. The Claimants contend that they are “different legal entities” from their predecessors in title. The whole point of incorporation is to create a new and distinct corporate personality separate from its shareholders. As such, the new corporations were the sole owners of the assets they acquired. The process was described by the Claimants' legal expert, Dr. Paliashvili, as follows:

Also the new joint stock company acquires all kind of legal rights: it acquires permits, licences. In our case those were subsoil permits, those were pipeline licences, those were gas storage licences. Mr Geisinger yesterday mentioned the legal rights to permits and licences. And I just want to point out that under Ukrainian law, the permits are issued only specifically to the applicant, and only the holder of the permits can operate this permit; they cannot be operated by any third parties. So the legal rights in the permits are in the name of the joint stock company. When the permit is obtained and when the permit is operated by the holder, by the permit-holder, there is the whole array of payments, mandatory payments that the holder of the permit has to make to the state budget.⁵⁴ (emphasis added)

311. The Respondent's legal expert, Professor Vygovskyy, testified that despite "corporatization”, each of the Claimants was not “in fact a new legal entity” but “part of the same legal entity though in a new corporate form":

Following corporatisation, corporate enterprises did not become the owners of the assets obtained from the state. The state remained the owner of the assets assigned to such enterprises, usually assigned for their use in economic activities. Transfer of the state property of the charter capital of newly created joint stock companies, in particular those created by means of corporatisation, did not constitute alienation of this property from the state property into the private ownership. And if the state property was assigned to a corporatised state enterprise based on the right of economic authority, so this property usually, after corporatisation, was operated on the basis of this right. Therefore, I concluded that State Joint Stock Company Chornomornaftogaz, which was founded on the basis of the assets of State Production Enterprise Chornomornaftogaz, was not in fact a new

⁵³ Reply on Quantum, ¶ 229. ↩

⁵⁴ Tr., Hearing on Quantum, Day 2, 13:6-20. ↩

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legal entity, created from scratch in 1998, but part of the same legal entity, though in a new corporate form.⁵⁵ (emphasis added)

The Ruling of the Tribunal Majority on the Effect of Incorporation

312. The Tribunal majority does not accept Professor Vygovskyy's position that the Claimants are not “new legal entities” but “part of the same [Soviet-era] legal entity though in new corporate form.” (emphasis added) Such a novel proposition, for which Professor Vygovskyy cited no persuasive authority, contradicts the basic theory of incorporation and would destroy most of the advantages of incorporation. As explained by Dr. Paliashvili:

So the joint stock companies where the state was the sole shareholder, as any other joint stock company, can own assets or can operate assets under different legal regimes. And here I have several buckets and I just want to explain each of them. So we already established that the state contributed to joint stock company, into its charter capital, certain assets. So the joint stock company is the owner of these assets that were contributed to its charter capital unless specifically designated otherwise. That's the first bucket. Then the joint stock company starts operations. It makes money, it produces revenues, and then is using these revenues to acquire new assets or to enhance the assets it received from the state, like make them more modern, modernise, et cetera. So these new assets are in this bucket.⁵⁶

313. Moreover, as explained by Dr. Paliashvili, while the State is the regulator of the new corporations, the State neither retains nor enjoys corporate benefits beyond the usual shareholder rights and remedies.⁵⁷ There is no evidence of a "special designation otherwise” (to use

⁵⁵ Tr., Hearing on Quantum, Day 2, 98:20-99:14. ↩

⁵⁶ Tr., Hearing on Quantum, Day 2, 12:14-13:5. ↩

⁵⁷ Tr., Hearing on Quantum, Day 2, 70:20-71:24: ↩

THE PRESIDENT: My question is whether, in the circumstances that are being discussed here, the state has any authority other than as shareholder unless it exercises some kind of regulatory power. Is there anything special about the state when it is acting as the sole shareholder?

A. The state wears two hats which are very distinct. One hat is a sovereign, where the state exercises its sovereign rights: it legislates, it establishes regulatory regime, it issues permits, et cetera. And then the other hat is when the state is acting in the civil law sphere, or in this case specifically in the corporate law sphere. So this other hat grants the state the same rights as it would grant to any other shareholder. So when the state exercises its corporate governance rights, it exercises them through the system of corporate governance legislation. And the Ministry of Justice letter said that there is no law that regulates how the state should exercise its corporate governance powers; it's just said it's a general regime for all joint stock companies. Now, when the state wears the hat of a sovereign, the state adopts the laws that can influence Naftogaz, as any other legal entity, through the legislation or through the regulatory normative acts or through all kinds of regulatory actions. So the state wears two hats, but in the law they are very distinguished from each other: they are in separate systems.

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Dr. Paliashvili's expression) when the State assets were transferred to the Naftogaz entities in exchange for shares. The benefits of share ownership do not include ownership of the corporation's assets.

314. The most basic principle of corporate law is that the corporation, once established, has a legal personality separate from its shareholders. The Russian Federation relied on the principle of separate corporate personality in Vladimir Berschader and Moïse Berschader v. Russian Federation⁵⁸ although it takes a contrary position in this case.

315. The assets of the corporation belong to the corporation (unless, as Dr. Paliashvili testified, there is some “special designation” or arrangement not present here). Corporate assets are not owned by the shareholders. Thus, the corporation is not liable for the debts of the shareholders and the shareholders' assets cannot be seized to satisfy the debts of the corporation. The Claimants' legal expert, Dr. Paliashvili, testified in her first report that each Claimant is truly a separate "legal entity":

51. Based on my review of the documents available in public sources, and of the documents provided by Claimants, I conclude that each Claimant is a legal entity, constituted in accordance with the legislation in force in the territory of Ukraine. Each Claimant has been duly incorporated, and has satisfied the requirements for operating as a legal entity, in accordance with the laws of Ukraine in effect at the time of its incorporation and at the material time, and continues to be validly incorporated and in compliance with the said requirements until the present time.⁵⁹ (emphasis added)

316. As the Claimants were only created in 1998 and onwards, Dr. Paliashvili expressed the view that their investments could not have been "made" at an earlier date. The Claimants could not have "made" investments before their creation.

I want to start with the imperative rule of Ukrainian law. Legal capacity of a legal entity arises as of the moment of its establishment. And under Ukrainian law, legal capacity means the capacity of a legal entity to acquire rights and obligations. It

⁵⁸ Vladimir Berschader and Moïse Berschader v. Russian Federation, SCC Case No. 080/2004, Award, 21 April 2006 (RLA-107). Here, the claimants owned shares in a Belgian company that had property expropriated in Russia. The tribunal found that the company may have a cause of action, but that the company's right to pursue a cause of action did not extend to its shareholders. ↩
⁵⁹ First Expert Report of Dr. Irina Paliashvili, dated 14 September 2017 (hereinafter “First Paliashvili Report”), ¶ 51. ↩

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doesn't matter through which mechanism the legal capacity was acquired, but it only arises from the moment the company was established.⁶⁰

317. The majority accepts Dr. Paliashvili's expert evidence. The Claimants were constituted as "new legal entities” and are not “part of the same legal entity" as their predecessors in title.

2. The “Legal Succession” Issue

318. The Claimants acquired assets (including Special Permits) from the State and other sources from 1998 until 2014. In part, State assets were acquired at the outset as part of the Claimants' "Charter Capital” for which they paid the Government in shares. The investment was “made” within the meaning of Article 12 of the BIT when the Claimants paid for the assets with their shares. Additional assets were acquired in the ordinary course of business. Orthodox corporate law suggests these assets became protected investments within the scope of Article 1 of the BIT at the time of the investment.

319. The Russian Federation questions whether the Claimants actually acquired any property interest from the State as a result of “legal succession” as described by Professor Vygovskyy, or just some sort of ill-defined operating authority:

State Joint Stock Company Chornomornaftogaz was created on the basis of pre- existing property and pre-existing scope of rights and obligations to which it succeeded from its legal predecessor.⁶¹ (emphasis added)

320. Professor Vygovskyy expanded on what he meant by legal “succession" in his opening presentation in terms of a "complete" transfer to the “legal successor”.⁶²

(Slide 9) Universal legal succession was the predominant feature of corporatization, where the complete scope of rights and obligations is transferred to the legal successor. And since the moment of the state registration of a joint stock company established within the process of corporatization, the assets and liabilities of a corporatized entity were transferred to this newly formed joint stock company and that joint stock

⁶⁰ Tr., Hearing on Quantum, Day 2, 14:9-16. ↩
⁶¹ Tr., Hearing on Quantum, Day 2, 99:14-18. ↩
⁶² Tr., Hearing on Quantum, Day 2, 95:9-19. ↩

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company became the legal successor in respect to such rights and obligations of the corporatized enterprise. (emphasis added)

321. Despite this general description (with which the Claimants agree), Professor Vygovskyy advanced the view that a different rule applies where the “corporatized entity” is owned by the State. In that case, the State-owned entity does not acquire ownership of “transferred assets”. Ownership remains with the State and the corporations only operate the assets by delegation of the State's "economic authority”.

322. The Claimants contend that Professor Vygovskyy's theory of “legal non-succession succession" is contradicted by the relevant Ukrainian case law, which establishes that once the State transferred assets to the Joint Stock Company, the State no longer had a proprietary interest in those assets.⁶³ Thus, in cross-examination, Professor Vygovskyy was asked about an apparent

⁶³ See, e.g., Judgment of the Commercial Court of Kyiv City in Case No. 910/10255/13, 27 June 2013, T-0005- T-0006 (CE-1263): ↩

From the time of the transfer of property contributions to the company, the founders of the joint-stock company cease being the owners of the property that makes up their contributions and instead become owners of shares issued by the company.

*****

[A] joint-stock company in which the state owns 100% of the company shares the state - of an acquired property rights - is entitled to participate in the management of NJSC Naftogaz ... and receive dividends from its operations; however, the owner of the property contributed to the authorized capital of NJSC Naftogaz of Ukraine is the latter, except for the property made available to it by the state for use and which has not been contributed to the authorized capital of the company.

*****

[T]he property contributed by the defendant named in the original claim [Naftogaz] as well as the property acquired, manufactured, or obtained by [UGV] from other sources ... is under the ownership of [UGV], while...Naftogaz of Ukraine in turn owns only corporate rights in the authorized capital of [UGV].

See also Commercial Court of Kyiv, Judgment in Case No. 910/18227/13, 25 December 2013 (CE-1231), which shows the same discussion about ownership found in Judgment of the Commercial Court of Kyiv City in Case No. 910/10255/13, 27 June 2013 (CE-1263).

See finally Ruling of the High Administrative Court of Ukraine in Case No. 826/4842/14, 31 March 2015, T-0004 (CE-1265):

[S]ince 1998 these premises are not under state ownership because the building in dispute became the property of [NJSC] Naftogaz of Ukraine after being contributed to its authorized capital stock and later [it] became the property of PJSC [UGV] after being contributed to the authorized capital stock of JSC [UGV]

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inconsistency between his evidence of “legal non-succession succession” and his academic writing where he wrote:⁶⁴

The main function of the charter capital, as follows from Part 1 of Art. 14 of the Law [on Joint Stock Companies], is to determine the minimum size of the company's property, which guarantees the interests of its creditors. It should be emphasized that the national legislation has adopted the nominal concept of charter capital, where it is primarily an indicator, the value of which is associated with certain legal consequences, rather than a set of real property that must be owned by the company during its existence; the property that the founders (shareholders) transfer to a joint stock company as a payment for the shares, becomes the property owned by this company, which it has the right to dispose of at its own discretion. (emphasis added)

323. Professor Vygovskyy was cross-examined on his text as follows:

Q. Well, this is a chapter on the "Capital of Joint-Stock Companies." Is there anywhere in this paragraph where you specifically refer to this exception that you state to this for when the state is sole shareholder of the JSC?

A. Well, you see, this law -- this book in particular was commentary of the existing provisions in the Law on Joint Stock Companies. And since there are no and there were no specific provisions as to the legal regime of property used by state joint stock companies, so there is nothing in this book, there is no commentaries in this book on this issue.

Q. Okay, thank you.⁶⁵ (emphasis added)

324. However, Professor Vygovskyy's acknowledgment that “[t]here were no specific legislative provision as to the legal regime of property used by State joint stock companies” left his opinion essentially bereft of any supporting authority.

325. Professor Vygovskyy agreed that ordinarily when founders transfer assets to a corporation in exchange for shares, there is a presumption the founders intended “the property" to pass. However, he testified that in the case of State entities there is no such presumption.⁶⁶ Where the

⁶⁴ O Vygovskyy, Novelties of Corporate Legislation: Academic and Practical Commentary on the Law of "on Joint Stock Companies” (2009) (CE-1267). ↩
⁶⁵ Tr., Hearing on Quantum, Day 2, 136:21-137:8. ↩
⁶⁶ Tr., Hearing on Quantum, Day 2, 155:15-156:11: ↩

A. Yes. I meant that if we speak about establishment of an ordinary, let's say, joint stock company by private persons, by legal entities, for example, by individuals, so these relations are covered by Law on Commercial Entities, then applicable by Civil Code, Commercial Code of Ukraine. So these are civil law relations, because in this case ordinary, standard joint stock companies are established by private entities. In case of

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State is the sole shareholder, civil law relations do not apply. Rather, the situation should be looked at through the lens of either public law or administrative law.

326. In effect, Professor Vygovskyy characterizes the post-Soviet situation in the case of State- owned corporations in terms used by Dr. Paliashvili to describe the Soviet system where “all the assets were owned by the state ... and mostly operated by state enterprises.”⁶⁷

The Tribunal Majority Ruling on “Legal Succession” of Property Acquired by the Claimants from the State

327. The Tribunal majority accepts the evidence of Dr. Paliashvili that the “legal succession" of the Claimants to State property by way of exchange for shares was a real transfer of the complete “property interest”.

328. The Tribunal majority rejects Professor Vygovskyy's view that the purported “legal succession" was not in fact a “succession” but essentially a transfer of operating rights. As Dr. Paliashvili testified, “the joint stock company is the owner of these assets that were contributed to its charter capital unless specifically designated otherwise”⁶⁸ and, as mentioned, here there are no designations otherwise.

329. Professor Vygovskyy's theory of “legal succession" is in fact a denial of “succession” because the property interest allegedly transferred remains with the State transferor and does not “succeed” to the joint stock company. But this argument, in the majority view, is:

Naftogaz Group, in particular in relation to state joint stock companies which were established on the basis of resolution of Cabinet of Ministers of Ukraine or other competent state authorities within the administrative order, within the regulatory powers of the state, I think that in this case we deal not with civil law relations. These are public law relations, because these companies were established by the will of the state, within the public powers and authorities of the state. So I think that this is a case for public law relations, and there is no such presumption in this relation, presumption of presence of this express willingness [to transfer this property into ownership].

⁶⁷ Tr., Hearing on Quantum, Day 2, 7:19-24: “Until 30-plus years ago, under the Soviet system, all the commercial assets in the Soviet Union were owned by the state. In this included everything: land, real estate, vehicles, machinery, absolutely everything was owned by the state. Private entrepreneurship was a crime." See also Tr., Hearing on Quantum, Day 2, 8:3-10: “Locally, this property was assigned to the so-called “state enterprises” and I'm now pointing at those state enterprises. The state enterprises did not own anything; they only operated the assets which were assigned to them by the state. I started my career in the late 1980s in Kyiv as an in-house lawyer with one of such state enterprises, so I'm very familiar with this system." ↩
⁶⁸ Tr., Hearing on Quantum, Day 2, 12:21-23. ↩

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(a) inconsistent with Professor Vygovskyy's own general description of legal principle;

(b) not supported by legal authority;

(c) a denial of the basic doctrine of separate corporate personality but only in cases where the state is the shareholder; and/or

(d) a theory that the “investments" acquired by the Claimants were bereft of any investment value at the time of acquisition because, according to Professor Vygovskyy, value continues to be attributed to the State and not to the joint stock company, despite the fact (accepted by Professor Vygovskyy) that the joint stock company is the legal owner.⁶⁹

330. In the majority view, the Naftogaz corporations “bought” the Soviet-era assets with their shares. The State exchanged ownership rights for shareholder rights. At that stage, and not before, the assets became protected investments within the scope of Article 1 of the BIT.

331. The Russian Federation in its Sur-Rebuttal on Quantum states:

The Respondent's case is that, since the creation of the Claimants was simply a state-controlled restructuring of state-owned property, the Claimants themselves did not "make" any investment when they received property from this state upon their establishment. To use the analogy made in the Rejoinder on Quantum, when this state merely moves assets from its right pocket to its (newly created) left pocket, the left pocket cannot claim to have made an investment.⁷⁰ (emphasis added)

332. In the majority view, the Claimants did not simply “receive” property from the State. The property was purchased with Treasury Shares—a common feature of many incorporations.

333. There is no evidence of any “specific designations” in the case of the Claimants' assets acquired from the State to upset the usual rule of transfer of ownership. Professor Vygovskyy's

⁶⁹ Tr., Hearing on Quantum, Day 2, 12:14-13:20. ↩
⁷⁰ Sur-Rebuttal on Quantum, ¶ 67. ↩

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general theory of “legal non-succession succession” is at odds with the authorities on which he relied, as illustrated in his cross-examination:

Q. Professor Vygovskyy, you quoted this case. You quoted this case to support your view that there needs to be express willingness [of the state to part with ownership]. And in this same case, the court, literally in the same sentence, said that that express willingness is presumed. So I guess we could at least agree that in this court case that you cite, it says that there is presumption of the willingness of the founders to transfer such property directly into the company's ownership; correct?

A. This presumption exists only in case of civil law relations, but not in case of public law relations related to establishment of state entities.⁷¹

Nevertheless, Professor Vygovskyy was unable to point to any relevant legislative provision in the area of public law to support his proposed differentiation.

334. On the other hand, Dr. Paliashvili's evidence is corroborated by the corporate charters of the Claimants—for example, see:

4.2. The Company is the successor to the Chornomornaftogaz state production enterprise for oil and gas production, storage, and transportation.

4.3. The Company's property consists of fixed assets and working capital owned by it as well as assets whose value is reflected on the independent balance sheet of the Company.

4.4. The Company owns:

property transferred into its ownership by the Founder;

products made by the Company in the course of commercial operations;

income generated by its own commercial operations (including foreign trade provided for by these Articles of Association);

dividends accrued on shares (membership interests, equity units) that have been transferred to or are owned by the Company;

inventions, patents, or technologies resulting from the operations of the Company;

other property acquired in a way that does not contravene the law.

The risk associated with damage to or loss of its own property as well as property made available to it for use shall be borne by the Company. The Company shall

⁷¹ Tr., Hearing on Quantum, Day 2, 141:19-142:6. ↩

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possess, use, and dispose of property belonging to it under the right of ownership in accordance with its purpose and objects.⁷² (emphasis added)

335. In the view of the Tribunal majority, Dr. Paliashvili's testimony on these points should be preferred to that of Professor Vygovskyy because:

(a) he offers no support from the legislation or the case law for his “non-succession succession" theory;

(b) his theory is contradicted by the documents incorporating the Claimants;

(c) his concept of continuing State ownership contradicts the fundamental premise of corporate personality, which is that the transferor gets shares and the company owns the property in the transferred assets;

(d) there is no evidence that the transfer of assets to the joint stock companies was a sham nor that as a matter of law the property interest remained in the State transferor and rely on an “operating authority" conferred on the joint stock company.

336. Accordingly, looking only to assets acquired by the Claimants since their incorporation, and with full recognition of the 1 January 1992 “backstop” provided by Article 12 of the BIT, the Tribunal majority proceeds to the issue of quantification.

⁷² Charter of National Joint-Stock Company “Chornomornaftogaz”, 18 August 1998, T-0003 (CE-1229). See also Charter of PJSC "State Joint-Stock Company “Chornomornaftogaz", Arts. 3.1, 3.6, 6 March 2013 (CE-128-Am): ↩

3.1. The Company is considered established and acquires the rights of a legal entity from the date of its state registration.

*****

3.6. The Company is the owner of:

- property transferred to it by the founder and shareholder into ownership, as a contribution to the charter capital;

- products produced by the Company as a result of economic activity;

- income received from own economic activity (including foreign economic activity provided by this Statute);

- inventions, industrial designs, names, other objects of intellectual property rights, including technologies obtained as a result of the Company's activities. (emphasis added)

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PART 9 - QUANTIFICATION OF UPSTREAM ASSETS

337. The Upstream Assets represent about 70 percent of the value of the Claimants' claims. The Claimants assess their value at USD 3,606,000,000 (Ukrainian Scenario) or USD 3,321,000,000 (Russian Scenario).⁷³

338. The Upstream Assets consist of “rights to engage in commercial activity” within the scope of Article 1.1(d), specifically:

(a) Naftogaz's Special Permits ⁷⁴ acquired between 24 December 1999 and 27 December 2013;⁷⁵ and

(b) UGV's participatory interest in Joint Venture with CNG, between 24 December 1999 to 27 December 2013.⁷⁶

339. As stated, the Upstream Assets are defined by the Claimants as (1) “interests in special permits" and (2) “investments in the underlying oil and gas fields and prospects."⁷⁷

The Ruling of the Tribunal Majority on the Relevance of Sunk Costs

340. Our colleague, Professor Stanivuković, takes the view that Upstream Assets should be valued by apportioning as between the Claimants and their State predecessors in title the sunk costs in their historic exploration and development. She points out that under the Ukrainian Constitution, the land, its subsoil, and other natural resources within the territory of Ukraine, as well as its continental shelf and the exclusive maritime economic zone, are owned by the people of Ukraine.⁷⁸ State ownership of the assets is also confirmed in the Special Permits for the use of the Upstream Assets:

⁷³ Respondent's Opening Presentation, Hearing on Quantum, slide 59. ↩
⁷⁴ See, e.g., Special Permit No. 4125, 5 April 2012 (CE-109). ↩
⁷⁵ Claimants' Opening Presentation, Hearing on Quantum, slide 24. ↩
⁷⁶ Claimants' Opening Presentation, Hearing on Quantum, slide 25. ↩
⁷⁷ Memorial on Quantum, ¶¶ iii, 21, ¶ 53. ↩
⁷⁸ First Paliashvili Report, ¶ 67. ↩

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The subsoil belongs to the exclusive property of the people of Ukraine and shall be transferred to other parties for use only.⁷⁹

341. The majority agrees that the underlying resources are owned by the State. However, it notes that the Claimants make no claim to the underlying assets. Their “Upstream” investments are permits “for use only”, to exploit the resource and to profit thereby, as well as to invest pursuant to the licenses in developing the “underlying oil and gas fields and prospects.” The experts agree that the appropriate valuation methodology for Upstream Assets is the DCF method, derived from the analysis of present and future net income. In the view of the Tribunal majority, the source of past "sunk costs” is of no relevance to the quantification of current and future net income and the other steps in the DCF valuation.

342. The Claimants' claim with respect to the Upstream Assets is based squarely on Article 1.1(d) of the BIT which explicitly protects:

d) rights to engage in commercial activity, including rights to the exploration, development and exploitation of natural resources.

343. In buying from the Government the rights to “exploration and development” of the oil and gas reserves, the Claimants sought to generate profits from their “exploitation”; it is the anticipated income stream from that "exploitation" which is at the basis of the valuation of the claim. The "rights” were purchased in the way typical of the extractive industries, namely by fees and royalties and other terms of the respective licenses.

344. Our colleague, Professor Stanivuković, provides a list of economic activities which she states “can be considered as 'making an investment' in an oil and gas field":⁸⁰

(a) regional geological exploration works (involving basin analysis, play analysis and prospect analysis),

⁷⁹ See, e.g., Special Permit No. 3907 (Palasa Area), Art. 6(1), 22 December 2010 (CE-83). ↩
⁸⁰ Dissenting Opinion of Professor Maja Stanivuković, dated 8 February 2023 (hereinafter “Dissenting Opinion"), ¶ 23. ↩

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(b) drilling wells (prospecting or exploration drilling and appraisal drilling),

(c) development (drilling additional wells, constructing platforms, laying of intra-field pipelines, pipelines to shore, constructing compressor stations, onshore and offshore gas processing facilities, etc.),⁸¹ and

(d) production (management and control).⁸²

345. The evidence established that the Claimants, since 1998, have invested in the development of the resource (which is what the Special Permits contemplated). However, with respect, the approach adopted by our colleague conflates a claim for the value of the Special “Use” Permits with a claim to the value of the underlying resource itself.

346. The Claimants' quantum expert, GCA, valued the Upstream Assets based on their estimate of the future net income to be derived from the production and sale of hydrocarbons produced in those oil and gas fields, using a DCF analysis.⁸³ GCA observes that exploration costs are meaningless. For example, in 1982, BP spent USD 1 billion exploring and developing in Alaska and never got a drop of oil, resulting in a total write-off.⁸⁴

347. Our colleague points out in the Dissenting Opinion of Professor Dr. Maja Stanivuković to the Final Award, dated 8 February 2023 (the “Dissenting Opinion”), that the GCA approach proceeded:

without specifying the value of the interests in special permits on the one hand, and the value of the investments in the underlying oil and gas fields, and prospects, on the other hand. GCA's valuation fails to distinguish between the value of these two categories. It also fails to distinguish between the value of investments made before and after 1 January 1992. As a matter of fact, GCA's valuation does not value the Claimants' investments in oil and gas fields and prospects at all, but rather the value of the Upstream Assets as a package, i.e., the estimate of the future net income to be derived from the estimated production and sale of hydrocarbons produced in those oil and gas fields, based on a DCF analysis. There is no

⁸¹ Presentation of Dr. Grigory Vygon, Hearing on Quantum, slide 8; First GCA Report, ¶¶ 160, 200, Appendix 7, ¶¶ 6, 65, 73, 134, 151, 152, 325. ↩
⁸² First Expert Report of Vygon Consulting, dated 29 May 2020 (hereinafter “First Vygon Report"), ¶ 14. ↩
⁸³ First GCA Report, ¶ 14. ↩
⁸⁴ First GCA Report, ¶ 43. ↩

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indication of the value of the investments made to enable such production or of the amount paid by the Claimants to acquire the right to such production.⁸⁵

348. In the majority view, there were not “two categories” and there was no need to make the differentiation our colleague suggests. GCA assessed the present value of the “Use” permits as of the Valuation Date. There was no independent quantification of development costs incurred by them or their predecessors in title because such costs were incurred under the terms of the Special “Use” Permits. A separate claim for “sunk costs” under the “Use” permits would have been double counting.

The Ruling of the Tribunal Majority on Dr. Vygon's Concern About Lack of Evidence of Exploration Costs

349. In pursuit of his “historical cost” theory, Dr. Vygon looked at Soviet-era costs relying on undisclosed records of Rosgeolfond,⁸⁶ the accuracy of which is challenged by the Claimants. His position is that the Claimants' predecessors incurred development costs and these should be deducted from the present value of the “Use” Permits. The Respondent argues that in the absence of proof of the precise portion properly allocated post-1992 to the Claimants, the Claimants have failed to discharge their burden of proving the quantum of their claim. However, as noted above, the Claimants seek the FMV of the Special “Use” Permits as of the Valuation Date. Russia does not deny the existence of the Special Permits. Their quantum experts agree that the proper

⁸⁵ Dissenting Opinion, ¶ 20. See Rejoinder on Quantum, ¶ 353; Sur-Rebuttal on Quantum, ¶¶ 7, 143. ↩
⁸⁶ First Vygon Report, ¶ 83. Here, Dr. Vygon says that: ↩

Exploration works performed before 01.01.1992 can be divided into two groups:

Exploration surveys, which are aimed at understanding the geological structure of sedimentary basins and their parts, identifying oil and gas potential and priority areas for prospect analysis and detailed surveys carried out with a view to preparing the identified structure for prospecting drilling [...];

Prospecting and appraisal drilling. This stage of exploration works could be allocated to the specific fields [...].

Furthermore, he states:

The actual costs of exploration works in Soviet roubles are converted into US dollars at the official average exchange rate during the year of work performance;

The costs of these works in US dollars are then revaluated in prices as of the VD, by indexing the costs in US dollars to account for inflation.

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methodology to assess their value is the DCF method, which is based on expected future income, not on past "sunk costs”.

350. In the majority view, the entire “historical cost” argument is misconceived, and the fact the Tribunal lacks the evidence to make such an apportionment in precise terms between Soviet and post-Soviet expenditures is irrelevant to the correct issue; that question, rather, is what were the Special "Use" Permits worth in an open and unrestricted market on the Valuation Date, 17/18 March 2014?

In the Majority View, the Claimants Actively “Made” an Investment in the Special Permits

351. It will be recalled that The Hague Court of Appeal declared the effect of Article 12 of the BIT to be as follows:

5.7.5.8 Therefore, the [BIT] does not apply to investments made before 1 January 1992, meaning that Naftogaz et al. cannot obtain protection under the [BIT] if they [i.e., the Claimants Naftogaz, et al.] made their investments before that date. It should be borne in mind, however, that investments may count as having been made after 1 January 1992 if after 1992 Naftogaz c.s. bought (parts of) investments made by others or if after January 1, 1992 they made an expansion to investments made by others. In the latter case, the [BIT] applies only to the expansion made after 1 January 1992.

352. The Claimants make no claim to having “made” investments before 1 January 1992. Their claim relates to the permits issued after 1998 that were valid and existing at the date of the unlawful expropriation.⁸⁷ Listed below (a list whose accuracy is agreed to by colleague Professor

⁸⁷ The evidence accepted by our colleague Professor Stanivuković is as follows: ↩

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Stanivuković) are all of the licenses and permits which were acquired post-1998 by “an array of payments". As Dr. Paliashvili put it:

When the permit is obtained and when the permit is operated by the holder, by the permit-holder, there is the whole array of payments, mandatory payments that the holder of the permit has to make to the state budget.⁸⁸

353. The fees for the Special Permits were paid. The Claimants' investments in Upstream Assets were therefore paid and “made” after 1 January 1992.

The Tribunal Majority on Compliance with Article 12 of the Treaty

354. It is true as the Russian Federation contends, that the date of 1 January 1992 was inserted as a backstop,⁸⁹ "chosen in order to exclude investments made during Soviet times, in accordance with the Russian Federation's general BIT practice with former USSR states.”⁹⁰ The Russian Federation cites the traveaux préparatoires dealing with the Russian Federation's BITs with Uzbekistan and Azerbaijan. The Russian Federation contends, and our colleague Professor Stanivuković agrees, that unless the Tribunal discounts the present value of the Special

⁸⁸ Tr., Hearing on Quantum, Day 2, 13:17-20. ↩
⁸⁹ Rejoinder on Quantum, ¶¶ 215 et seq. ↩
⁹⁰ Rejoinder on Quantum, ¶ 251. ↩

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Permits to account for development costs incurred in the Soviet-era and between 1992 and their acquisition by the Claimants, there is non-compliance with Article 12 and the Tribunal deprives itself of jurisdiction ratione materiae.

355. The Tribunal accepts as accurate the Respondent's explanation of the intent of Article 12 of the BIT. However, in the majority view, Article 12 does not require an artificial disaggregation of an asset's present day value into slices of various past contributions to the underlying resources because the Claimants make no claim to the underlying resources. The Russian Federation's own expert, Dr. Vygon, testified that in the real world, oil and gas assets are valued for what they are worth at the time of acquisition without regard to their cost history:

THE PRESIDENT: Alright. Dr Vygon, I just have one fairly basic question about the approach here, because I understand that your firm does a lot of consulting work in the oil industry. If, in the ordinary case, big oil company A wishes to purchase upstream assets from big oil company B, in making that valuation, do you look at the history or just the value of the assets as they are?

DR. VYGON: In case, in the market conditions, company A would be buying assets from company B, then naturally the value of those assets will be estimated at the valuation date, without the history.⁹¹ (emphasis added)

356. In the view of the Tribunal majority, FMV requires a hypothetical transaction under "market conditions”. The question is how much would a Willing Buyer pay for the assets (e.g., for the Special “Use” Permits) to a Willing Seller in an “open and unrestricted market”,⁹² which is the "hypothetical” situation contemplated by the Tribunal's question and Dr. Vygon's answer. The Claimants' investment in the Upstream Assets must be valued “without the history” in accordance with orthodox FMV methodology and the acknowledgment of Dr. Vygon.

⁹¹ Tr., Hearing on Quantum, Day 3, 70:18-71:5. ↩
⁹² American Society of Appraisers, International Glossary of Business Valuation Terms, “Fair Market Value", 44 (CE-912): ↩

...the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical will and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell when both have reasonable knowledge of the relevant facts.

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357. In pursuit of discounting present “use” value by subtracting earlier development costs, the Russian Federation relies on the analogy of a house built before 1992 but improved thereafter. Specifically, it says:

309. For instance, if the construction of a house commenced in 1991 was completed in 1993, the house as a whole cannot qualify in its entirety as a protected investment. What could potentially qualify as a protected investment in such a scenario is only the parts of the house built after 1 January 1992 (provided the new injections of money made after that date are sufficiently identified and proven, and provided, of course, that all other conditions of a protected investment under the BIT are met), to the exclusion of what was made before 1 January 1992. Put differently, any “fresh” post-1992 investment would not have the effect of transforming the entire investment (including the pre-1992 portion thereof) into a protected investment. In order for the investment to qualify in its entirety as a protected investment under the BIT, it must begin after 1 January 1992, and not only be completed after this date.⁹³

358. Of course, in terms of the Upstream Assets, the Claimants are not “buying” the house, they are renting the use of it. The cost of building or re-modeling the house and who paid what and when is not relevant to its present lease value in the eyes of the potential leaseholder. The “Use” assets were acquired after 1998. The limiting provisions of Article 12 have no relevance to the Upstream Assets, in the majority view.

359. Since the house analogy is based on the reasoning in Gold Reserve, it is worth recalling that in Gold Reserve itself, the claimant's USD 300 million investment triggered BIT protection valued in an award of USD 713 million (plus costs and interest) against Venezuela,⁹⁴ i.e., more

⁹³ Rejoinder on Quantum, ¶ 309. If the house burns down, the insurance company on the Russian Federation's theory need only pay the homeowner the value of his or her improvements, not the present FMV of the asset. ↩
⁹⁴ Gold Reserve Inc. v. The Bolivarian Republic of Venezuela [2016] EWHC 153 (Comm), Judgment, 2 February 2016, ¶ 50 (RLA-108) (hereinafter “Gold Reserve Inc. - Judgment"): ↩

This conclusion appears to me to be consistent with the object and purpose of the BIT. The preamble records that the promotion and protection of investments of investors of one Contracting Party in the territory of the other Contracting Party will be conducive to the stimulation of business initiative and to the development of economic cooperation between them. Concluding that GRI's contribution of [USD] 300 million to the Brisas Project in Venezuela enables it to qualify as an investor will serve to promote investment in Venezuela by Canadian enterprises. The investment of [USD] 300 million by a Canadian enterprise in a Venezuelan mining project which it owns or controls indirectly is surely the very sort of investment which the BIT was designed to encourage. (emphasis added)

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than double the amount invested by Gold Reserve Inc. The issue in an FMV analysis is, as its name suggests, present and current FMV.

360. Many of the cases relied upon by the Russian Federation to illustrate lack of investment involve jurisdictional objections ratione personae to “front companies" created for the sole purpose of BIT jurisdiction, while others involve indirect claims under a BIT.⁹⁵ Such fact situations have no relevance to the valuation of the Claimants' Special “Use” Permits.

361. The attempt to introduce “investment history” into the valuation exercise is antithetical to the whole theory and practice of FMV. There are numerous investor-State awards in respect of concessions in the oil and gas fields and mining deposits which are based on the FMV of the concessions (not the underlying resources) at the Valuation Date.⁹⁶ Such concessions are the

⁹⁵ Bolivarian Republic of Venezuela v. Serafin García Armas and Karina García Gruber, Cour d'Appel de Paris, Registration No. 15/01040, Decision, 25 April 2017 (RLA-30-Am). ↩

See Clorox Spain S.L. v. Bolivarian Republic of Venezuela, PCA Case No. 2015-30, Award, 20 May 2019 (later set aside by the Swiss Supreme Court) (RLA-32-Am). Clorox International is a U.S. company that invested in Venezuela in 1990, creating Clorox Venezuela. In 2011, Clorox International transferred its shares in Clorox Venezuela to a newly formed Spanish corporation, Clorox España. Clorox España then commenced an arbitration against Venezuela. The tribunal found that Clorox España was created only to take advantage of the Spain-Venezuela BIT of 1995, and that Clorox España itself did not invest in Venezuela.

See also Gold Reserve Inc. - Judgment (RLA-108). This was a case involving enforcement of an ICSID award. Gold Reserves (Venezuela) held rights to a Venezuelan mining concession. That company was a subsidiary of Gold Reserves (U.S.). GRI acquired Gold Reserves (U.S.) in a share swap. The concession then came under the control of GRI (Canada). The Canadian entity was used so that it would have the benefit of the Canada-Venezuela BIT. The Canadian corporation raised USD 300 million and invested it in the Venezuelan mining concession. In obiter dicta, Teare J. found that the passive ownership of the mining concession created by the share swap would have been insufficient to receive protection under the BIT. However, because GRI (Canada) invested [USD] 300 million, it had made an investment under the BIT.

See also Standard Chartered Bank v. United Republic of Tanzania (I), ICSID Case No. ARB/10/12, Award, 2 November 2012 (RLA-110); Alapli Elektrik B.V. v. Republic of Turkey, ICSID Case No. ARB/08/13, Excerpts of Award, 16 July 2012 (RLA-111); Ruby Roz Agricol and Kaseem Omar v. Republic of Kazakhstan, UNCITRAL, Award on Jurisdiction, 1 August 2013 (RLA-113) (hereinafter “Ruby Roz").

⁹⁶ See, e.g., Bear Creek Mining Corporation v. Republic of Perú, ICSID Case No. ARB/14/21, Award, 30 November 2017 (CLA-177); Crystallex International Corporation v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016 (CLA-182); Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award, 5 October 2012 (CLA-187) (hereinafter “Occidental"); Phillips Petroleum Co. Iran v. The Islamic Republic of Iran, The National Iranian Oil Company, Iran-US Claims Tribunal, Award No. 425-39-2, 29 June 1989, ¶ 79 (CLA-219) (hereinafter “Phillips"); Gold Reserve Inc. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/09/1, Award, 22 September 2014 (CLA-270 / RLA-45); Sapphire International Petroleum Ltd. v. National Iranian Oil Company, Award, 15 March 1963 (RLA-44); Chevron Corporation and Texaco Petroleum Corporation v. Republic of Ecuador, PCA Case No. 2007-02/AA277, Interim Award, 1 December 2008 (RLA-97); Mobil Exploration and Development ↩

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staple of the extractive industries. The parties to the BIT cannot have intended to exclude investments in the extraction industries from protection thereunder, and the Upstream Assets are to be valued precisely as “rights to prospecting, development and exploitation of natural resources" designated for protection in Article 1.1(d) of the BIT.

362. The question before the Tribunal is the value of the Claimants' Special Permits in “an open and unrestricted market” on the Valuation Date, a question to which the investment history from Soviet times and other expenditures before the Valuation Date are both irrelevant.

PART 10 - IS THE VALUE OF THE "USE" OF UPSTREAM ASSETS TO BE ASSESSED ON THE VALUATION DATE UNDER THE UKRAINIAN SCENARIO OR RUSSIAN SCENARIO?

363. The Claimants' primary position is that on the Valuation Date, the Willing Buyer's price would assume that the Claimants' assets “would continue to operate within the Ukrainian energy market and in accordance with Ukrainian law."⁹⁷ The Respondent disputes the choice of Ukrainian law, stating that this “assumption is unrealistic and ignores the very facts on which the Claimants purport to rely."⁹⁸ The Respondent submits that the Willing Buyer would assume that it was purchasing assets in the Russian energy market and in accordance with Russian law.⁹⁹

364. The choice of law changes the valuation of some of the Claimants' assets.¹⁰⁰ Importantly, Russian law would lower certain aspects of the Upstream Assets' valuation with cascading effects on the Midstream Assets. The choice of law at issue also impacts the Transition Period, which ended on 31 December 2014. More fundamentally, however, according to the Respondent the choice of law issue also affects the full reparation standard under Chorzów Factory,¹⁰¹ a standard, it argues, that must not be applied in the abstract but rather based on the concrete facts at the time of the illegal taking.

Inc. Suc. Argentina and Mobil Argentina S.A. v. Argentine Republic, ICSID Case No. ARB/04/16, Decision on Jurisdiction and Liability, 10 April 2013 (RLA-99).
⁹⁷ Memorial on Quantum, ¶ 51. ↩
⁹⁸ AmCM, ¶ 412. ↩
⁹⁹ AmCM, ¶ 413. ↩
¹⁰⁰ AmCM, ¶ 414. ↩
¹⁰¹ AmCM, ¶ 399 et seq; Reply on Quantum, ¶¶ 37 et seq; Rejoinder on Quantum, ¶ 526 et seq. ↩

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1. Factual Dispute: Applicable Law on the Valuation Date

365. The Claimants assert that as "a matter of basic fact" the Valuation Date is before Crimea's annexation because technically although the annexation was rumoured it had not yet been made official.¹⁰² As of the Valuation Date, “a number of possibilities existed for Crimea".¹⁰³ The Claimants further argue that the majority held in the Partial Award that the expropriatory acts took place "from and after 18 March 2014.”¹⁰⁴

366. The Respondent highlights the timeline of the incorporation into the Russian Federation of Crimea, which started in mid-February 2014,¹⁰⁵ following the deposition of Ukraine's former President Victor Yanukovich.¹⁰⁶ The Respondent further says that were the Tribunal to find that Ukrainian law applies, this would create an “inextricable contradiction” with the Claimants' position that “the investments were made in the territory of the Russian Federation for the purpose of the application of the BIT”.¹⁰⁷

The Ruling of the Tribunal Majority on Applicability of Russian Law on the Valuation Date

367. The majority agrees with the Respondent that although technically “a number of possibilities existed for Crimea”, its incorporation into the Russian Federation was merely a formality and all but certain (i.e., beyond a mere “probability") on the Valuation Date. The majority also agrees that applying Ukrainian law would contradict the BIT, since the Claimants' case presupposes the investments to have been made in the Russian Federation.

2. Is the Russian Federation Entitled to Benefit From its Wrongdoing?

368. The Claimants contend that the Russian Federation's invasion of Crimea inflicted loss on the value of their assets and that Russia should not benefit from its wrongdoing.¹⁰⁸ Adverse impacts include subjecting the assets to a less favourable legal and regulatory framework¹⁰⁹ and

¹⁰² Reply on Quantum, ¶¶ 118-120. ↩
¹⁰³ Reply on Quantum, ¶ 121. ↩
¹⁰⁴ Claimants' Opening Presentation, Hearing on Quantum, slides 81-82, citing Partial Award, ¶ 231. ↩
¹⁰⁵ Rejoinder on Quantum, ¶ 561. ↩
¹⁰⁶ Mikhail Zygar, All the Kremlin's Men: Inside the Court of Vladimir Putin (2016) 274-279 (CE-719). ↩
¹⁰⁷ Rejoinder on Quantum, ¶ 565. ↩
¹⁰⁸ See, e.g., Reply on Quantum, ¶ 149. ↩
¹⁰⁹ Reply on Quantum, ¶¶ 123-127, 149. ↩

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the creation of social and economic upheaval.¹¹⁰ More particularly, the Claimants say the claimed losses are “solely the result of the Russian Federation's wrongful conduct and therefore cannot be used as a basis to reduce the valuation of Naftogaz's investments.”¹¹¹ The Tribunal is obligated to remove the effects of the host State's actions where those actions have depressed an investment's value.¹¹² On this basis, the tribunal in Phillips Petroleum v. Iran held that, “it is well established that the Tribunal must exclude from its calculation of compensation any diminution of value resulting ... from any prior threats or actions by the Respondents related thereto.”¹¹³ As the Phillips Petroleum v. Iran tribunal stated:

...the Tribunal would not be warranted in ignoring the effects on the value of the property of the Iranian Revolution as they would have been perceived by a reasonable buyer in September 1979.¹¹⁴

369. While the Russian Federation¹¹⁵ states that “[o]nly the value depressing impact of the act of expropriation itself must be discounted”¹¹⁶ and “any elevated risk of expropriation—but only that risk—must be discounted from the country risk premium",¹¹⁷ the Russian Federation also

¹¹⁰ Reply on Quantum, ¶ 59. ↩
¹¹¹ Reply on Quantum, ¶ 125. ↩
¹¹² Reply on Quantum, ¶ 125; Memorial on Quantum, ¶ 44, quoting American International Group Inc. v. Islamic Republic of Iran, Iran-US Claims Tribunal, Award No. 93-2-3, 19 December 1983, 96, 107 (CLA-176) ("[A] state should not benefit from wrongful acts taken against an investor's asset "which actions may have depressed its value."). ↩
¹¹³ Reply on Quantum, ¶ 125; Phillips, ¶ 135 (CLA-219). See also Occidental, ¶ 546 (CLA-187). ↩
¹¹⁴ See Phillips, ¶ 135 (CLA-219). Respondent's Opening Presentation, Hearing on Quantum, slide 49. ↩
¹¹⁵ Respondent's Opening Presentation, Hearing on Quantum, slides 46-47. ↩
¹¹⁶ See Ebrahimi v. Islamic Republic of Iran, Iran-US Claims Tribunal, Award No. 560-44-46-47-3, 12 October 1994, ¶ 170, ¶ 124 (CLA-221): ↩

It is well-established Tribunal precedent that while general political, social, and economic conditions that may affect a company's business prospects as of the date of taking are to be taken into account in valuing the expropriated entity, the effects of the very act of expropriation or events that occurred subsequent to expropriation shall be excluded.

¹¹⁷ See Tidewater et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/10/5, Award, 13 March 2015, ¶ 186 (CLA-230): ↩

This is not a matter of permitting a respondent State to profit from its own wrong. On the contrary, the damages that the Tribunal is empowered by virtue of the Treaty to award are designed to ensure that the private investor is compensated for the loss of its investment. But, in determining the amount of that compensation by reference to a discounted cash flow analysis, the Tribunal should consider the value that a willing buyer would have placed on the investment. In determining this value, one element that a buyer would consider is the risk associated with investing in a particular country. Such a factor is not specific to the particular State measure that gives rise to the claim. That measure must be left out of account in arriving at a valuation, since, according to Article 5, the market valuation must be arrived at “immediately before the expropriation or before the impending expropriation became public knowledge, whichever is the earlier". Rather, the country risk premium quantifies the general risks, including political risks, of doing business in

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contends¹¹⁸ that the “turmoil” in 2014 Crimea would be a factor in the mind of the hypothetical Willing Buyer, citing the tribunal in Ukrnafta v. Russia:¹¹⁹

The Tribunal notes that 2014 was a period of turmoil in the Crimean Peninsula, and in the relations between Ukraine and Russia generally. A hypothetical willing buyer and seller would no doubt have borne these uncertainties in mind when valuing an asset located in the Crimean Peninsula on 22 April 2014.

The Ruling of the Tribunal Majority in Respect of Russia “Benefitting from Wrongdoing"

370. The view of the Tribunal majority is that while the Claimants are correct that “but for” the Russian invasion, the Claimants would have enjoyed a Russia-free Ukrainian Scenario and not suffered the loss imposed by the Russian Scenario, the arbitration is governed by the BIT. The BIT provides the remedy of compensation against any misconduct of the host State. Compensation for the misconduct is to be based on FMV measured in a hypothetical marketplace. It is understood that Ukraine and its State-owned corporations are seeking compensation elsewhere for the losses sustained by Russia's military action. The present arbitration is bound by the BIT and the role of FMV.

PART 11 - HOW ARE THE UPSTREAM ASSETS TO BE VALUED UNDER THE RUSSIAN SCENARIO?

371. In the First GCA Report, GCA proceeded on the supposition that it would apply Ukrainian law when valuing the Claimants' assets. The Claimants submit that, in its Amended Counter- Memorial, the Russian Federation advanced the Russian Scenario but did “not provide a fair market valuation of Naftogaz's investments under a Russian legal and regulatory regime for the Tribunal to evaluate."¹²⁰

the particular country, as they applied on that date and as they might then reasonably have been expected to affect the prospects, and thus the value to be ascribed to the likely cash flow of the business going forward.

¹¹⁸ Respondent's Opening Presentation, Hearing on Quantum, slide 52. ↩
¹¹⁹ PJSC Ukrnafta v. Russian Federation, PCA Case No. 2015-34, Final Award, 12 April 2019, ¶ 383 (RLA-77) (hereinafter "Ukrnafta"). See also, Stabil LLC et al. v. Russian Federation, PCA Case No. 2015-35, Final Award, 12 April 2019, ¶ 393 (RLA-78) (hereinafter “Stabil"). ↩
¹²⁰ Reply on Quantum, ¶ 128. ↩

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372. Instead, the Russian Federation provided what it described as “illustrative calculations” of the value of one of Naftogaz's producing fields (the Odeske field) and one prospective resource (the South Kerchenske prospect).¹²¹ However, according to the Claimants, in these calculations the Russian Federation applies: (i) gas prices that are not reflective of the applicable Russian regulatory regime or economic conditions; (ii) incorrect fiscal terms (i.e., the applicable royalties, taxes, and duties); and (iii) an inflated discount rate.¹²²

373. GCA was instructed to provide an alternative Russian valuation and in the Second GCA Report,¹²³ it estimated the FMV of the Claimants' expropriated oil and gas assets under its Russian Valuation to be USD 4.447 billion—approximately USD 375 million less than the FMV of the same assets under Ukrainian law.¹²⁴

¹²¹ First Expert Report of FTI Consulting, dated 6 December 2019 (hereinafter “First FTI Report"), ¶ 1.16. ↩
¹²² Reply on Quantum, ¶ 128. ↩
¹²³ Second GCA Report, ¶¶ 366-448, Table 24; First FTI Report, ¶¶ 2.15-2.44. ↩
¹²⁴ Second GCA Report, ¶ 448. The main dif erence is in GCA's valuation of the Upstream Assets, which under the Ukrainian Scenario is USD 3.606 billion. See Second GCA Report, ¶ 287, Table 14. Under the Russian Scenario, this is reduced to USD 3.231 billion. See Second GCA Report, ¶ 448, Table 24. GCA based its Russian Scenario on the expert opinion of Mr. Evgeny Zhilin, the Claimants' Russian legal expert. See Second GCA Report, ¶ 368. On the other hand, the First FTI Report is based its own expertise in Russian oil and gas, which forms the basis for its illustrative calculations under the Russian Scenario. The Second Expert Report of FTI Consulting, dated 3 June 2020 (hereinafter "Second FTI Report”), however, relies on the legal opinion of the Respondent's subsequently retained expert on Russian law, Professor Vitaly D. Melgunov. GCA observes that, in the Russian Scenario, three factors remain the same: ↩

First, the technical aspects of the valuation are unchanged. These have to do with whether Reserve Adjustment Factors (“RAFs”) apply to the valuation methodology and GCA's calculation of operating costs. See Second GCA Report, ¶¶ 374-376. The majority deals with RAFs and operating costs separately, below.

Second is the assumption that the Russian Federation would renew the Claimants' Special Permits. See Second GCA Report, ¶¶ 377-378. Subsequently, Professor Melgunov challenged this assumption; the majority deals also with this separately, below.

Third, GCA and FTI agree that the price of oil and condensate would remain at about the same level. See Second GCA Report, ¶¶ 379-380. FTI does not dispute that these factors would remain the same under the Russian Scenario. See Second FTI Report, ¶ 5.1 et seq.

In its Russian Scenario, GCA assumes (i) the application of a Transitional Period during which Ukrainian law would apply; (ii) a Russian regulatory regime would then apply from 1 January 2015 onwards, which would yield higher prices than those in neighbouring Krasnodar (See Second GCA Report, ¶¶ 389-392); (iii) the designation of the Upstream Assets and Midstream Assets as an RGSS under Russian law, which would require the Willing Buyer to supply a specially defined regulated regional gas market at regulated prices set separately from those applicable in Russia more generally; (iv) a change to the applicable fiscal terms to incorporate elements of Russian tax law; and (v) a change to the discount rate to reflect Russian country risk premium.

The focus of FTI's criticisms of GCA's analysis of the Russian Scenario are summarized as follows:

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374. GCA and FTI agree(d) on the following assumptions: (i) The Willing Buyer's gas would largely be sold in Crimea; (ii) the Willing Buyer's surplus gas would be sold to Ukraine; (iii) both agree on Crimea's consumption in consumer segmentation; (iv) a transition period would continue through to 31 December 2014. After receiving the First Melgunov Report, FTI considers itself bound by his opinion that Crimea was in fact in a gas deficit in 2014¹²⁵ but Dr. Moselle did not explain why the issue a gas surplus or deficit should be decided by a lawyer rather than a resource economist. Indeed, the Respondent's expert, Dr. Moselle was uncomfortable in cross-examination on this point, as follows:

Q. So it's fair to say that on the valuation date, there was no gas deficit in Crimea?

A. I mean, you'll see in our first report that we assume that there would be exports from Crimea. So on that basis, yes, that's correct.¹²⁶

375. Accordingly, the majority proceeds on the basis that there was some surplus gas since GCA and FTI initially agreed on this and Dr. Moselle could or would not explain why FTI reversed itself in accepting Professor Melgunov's contrary opinion. Professor Melgunov is a legal academic and practicing lawyer with expertise in oil and gas regulation not an expert in resource economics or in oil and gas resource management.¹²⁷

(1) gas prices: we consider that GCA has significantly overestimated gas prices, and thus the value of the Upstream Assets, by applying what are effectively Ukrainian gas prices, rather than the much lower prices that can be clearly observed in Russia both at the Valuation Date and since;

(2) discount rate: we consider that GCA has significantly underestimated the discount rate, and thus overestimated value, in particular by basing its calculation of country risk on a 13-year average instead of assessing risks as at the Valuation Date; and

(3) fiscal regime: we have been instructed to rely on the opinion of Professor Melgunov for the applicable fiscal terms under Russian laws and regulations. GCA has applied fiscal terms that incorporate material tax rate reductions, leading to a higher valuation than GCA would derive based on the fiscal terms and related coefficients set out in our instructions. See Second FTI Report, ¶ 5.1.

¹²⁵ See First Melgunov Report, ¶ 163 ("in case of deficit, which, existed in the Republic of Crimea as of the Valuation Date."). ↩
¹²⁶ Tr., Hearing on Quantum, Day 7, 41:25-42:4. ↩
¹²⁷ Tr., Hearing on Quantum, Day 4, 82:25-85:11. ↩

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1. Areas of Disagreement

376. The Second GCA Report outlines the following four areas of disagreement:

(a) Whether the Willing Buyer would be required to sell gas at Ukraine's regulated prices and tariffs during the Transition Period;

(b) whether Krasnodar gas prices are relevant to Crimean gas pricing after the Transition Period ends;

(c) whether the Willing Buyer would expect Russian gas prices would move towards export parity; and

(d) whether surplus gas sold to Ukraine's industrial market would be above Russia's export price to Ukraine.¹²⁸

2. Transition Period: Supply Obligations and Price Regulations

377. Immediately prior to annexation, the Ukrainian Parliament adopted a resolution to continue the application of existing Ukrainian law in Crimea until overridden by subsequent “regulatory acts of the Republic of Crimea",¹²⁹ but its independent legislative authority was terminated prior to annexation. The Russian Federation's Annexation Law contained a similar provision.¹³⁰

378. The Annexation Treaty provided for the following “transition period” (the “Transition Period"), to run from 18 March 2014 to 31 December 2014:

Article 6

A transition period, during which matters pertaining to the integration of the new constituent entities of the Russian Federation into the economic, financial, credit,

¹²⁸ Second GCA Report, ¶ 390. ↩
¹²⁹ Autonomous Republic of Crimea, Resolution No. 1745-6/14, 17 March 2014 (CE-199) (hereinafter "Independence Resolution"): ↩

2. Upon the entry into force of this Resolution, the legislation of Ukraine shall not apply in the territory of the Republic of Crimea, and decisions adopted by the Verkhovna Rada of Ukraine and other state bodies of Ukraine, adopted after 21 February 2014, shall no longer be carried out.

The legislation of Ukraine, other than that specified in the first paragraph of this clause, shall apply in the territory of the Republic of Crimea until there are corresponding regulatory acts of the Republic of Crimea.

¹³⁰ Russian Federation, Federal Constitution Law No. 6-FKZ, Arts. 6, 23, 21 March 2014 (CE-230). ↩

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and legal systems of the Russian Federation and the system of state bodies of the Russian Federation, as well as matters pertaining to the execution of military obligations and the performance of military service in the territory of the Republic of Crimea and the federal city of Sevastopol have to be resolved, shall be in effect from the date of admission of the Republic of Crimea to the Russian Federation and the formation of new constituent entities within the Russian Federation and until 1 January 2015.¹³¹ (emphasis added)

379. Russian law was de facto paramount from and after the annexation. The relevant inquiry is, therefore, what would a Willing Buyer reasonably expect on the Valuation Date as to whether Russian law would permit Ukrainian law and gas regulations to apply during and after the end of the Transition Period on 31 December 2014?

380. Under Ukrainian law, Naftogaz was a State-owned enterprise tasked with domestic supply and thus subject to price regulation. The key difference is that the Willing Buyer would be a "hypothetical" independent producer. Under Ukrainian law, independent producers have no domestic supply obligations and few (if any) price regulations.¹³²

381. Equally, the Claimants argue that Crimean regulations would cease to apply because the superseding Russian law did not purport to regulate Crimean gas prices, meaning the Willing Buyer, freed of any regulations of either Ukraine or Russia, could have exported gas to Ukraine at "unregulated" prices.¹³³ The Claimants say this could produce nine months of near-windfall

¹³¹ Treaty Between the Russian Federation and the Republic of Crimea on the Admission to the Russian Federation of the Republic of Crimea and the Formation of New Constituent Entities Within the Russian Federation, Art. 6, 18 March 2014 (CE-224-Am) (hereinafter “Annexation Treaty"). ↩
¹³² Expert Report of Evgeny Zhilin, 14 February 2020 (“First Zhilin Report”), ¶¶ 27-29; First GCA Report, ¶¶ 274-275; Second GCA Report, ¶ 393. ↩
¹³³ See Tr., Quantum Hearing, Day 7, 41:25-42:4. Here, on whether Crimea had a gas surplus or deficit after meeting market demand, Dr. Moselle testified in cross-examination as follows: ↩

Q. So it's fair to say that on the valuation date, there was no gas deficit in Crimea?

A. I mean, you'll see in our first report that we assume that there would be exports from Crimea. So on that basis, yes, that's correct.

In the First Melgunov Report, ¶ 163 (served with the Rejoinder on Quantum), Professor Melgunov says the opposite: "in case of deficit, which, existed in the Republic of Crimea as of the Valuation Date.". The contradiction between FTI and Professor Melgunov and was put to Dr. Moselle in cross-examination several times for an explanation; he repeatedly stated that it was a question for Professor Melgunov, declining to explain why FTI had come to an opposite conclusion previously. See Tr., Hearing on Quantum, Day 7, 51:15-57:7.

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profits during the Transition Period, since the new owner would also not have to sell at Russian tariff prices.

382. The Russian Federation argues that a Willing Buyer would have assumed, as of the Valuation Date, that Naftogaz's investments would be subject to Russia's regulatory regime and to the market conditions specific to Crimea as a constituent unit of the Russian Federation, including the obligation to sell gas into the domestic Crimean market at Russian tariff prices. Here, it notes that under Russian law, only Gazprom is authorized to export gas.¹³⁴

383. The principal part of the Russian Federation's gas supply system is the Unified Gas Supply System (“UGSS”) located in the western, or European, part of the country. Gazprom owns the UGSS and is its main user. Between 2008 and 2013, gas from independent producers only accounted for between 10 percent and 17 percent of usage of the UGSS.¹³⁵ The Naftogaz assets were part of the Crimean Regional Gas Supply System (“RGSS"). Mr. Zhilin and Professor Melgunov agree that once under Russian jurisdiction, the Crimea gas supply system would be classified as being part of the Russia's RGSS rather than the UGSS.

384. The Claimants' expert, Mr. Evgeny Zhilin, described the Transition Period as follows:

28. As Russian laws and regulations would not yet apply during this transitional period, the owner of the Upstream and Midstream Assets would not have an obligation to satisfy demand for gas in Crimea (i.e., the owner would not have the obligations that it would otherwise have had if the assets were categorized as an RGSS [Regional Gas Supply System]...as of November 2014, the Russian authorities did not yet consider the Upstream and Midstream Assets to be an RGSS.

29. On this basis, given that Russian laws and regulations would not apply during the transitional period, the willing buyer could sell gas at unregulated prices within Crimea, save that unlike Independent Producers operating under Russian laws and regulations (who cannot export gas, as explained below at Section VI), the owner of the Upstream and Midstream Assets would not be restricted from exporting gas. As a result, the Russian Government would need to take steps

Since the Respondent's experts had confusing opinions on whether there was a surplus or deficit on the Valuation Date, the majority proceeds from the assumption that there was a surplus since GCA and FTI initially agreed on this and Dr. Moselle could or would not explain the contradiction.
¹³⁴ AmCM, ¶¶ 410-414. ↩
¹³⁵ First FTI Report, ¶¶ 3.50-3.52 (which paragraphs contain the extent of FTI's UGSS vs. RGSS "analysis" in its First Report). ↩

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to ensure that the owner of the Upstream and Midstream Assets would satisfy local Crimean gas demand.¹³⁶ (emphasis added)

385. To this, Professor Melgunov responded as follows:

46. ... The normative legal acts that were previously adopted by the state bodies of the Autonomous Republic of Crimea in the City of Sevastopol, as well as newly adopted legal acts of the Republic of Crimea and Sevastopol would remain effective in the territories of the Republic of Crimea and the Federal City of Sevastopol until the expiry of the transitional period or the adoption of the relevant normative legal acts of the Russian Federation and or normative legal acts of the Republic of Crimea or the Federal City of Sevastopol

*****

61. That being said, the Law No. 6-FKZ did not provide that Russian laws would only apply as of January 2015 in relation to the use and protection of the subsurface, foreign investments and ensuring national defence and security.

62. Thus, from a legal standpoint, as of the Valuation Date, the Willing Buyer, being aware of the planned admission of the Republic of Crimea to the Russian Federation as a constituent entity of the Federation, would have no reasonable grounds to expect that the laws of Ukraine would continue to apply in the territory of the Republic of Crimea after its admission into Russia. (emphasis added)

386. Additionally, Professor Melgunov is of the opinion that if the Willing Buyer decided not to supply gas to domestic consumers in Crimea during the Transitional Period, it would constitute a breach of the Law on Competition,¹³⁷ which breach would be remedied thereunder by Russia's Federal Antimonopoly Service (“FAS”).

¹³⁶ First Zhilin Report, ¶¶ 28-29. See also Tr., Hearing on Quantum, Day 4, 49:17-50:9. ↩

So the Constitution sets the framework for admitting new constituent members of Russia which have been part of foreign states or independent states. So that is what the Constitution says. Then there is the federal constitutional law, which sets out the principles under which independent foreign states or parts of foreign states are integrated into Russia. And then we have the treaty of 18th March, we have the Law on Admission of 21st March, and we have also the Law on Admission being checked by the Constitutional Court of the Russian Federation on 19th March. So all of them, the treaty and the Law on Admission, contain similar provisions giving effect to Ukrainian legal regime effectively Ukrainian legal regime, which was incorporated into the Crimean legal regime on 17th March 2014 by way of the Independence Resolution, by virtue of the Independence Resolution. So this is how it needs to be read and treated.

¹³⁷ Second Expert Report of Professor Vitaly D. Melgunov, dated 16 November 2020 (hereinafter “Second Melgunov Report”), ¶ 94; First Melgunov Report, ¶ 96: ↩

Furthermore, I believe that, after the acquisition of the Upstream and Midstream Assets, a hypothetical willing buyer would acquire a dominant position in the gas market of the Republic of Crimea. Pursuant to Article 5 of Federal Law No. 135 dated 26 July 2006 "On the Protection of Competition” (the “Law on Competition"), a dominant position means the position of an economic entity (or a group of entities) or several economic entities (groups of entities) in the market for a specific commodity, that enables such an

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387. In his Second Report, Mr. Zhilin makes the following response:

While Prof. Melgunov has baldly asserted that the willing buyer would have occupied a dominant position, and that a refusal to supply gas to consumers in Crimea would have constituted an abuse of such position, the FAS would have needed to undertake a detailed legal and economic analysis and investigation into these two issues under the Law on Competition, before making such a determination and it would take several months for at an FAS investigation to commence and that even if a Crimean RGSS were found to have abused its market position, it would still have a rights of appeal.¹³⁸

The Tribunal Majority's Ruling on the Transition Period

388. The Tribunal majority notes the whole purpose of a Transition Period was to avoid a legal vacuum by continuing the old laws and regulations in place until, as Mr. Zhilin notes, the Government of the Russian Federation took steps to introduce a different regulatory regime into Crimea. In the majority view, however, a Willing Buyer would reasonably assume the transition would be completed as of the end of the Transition Period, i.e., 31 December 2014. Up to that point, the reasonable expectation would be one of a Ukrainian market at Ukrainian prices.¹³⁹

389. The Tribunal notes Crimea's physical separation from the Russian Federation during this period. A pipeline connection between the Kerch Peninsula and Krasnodar was not complete until December 2016.¹⁴⁰

390. Professor Zhilin says that the Russian Federation “would have to take steps to ensure upstream and midstream assets would satisfy local Crimean gas demand."¹⁴¹ In the majority view, the Willing Buyer would expect Russia to do so.

391. In the view of the Tribunal majority, the Willing Buyer would expect to be obliged to supply the Crimean domestic market during the Transition Period at existing prices. It would be

economic entity (a group of entities) or such economic entities (groups of entities) to have a decisive influence on the general conditions of commodity circulation in the respective commodities market. The Law on Competition therefore would have prevented any hypothetical willing buyer from abusing from its dominant position (in particular, this law would have prevented it from setting a high monopolistic price, or from refusing (avoiding) to supply gas to consumers without economic or technological reasons for such refusal).

¹³⁸ Second Expert Report of Evgeny Zhilin, dated 7 September 2020, ¶¶ 68-69 (“Second Zhilin Report"). ↩
¹³⁹ The Transition Period was clearly established by law. See Independence Resolution (CE-199); Annexation Treaty (CE-224-Am); Russian Federation, Federal Constitutional Law No. 6-FKZ, 21 March 2014 (CE-230). ↩
¹⁴⁰ First FTI Report, ¶ 6.11. ↩
¹⁴¹ First Zhilin Report, ¶ 29. ↩

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unrealistic for the Willing Buyer to expect that, during the Transition Period, the Russian Federation would have allowed the major gas supplier in Crimea:

(a) to deny supply to the domestic market (where else would local residents get their gas as there were no pipelines in 2014-2015 connecting Crimea to Russia?);

(b) or sell at unregulated prices despite Russian policy to keep prices low;

(c) or to export gas to Ukraine despite the Gazprom monopoly.¹⁴²

392. Accordingly, in the majority view, gas produced by the Upstream Assets in the Transition Period would have been sold into all market segments in Crimea.

393. Mr. Zhilin suggests a Willing Buyer might reasonably believe that the Russian Federation would subsidize the Willing Buyer in the same way it subsidized Gazprom's purchase of gas from Sakhalin Energy, under a Production Sharing Agreement (“PSA”). Sakhalin Island is north of Japan, 8,000 kilometres (“km”) away from the Crimean Peninsula. Professor Melgunov testified that the Russian Federation has only had three PSA's and they were all concluded before 2003. The majority finds that Mr. Zhilin's suggestion is an unlikely “best case scenario” for the Willing Buyer rather than the most probable scenario. The possibility of a PSA should not, therefore, be factored into the valuation.

394. In the view of the Tribunal majority, the Willing Buyer would not expect to be permitted to behave as aggressively as Mr. Zhilin proposes, and, if it were permitted to, the Willing Buyer would almost certainly be corrected by the Russian Federation using the Law on Competition or perhaps a more direct intervention. The Russian Federation would not be expected to wait for lengthy FAS inquiries to take their course before stepping in to keep the gas flowing to Crimean factories and homes at regulated prices.

¹⁴² First FTI Report, ¶ 6.11. ↩

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3. Krasnodar Gas Pricing vs. RGSS Gas Pricing

395. The Parties do not agree on the expected gas pricing. FTI posits that Krasnodar's prices should apply because "the adjacent Krasnodar region would have been a reasonably [sic] proxy for expected Crimean prices".¹⁴³ Krasnodar is separated from Crimea by the Kerch Strait. Mr. Zhilin contradicted this assumption in the First Zhilin Report, observing that Krasnodar is connected to Gazprom's UGSS, but whether and when Russia would connect Crimea to the UGSS was unknown. He premised this on the fact that there was no connection over the Kerch Strait on the Valuation Date. In fact, as mentioned, a bridge with a pipeline connection was only completed in December 2016.¹⁴⁴

396. Professor Melgunov agrees with Mr. Zhilin that as of the Valuation Date “there were no official announcements that a gas pipeline would be built” to connect Crimea to Krasnodar across the Kerch Strait.¹⁴⁵ However, Professor Melgunov says that a pipeline connection to Krasnodar would nevertheless be expected by a Willing Buyer,¹⁴⁶ describing the various steps taken after the annexation to connect Krasnodar with Crimea.¹⁴⁷ However, this was not information available to a Willing Buyer on the Valuation Date.

The Tribunal Majority's Ruling on Krasnodar Prices

397. In the view of the Tribunal majority, the Willing Buyer in March 2014 would reasonably have assumed that gas prices would be governed starting in January 2015 by Russia. Mr. Zhilin and Professor Melgunov agree that Russia's Federal Tariff Service (“FTS") sets all regulated tariff prices for gas.¹⁴⁸ In the view of the Tribunal majority, such prices would not be expected to be linked to Krasnodar but would instead be expected to build on the prices applicable in Crimea in the Transition Period then gradually increase to export parity. The Tribunal majority rejects the Krasnodar "scenario” because:

¹⁴³ First FTI Report, ¶ 6.9. ↩
¹⁴⁴ First Zhilin Report, ¶¶ 53-55. ↩
¹⁴⁵ First Melgunov Report, ¶ 162. ↩
¹⁴⁶ First Melgunov Report, ¶ 163. ↩
¹⁴⁷ First Melgunov Report, ¶ 165. ↩
¹⁴⁸ First Melgunov Report, ¶ 158; First Zhilin Report, ¶¶ 57-60. ↩

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(a) Krasnodar did not have a gas-pipeline connection with Crimea on the Valuation Date. Krasnodar and Crimea were different gas markets;¹⁴⁹

(b) Crimea was connected to the Ukrainian market, which had higher gas prices than Krasnodar on the Valuation Date;

(c) as of the Valuation Date, Crimea was liberalizing its gas markets (which would promote higher gas prices in the future);¹⁵⁰

(d) the cost of offshore exploration and development in Crimea is significantly higher than the cost of onshore exploration and development in Krasnodar—meaning that Krasnodar prices would not provide the Willing Buyer with a profit, as Russian law requires;¹⁵¹

(e) on the Valuation Date, gas prices in Crimea were already much higher than Krasnodar prices;

(f) the Russian Federation had declared its intent that domestic prices should increase over time to a level on par with exports.¹⁵²

4. RGSS Pricing and Export Parity

398. At issue is the most likely tariff pricing that the FTS would use for the domestic supply of gas in Crimea. Mr. Zhilin testified that as of the Valuation Date, the Willing Buyer could not have known the regulated gas prices applicable from 1 January 2015, i.e., after the Transition Period ended.¹⁵³ However, Mr. Zhilin says that the regulated prices could nevertheless be estimated on the basis that the FTS is required to determine tariffs in accordance with stated guidelines.¹⁵⁴ RGSS tariff pricing requires that an operator: (i) recover its cost of supply and production (extraction, transportation, processing, storage, and sales), and (ii) make sufficient profit to finance

¹⁴⁹ Second GCA Report, ¶ 397. See also First FTI Report, ¶ 6.11. ↩
¹⁵⁰ Second GCA Report, ¶¶ 129, 398-399. ↩
¹⁵¹ Second GCA Report, ¶¶ 369, 387, 396. ↩
¹⁵² Second GCA Report, ¶¶ 401-404. ↩
¹⁵³ First Zhilin Report, ¶ 50; Tr., Hearing on Quantum, Day 5, 23:15-20. ↩
¹⁵⁴ First Zhilin Report, ¶ 48. ↩

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its expansion and development plans with respect to exploration, extraction, transmission, and storage activities.¹⁵⁵

399. Moreover, and in line with Russian law and market expectations as of the Valuation Date, Mr. Zhilin and GCA consider that FTS tariffs would gradually increase to “export parity”—i.e., the price a producer would receive on the export of gas after taking into account the export duty.¹⁵⁶ This goal was declared in 2007 in the Russian Federation's Resolution No. 333 “On Improvement of State Regulation of Gas Prices” wherein the Russian Government announced its intention to achieve the export parity by 2011.¹⁵⁷ According to Mr. Zhilin,¹⁵⁸ the Russian Federation reiterated that goal on several occasions, although its implementation was ultimately delayed.¹⁵⁹ In September 2013, the Russian Government decided to freeze gas prices for 2014 for industrial gas purchasers, as later reflected in the federal budget for 2014-2016, but thereafter it was predicted by observers that prices would increase to reach parity.¹⁶⁰

400. The Tribunal majority rejects the Respondent's arguments that Krasnodar prices would apply.¹⁶¹

¹⁵⁵ First Zhilin Report, ¶ 49; Russian Federation, Federal Law No. 69-FAZ "On Gas supply in the Russian Federation", Art. 21, 31 March 1999 (CE-1024); Russian Federation, Resolution No. 1021 "On State Regulation of Prices and Tariffs For Gas", Arts. 11, 13, 14, 29 December 2000 (CE-1065). ↩
¹⁵⁶ First Zhilin Report, ¶¶ 51-52; Government of the Russian Federation, Resolution No. 1021 "On State Regulation of Prices and Tariffs For Gas", Arts. 11, 13, 14, 29 December 2000 (CE-1065). ↩
¹⁵⁷ Russian Federation, Resolution No. 333 “On Improving State Regulation of Gas Prices", Art. 4, 28 May 2007 (CE-1071). ↩
¹⁵⁸ First Zhilin Report, ¶ 52. ↩
¹⁵⁹ In 2009, the Russian Federation adopted its road map "Energy Strategy of the Russian Federation Until 2030", which states at Section VI.5 the goal of further liberalizing the domestic gas market through the application of the principle of equal profitability of domestic and export gas supplies. See Russian Federation, Order No. 1715–r, "Energy Strategy of the Russian Federation Until 2030", Sec. VI.5, 13 November 2009 (CE-1073). In December 2010, the transition period for parity was prolonged from 2011 to 2014. See Russian Federation, Resolution No. 1205 "On Improvement of State Regulation of Gas Prices", 30 December 2010 (CE-1072). In April 2013, the Ministry of Economic Development of the Russian Federation published a document called "Forecast of Long-term Socio- economic Development of the Russian Federation for the Period up to 2030" further supporting the idea of netback parity. See Ministry of Economic Development of the Russian Federation, “Forecast of Long-term Socio-economic Development of the Russian Federation for the Period up to 2030", March 2013 (CE-1074). ↩
¹⁶⁰ Maxim Tovkailo, "People Will Pay For Businesses", Vedomosti, 8 November 2013 (CE-1030). ↩
¹⁶¹ See also First Zhilin Report, ¶ 53; First Melgunov Report, ¶¶ 153 et seq. ↩

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The Tribunal Majority's Ruling on Export Parity

401. The majority concludes that under its guidelines, the FTS is required to set tariffs in line with the Russian Government's repeated statements that it is committed to achieve export parity. In particular, the Tribunal majority concludes that the Willing Buyer would be guided by the Russian Federation's 2007 declaration in Resolution No. 333 that gas prices would achieve netback/export parity, which is to say that Russia's industrial gas prices would move toward the higher prices paid on the global market for industrial use. While implementation has been delayed,¹⁶² the FTS continued its policy on parity as of the Valuation Date.

402. The Tribunal majority agrees with GCA that a Willing Buyer would expect the FTS to impose tariffs as of 1 January 2015 equivalent to the weighted average Crimea price in 2014 and to gradually increase the regulated residential tariff by 3.5 percent a year until export parity had been achieved.¹⁶³ As GCA notes, this approach would be consistent with both the Russian Federation's gas liberalization plan that was publicly announced in late 2013 and also with market expectations at the time.¹⁶⁴

5. Ability of a Willing Buyer to Export Surplus Gas to Ukraine

403. The Parties disagree as to the likelihood of the Willing Buyer being permitted to export Crimean gas to Ukraine's industrial sector. The need to export would be driven by the fact that GCA expected Crimean production to exceed demand.¹⁶⁵ Export would earn it higher prices for gas. As mentioned above, the majority accepts the evidence of GCA (and, initially, of FTI) that Crimea had a gas surplus in 2014.

¹⁶² First Zhilin Report, ¶¶ 51-52. ↩
¹⁶³ Second GCA Report, ¶¶ 401-404. ↩
¹⁶⁴ First Zhilin Report, ¶ 67 (discussing government plan from September 2013). FTI cites to the same plan in their analysis, but only applies that plan to very low prices. As a result, FTI's regulated prices never achieve export parity and therefore do not reflect the Russian Federation's stated goals at the valuation date. See Second GCA Report, at Figure 7 (showing that the “FTI Domestic Price” series never meets the “Producer Export Parity" series). ↩
¹⁶⁵ Second GCA Report, ¶ 398. ↩

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404. The facts underlying the debate seem elusive and FTI and Professor Melgunov contradict each other.¹⁶⁶ FTI originally agreed with GCA that “production in excess of Crimean consumption would have been exported and sold into the Ukrainian industrial segment.”¹⁶⁷

¹⁶⁶ The diagram below explains such contradictions: ↩

¹⁶⁷ First FTI Report, ¶ 6.11. ↩

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405. However, in the Second FTI Report, FTI changed direction and accepted Professor Melgunov's opinion that exports to Ukraine would be prohibited by Russia.¹⁶⁸

406. The Respondent says the “export scenario” is unrealistic in light of evidence that in fact gas would be in short supply to meet domestic market demand in Crimea.¹⁶⁹ FTI seems to doubt the existence of such a shortfall. In its second report, FTI suggests a surplus smaller than predicted by GCA but nevertheless a surplus in excess of Crimean demand:

Our own production forecasts are significantly lower than GCA's as a whole, and therefore exceed Crimean consumption levels to a far lesser degree.¹⁷⁰

407. The Respondent further contends that the Willing Buyer would not have been permitted by Russia to export to Ukraine. Export operations require gas surpluses that would be available after the domestic demand has been satisfied by gas deliveries to the consumers in Crimea. As of the Valuation Date, according to the Respondent, “no such surpluses existed and there were no grounds to anticipate that such surplus would exist in the nearest future”¹⁷¹ but if there was surplus supply, the Willing Buyer:

(a) would have sought to sell the gas to Gazprom (which could then have exported it) at a price significantly less than the price that would have been achieved by

¹⁶⁸ Second FTI Report, ¶¶ 5.15-5.17. ↩
¹⁶⁹ Second Melgunov Report, ¶ 110, which states: ↩

BP's Statistical Review of World Energy 2013, which was available as of the Valuation Date, provided evidence of significant shortage of inland gas in Crimea. Information received from the State Unitary Enterprise "Chernomorneftegaz” also shows that in 2013 the consumption of gas in Crimea exceeded the level of its production. Furthermore, the gas shortage in the coming years was discussed in mass media shortly before the Valuation Date, in early 2014. Consequently, the Willing Buyer should have been aware of the situation as of the Valuation Date and should not have relied on the predictions of Ukrainian authorities. In the circumstances of gas shortage, which affected the Republic of Crimea in 2014 (and was expected to continue in the future years), it was unrealistic for the Willing Buyer to assume it would have been able to export gas (neither independently, in case of amending the Law of Gas Export, nor by entering into an agency or swap agreement with PJSC Gazprom, as Mr. Zhilin suggests), because export operations require gas surpluses that should be available after the domestic demand has been satisfied by gas deliveries to the consumers in the Republic of Crimea. As of the Valuation Date, no such surpluses existed.

¹⁷⁰ Second FTI Report, ¶ 5.19. ↩
¹⁷¹ Second Melgunov Report, ¶ 111. ↩

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exporting to Ukraine directly, given that a Willing Buyer would have had no other potential buyers of the gas; and/or

(b) otherwise it would have needed to curtail production, by restricting development of certain fields to keep production in line with expected demand.¹⁷²

The Tribunal Majority's Ruling on the Willing Buyer's Ability to Export

408. In the view of the Tribunal majority, the Claimants have not established a reasonable basis to conclude that either the Russian Federation or Gazprom would allow the Willing Buyer to export gas at export prices which would have the effect of reducing Gazprom's profits and diminishing the earnings of its Government shareholders.

409. Russian legislation protects the export monopoly of Gazprom. The Russian Federation would be unlikely to enact an exception for the Willing Buyer given Gazprom's track record¹⁷³ of

¹⁷² Second FTI Report, ¶ 5.18. ↩
¹⁷³ Russian Federation, Federal Law No. 177-FZ “On Gas Export", 18 July 2006 (CE-1069); First Melgunov Report, ¶ 103: ↩

At the federal level, the issues related to the export of gas are regulated by the Federal Law No. 117-FZ dated 18 July 2006 "On Gas Export” (the “Law on Gas Export”). The Law on Gas Export, in its Article 3, grants the exclusive right to export gas via a pipeline to the owner of the UGSS (de facto, PJSC Gazprom) or to its wholly owned subsidiary.

First Zhilin Report, ¶ 43:

Prior to Crimea's accession to Russia, there was no RGSS that was connected to a foreign country by pipeline (nor was this likely, as all RGSSs were located remotely from other countries in the northern and eastern territories of Russia). Therefore, prior to the Crimean RGSS, no RGSS had the ability to export pipeline gas from Russia. Only the UGSS operator (Gazprom) had connections to foreign pipelines, and its monopoly on pipeline gas exports was the practical result of both the UGSS infrastructure and its historical role as a state- owned, monopolistic gas supplier until the emergence of the first independent gas producers in the 1990s. As a result, the question of whether an RGSS would be permitted to export gas would have been a novel question under Russian law.

First Melgunov Report, ¶¶ 106-107:

What is more, based on the above rules of the Law on Gas Export, which provide for the exclusive right of PJSC Gazprom to export gas via a pipeline, it is impossible that a willing buyer would have been granted the right to export gas via a pipeline contrary to the terms of the applicable legislation. It would have required amending the Law on Gas Export, which, for objective reasons related to the peculiarities of the Russian federal legislative process (which in particular requires that the relevant draft law be first considered by the State Duma, then approved by the Federation Council and finally signed by the Russian President, before it is officially published and enters into force) and the significance of the issue at hand, would probably take no less than a year. This is of course assuming that the Law on Gas Export would be amended for the sole benefit of the hypothetical willing buyer.

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resisting such exceptions. Thus the majority's assessment of the value of the Claimants' Upstream Assets is based on price movement towards export parity (which was official Russian policy) not on any expectation about the Willing Buyer's ability to actually export as during the relevant period.

PART 12 - ADDITIONAL DISCOUNTS PROPOSED BY THE RUSSIAN FEDERATION

410. The Respondent contends that future earnings reasonably to be expected by the Willing Buyer should be further discounted as follows:

(a) the value of the Upstream Assets should be discounted to allow for the risk the Special Permits would not be renewed;

(b) the value of the Upstream Assets should be discounted because of anti-competition laws;

(c) the value of the Upstream Assets should be discounted because of a risk the gas fields would be designated as SPFIs.

1. Should the Value of Upstream Assets be Discounted to Allow for the Risk the Permits Would Not be Renewed?

411. Mr. Zhilin expressed the view that the Willing Buyer would have expected the Russian Federation to recognize the continuing validity of Naftogaz's Special "Use” Permits during the Transition Period.¹⁷⁴ In fact, he points out that Special Permits did continue to be valid after March 2014.

412. Professor Melgunov disagreed. He states in his Second Report that:

68 ... There was no certainty that the Willing Buyer could reasonably rely on the Ukrainian permits or have Russian licenses automatically reissued. In light of

In this regard, in my opinion, even a mere suggestion that the Law on Gas Export would be amended to grant the right to export specifically to the willing buyer is baseless and totally unrealistic, given that even major Russian oil and gas companies (such as PJSC Rosneft Oil Company and PJSC NOVATEK) failed to obtain it without offering the State new investments for the construction of LNG plants.

¹⁷⁴ The acts of the Republic of Crimea provided for the continued validity of Ukrainian permits. See Independence Resolution (CE-199); Nationalisation Resolution (CE-202). ↩

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such uncertainty, the most prudent course of action for the Willing Buyer would have been to assume that Ukrainian permits would not be effective and it would have to apply for the issuance of new Russian licenses.¹⁷⁵

413. In contrast, the First FTI Report, relied on by the Respondent, suggests it would be reasonable for the Willing Buyer to “assume that the licences issued by Russia would be issued to match the acreage rights under the licenses issued by the Ukrainian state.”¹⁷⁶

414. In the view of the Tribunal majority, the Russian Federation would be concerned about instability in the production and distribution of gas if permit renewals were refused to a Willing Buyer. No one but the Willing Buyer would possess the infrastructure to mobilize in a reasonable time production for Crimea users and continued exploration. In the view of the Tribunal majority, the Willing Buyer would have had no difficulty in securing renewal of the licenses through the Transition Period and beyond. No discount is justified in respect of permit renewal risk.

2. Should Upstream Asset Value be Discounted Because of a Risk the Gas Fields Would be Designated Subsurface Plots of Federal Importance?

415. Professor Melgunov opines that a Willing Buyer would be aware that the Russian Federation would/could designate the Upstream Assets as SPFIs, thereby eliminating their value.¹⁷⁷

¹⁷⁵ Second Melgunov Report, ¶ 68. ↩
¹⁷⁶ First FTI Report, ¶ 6.4: ↩

In our illustrative valuations, we assume that the licenses issued by Russia would be issued to match the acreage rights under the licenses issued by the Ukrainian state. We assume that technical reserves and resources remain unchanged from those that would've been exploited under Ukrainian jurisdiction.

The footnote within this paragraph, footnote 102, states the following: “Licenses issued by Russia our subsoil use licenses, while licenses issued by Ukraine are exploration and exploitation rights offered under a Special Permit, as explained in paragraph A9.3."

See First FTI Report, ¶ A9.3: "Licenses are typically of limited duration and can be subject to numerous rights, obligations, terms and conditions. In Ukraine, exploration and exploitation rights are offered under a Special Permit. In Russia, such rights are offered under a subsoil use license.", referring to Federal Agency for Mineral Resources, The Russian Government, accessed 22 November 2019 (FTI-111).
¹⁷⁷ See, e.g., First Melgunov Report, ¶¶ 21-22: ↩

B. The Claimants' Upstream Assets in the Black Sea and the Sea of Azov Constitute Subsurface Plots of Federal Importance Pursuant to the Legislation of the Russian Federation.

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416. FTI did not mention the SPFI issue in the First FTI Report, dated 6 December 2019,¹⁷⁸ despite the expertise in valuing Russian oil and gas assets of Dr. Stuart Amor, one of the First FTI Report's authors. The SPFI issue was raised for the first time in the First Melgunov Report,¹⁷⁹ which is dated 29 May 2020. This seems to the Tribunal majority to be a curious oversight on the part of Dr. Amor if SPFIs are as significant as Professor Melgunov suggests.

417. The Russian Federation maintains a federal list of SPFIs. The Upstream Assets have never been included on the federal list although, as Professor Melgunov points out, inclusion on the list is not a condition precedent to a designation.

418. Mr. Zhilin disputes Professor Melgunov's SPFI analysis. He explains that the Russian Federation introduced the current legal regime applicable to SPFIs in 2008 which (i) deemed geological exploration and production of hydrocarbons in SPFIs to be of strategic importance for ensuring national defence and security, and (ii) restricted foreign investors from becoming shareholders in new business entities of strategic importance to national defence and security.¹⁸⁰

56. Article 15 of the Law on Subsurface lists protection of interests of national security of the Russian Federation is one of the objectives of the State subsurface use licensing system. Moreover, the Russian mining law doctrine highlights, as one of its basic principles, the necessity to ensure national security in the area of subsurface use.

57. On that basis, Article 2.1 of the Law on Subsurface defines the term and the test for allotment of subsurface plots of federal importance (that is, the plots allotted to ensure national defence and security).

1. Such subsurface plots automatically include, based on the criterion of territory: any and all subsurface plots located in the internal waters, territorial sea, and continental shelf of the Russian Federation;

2. the plots whose use requires using defence and security lands;

3. any (mainland) plots with extractable oil reserves of at least 70 million tons, and gas reserves of at least 50 billion cubic meters.

*****

60. In view of the geographical location of the majority of the Claimants' Upstream Assets, i.e. most gas fields and structures are located in either the Black Sea or the Sea of Azov [list], most of the Claimants' upstream Assets qualify as subsurface plots of federal importance as per the criteria mentioned in para. 1 of Article 2.1. of the Law on Subsurface.

61. The other remaining subsurface plots related to the relevant Upstream Assets that are located on the mainland [list] would also be qualified as plots federal importance if there are [sic] located on the defence and security lands or contain material hydrocarbon reserves.

¹⁷⁸ See First FTI Report, ¶ 6.1 et seq. ↩
¹⁷⁹ First Melgunov Report, ¶ 60. ↩
¹⁸⁰ Second Zhilin Report, ¶ 21 et seq. ↩

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Mr. Zhilin claims that CNG does not satisfy two of the three SPFI criteria.¹⁸¹ He notes that the subsurface plots pertaining to the Upstream Assets have not been treated as SPFIs to date and in his view, as the Russian Federation had signalled a willingness to apply the regime pragmatically,¹⁸² a Willing Buyer would have been entitled to assume that the Russian Federation would not designate the offshore Upstream Assets.

419. In the view of the Tribunal majority, there is no reason on the evidence for the Willing Buyer to expect SPFI designation would happen, and no need to factor in a discount. Professor Melgunov’s suggestion is unsupported speculation and is thus irrelevant to the valuation.

PART 13 - FISCAL TERMS AND LICENSING OF THE SPECIAL PERMITS IN THE RUSSIAN SCENARIO

1. Mineral Extraction Tax

420. The First FTI Report states that the valuation of the Upstream Assets under the Russian Scenario must reflect the impact of Russia’s Mineral Extraction Tax (“MET”), a royalty paid per unit of produced hydrocarbon.¹⁸³ The First Zhilin Report called out FTI for its failure to mention that Federal Law No. 263-FZ dated 30 September 2013 (“Law No. 263-FZ”) amended the MET.¹⁸⁴ This Law amended the Tax Code of the Russian Federation (the “Tax Code”), lowering

¹⁸¹ Tr., Hearing on Quantum, Day 4, 14:24-15:4: ↩

This included Resolution No. 1758, referred to the Claimants as the Nationalisation Resolution, which is CE-202 on the record, which provided for the validity of Naftogaz’s Ukrainian permits after their transfer to another entity, the Russian Chornomornaftogaz, which didn’t satisfy the requirements for an SPFI user.

Second Zhilin Report, ¶ 20:

20. The Russian Chernomorneftegaz, however, could not have qualified for Russian Licenses in SPFI areas because it did not meet the Law on Subsurface’s requirement that the license holder have at least five years of experience developing subsurface plots located on Russia’s continental shelf, or the requirement that Russia hold a share in the license holder’s charter capital or control of voting shares exceeding fifty percent. The fact that the Russian Federation nevertheless intended for the Russian Chernomorneftegaz to hold the Russian Licenses served as a further signal to the willing buyer that Russia would not designate the subsurface plots pertaining to the Upstream Assets as SPFIs upon Crimea’s admission.

¹⁸² Nationalization Resolution (CE-202); Law No. 58-FZ, 29 April 2008 (CE-1148). ↩
¹⁸³ First FTI Report, ¶ A9.11 et seq. ↩
¹⁸⁴ First Zhilin Report, ¶ 67, citing Law 263-FZ, Art. 1(1)(3), 30 September 2013 (CE-1121). Specifically, Law 263-FZ amended Art. 342.4(14) of the Tax Code of the Russian Federation, 5 August 2000 (CE-1079) (hereinafter “Tax Code”). ↩

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the royalty payments for gas and gas condensate by 90 percent for RGSS producers.¹⁸⁵ It was scheduled to come into force on 1 July 2014, three months after the Valuation Date.¹⁸⁶ Mr. Zhilin expresses the opinion that the Willing Buyer would take tax reduction into consideration in its assessment of value.¹⁸⁷

421. In response to Mr. Zhilin, the Respondent called a new expert to provide opinion evidence about Russian law, Professor Melgunov. From Professor Melgunov’s perspective, a Willing Buyer would not factor in the 90 percent tax reduction in Law No. 263-FZ because, although it was scheduled to come into force on 1 July 2014, “there are cases where the effective date of published federal laws was postponed.”¹⁸⁸ He also observes that to qualify, the subsurface plots must belong exclusively to an RGSS.¹⁸⁹ Finally, he highlights that the procedure for claiming this exemption had not been established and points to the likely amount of document collection required to obtain this exemption.¹⁹⁰ Based on these three uncertainties, he concludes that a Willing Buyer would not presume that this tax benefit would be available to it.¹⁹¹

The Tribunal Majority’s Ruling on the MET

422. The majority prefers Mr. Zhilin’s opinion about the availability of the MET benefit. It is reasonable to assume that if a law is scheduled to come into force shortly, then it will likely do so. Professor Melgunov’s concern about whether the expropriated system would qualify as an RGSS for the purposes of Law 263-FZ contradicts his opinion elsewhere that the system would be an RGSS. Finally, a Willing Buyer is entitled to assume that it will be treated fairly and equitably under whatever procedure is established. The procedural difficulties prophesised by Professor Melgunov are speculative and bereft of any probative documentary support.

¹⁸⁵ First Zhilin Report, ¶ 67. ↩
¹⁸⁶ First Zhilin Report, ¶ 67. ↩
¹⁸⁷ First Zhilin Report, ¶ 67. ↩
¹⁸⁸ First Melgunov Report, ¶ 180. ↩
¹⁸⁹ First Melgunov Report, ¶ 183. ↩
¹⁹⁰ First Melgunov Report, ¶¶ 183-184. ↩
¹⁹¹ First Melgunov Report, ¶ 186. ↩

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2. New Offshore Hydrocarbon Deposits

423. Effective 1 January 2014, Federal Law No. 268-FZ (“Law No. 268-FZ”) came into force in the Russian Federation.¹⁹² This Law partially exempts new offshore hydrocarbon deposits (“NOHDs”) from the MET. To qualify, commercial extraction must have started after 1 January 2016. NOHDs receive favourable tax breaks at varying levels.¹⁹³ FTI did not mention this in the First FTI Report. Like the MET issue, this amendment to the Tax Code potentially favours the Claimants.

424. Appendix C to the Second GCA Report contains a Microsoft Excel spreadsheet which, relying on Mr. Zhilin’s NOHD opinion, describes which of the Upstream Assets would qualify as NOHDs, setting out their varying tax exemptions based on each field’s individual characteristics.

425. Professor Melgunov provides the following opinion:

As I was informed by Ivanyan and Partners, and as confirmed by the conclusions made in a separate expert report by the Russian industry expert Vygon Consulting that the Russian Federation will also submit in these arbitral proceedings, the development of a number of the offshore gas fields that comprise the Claimants’ Upstream Assets, began in the Soviet period or, if not, in the 1990-2000s.

For instance, as I learnt from the Vygon Consulting expert report, industrial production started on offshore gas fields in the following years: in 1994 - at Shtormove gas field, in 2012 - at Odeske gas field, in 1992 - at Arkhanhelske gas field, in 2002 - at East Kazantypske gas field, in 1983 - at Holitsynske gas field; in 2004 - at North Bulhanatske gas field.

Based on these facts, it can be concluded that a number of the offshore fields included in the Claimants’ Upstream Assets were put into industrial production development well before 1 January 2016. In view of this, as of the Valuation Date, a willing buyer would have no grounds to view itself “automatically” as a future NOHDs operator and, consequently, to expect that it would be able to benefit from a preferential tax regime.¹⁹⁴ (emphasis added)

¹⁹² First Zhilin Report, ¶ 68, citing Tax Code, Arts. 338(6), 342(2.1) (CE-1079). ↩
¹⁹³ First Zhilin Report, ¶ 68: “The law partially exempts an NOHD field—i.e., a field for which commercial extraction has not commenced before 1 January 2016, and which satisfies additional conditions as explained in Annex B to this report—from the MET such that the MET will equal a rate of 30, 15, or 10 percent of the sales price of gas condensate or crude oil only, or 30, 15, or 1.3 percent of the sales price of natural gas, depending on the characteristics of the field.”. ↩
¹⁹⁴ First Melgunov Report, ¶¶ 175-177. ↩

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426. Professor Melgunov repeated this in his PowerPoint presentation during the Hearing on Quantum:

The special (preferential) tax regime for new offshore hydrocarbon deposits (NOHD) is inapplicable to the majority of the Claimants’ Upstream assets, because they did not meet the established criteria (both in terms of the degree of reserve depletion and the date of the beginning of commercial production of hydrocarbons).

Most of the deposits from the Claimants’ Upstream assets were not new (were put into development long before the date specified in the Law), and the degree of depletion of the reserves has also been above 1% (see First Expert Report – paras. 175-177).¹⁹⁵ (emphasis in the original).

The Tribunal Majority’s Ruling on NOHDs

427. It appears that Professor Melgunov overlooked Appendix C to the Second GCA Report because the fields he mentions are excluded from GCA’s NOHD exemption calculations. GCA refers to Shtormove, Odeske, Arkhanhelske, East Kazantypske, and Holitsynske Offshore Hydrocarbon Deposits (“OHDs”) and as such GCA considers them to be ineligible for NOHD deductions. Mr. Zhilin points out that OHDs—minimally depleted fields—are dealt with separately under the Tax Code.¹⁹⁶ The majority finds that Professor Melgunov’s opinion pertaining to NOHDs is not supported by the facts.

3. One-Time License Payments

428. Professor Melgunov testified that the Willing Buyer could face substantial one-off payments to acquire the Special Permits¹⁹⁷ because “a one-time payment for a SPFI can reach several billion rubles”.¹⁹⁸ This opinion, however, is premised on the Upstream Assets being designated as SPFIs.¹⁹⁹

¹⁹⁵ Presentation of Professor Melgunov, Hearing on Quantum, slide 32. ↩
¹⁹⁶ First Zhilin Report, ¶ 68, footnote 84. ↩
¹⁹⁷ First Melgunov Report, ¶¶ 189-190. ↩
¹⁹⁸ Presentation of Professor Melgunov, Hearing on Quantum, slide 33. ↩
¹⁹⁹ First Melgunov Report, ¶ 191: ↩

It should be noted that, in practice, in similar circumstances, the one-off payment for federal subsurface plots may amount to several billion roubles. For example, in a 2014 auction for the use of the subsurface of the Minkhovsky subsurface plot of federal importance located in Yamal-Nenets Autonomous District of the Russian Federation, the initial amount of the one-off payment was RUB 2.722 billion, while the eventual

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The Tribunal Majority’s Ruling on One-Time License Payments

429. The majority has already given its reasons for concluding that the Upstream Assets would not be designated SPFIs. It should further be noted that FTI does not mention one-off licensing fees of several billion rubles in its First Report, nor does it mention SPFIs. To the contrary, FTI assumed “zero bonus fees were payable.”²⁰⁰ The Tribunal majority thus rejects this aspect of Professor Melgunov’s opinion in favour of Mr. Zhilin’s evidence about subsurface license fees, which formed the basis of GCA’s opinion of value and closely resembles FTI’s initial opinion.²⁰¹

4. Value Added Tax, Corporate Tax, Environmental Impact Fees, Property Tax

430. There appears to be substantial agreement among the experts about the application of these various taxes to the Upstream Assets.²⁰²

5. Export Duties

431. Mr. Zhilin provides an opinion about the Russian Federation’s levies of export duties on oil and gas under Federal Law No. 5003-1 “On Customs Tariff”, dated 12 May 1993 (“Law on

one-off payment (as per the auction winner’s bid PJSC “Oil Company “Rosneft”) amounted to RUB 5.9 billion.
²⁰⁰ Second FTI Report, ¶ 5.53: “In Our First Report we had assumed that signature/production bonuses would have varied significantly from field to field whilst conservatively assuming that zero bonus fees were payable to the government for the purpose of our illustrative calculations.” (emphasis added); First FTI Report, Table A9-1. Under the line titled “Signature/production bonuses”, this Table states the following: “We conservatively assume zero bonus fees payable to the government.” (emphasis added). ↩
²⁰¹ First Zhilin Report, ¶¶ 73-75. ↩
²⁰² Second GCA Report, ¶¶ 422-424: ↩

We agree with FTI that a 20% corporate tax profits rate applies in Russia, and that within any one legal entity, losses from one project can offset profits from others. We also agree with FTI that VAT at 18% is paid on domestic purchases and is levied on domestic sales.

However, we have noted an additional levy that is payable, namely Property Tax. FTI does not address this, although it is stated as being levied at 2.2% of the net book value of fixed assets.

We do not have these net book values upon which to make such a calculation and, as FTI has assumed in its illustrative valuations of Odeske and South Kerchenske, we have likewise assumed that any Property Tax has a de minimis effect.

Second FTI Report, ¶ 5.50 (“In the Second GCA Report, GCA agrees with our assessment of: (i) a 20% corporate tax profit rate in Russia; and (ii) an 18% rate of VAT.”).

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Customs Tariff”).²⁰³ Specifically, he states that “exemptions from export duties apply for exports of gas, gas condensate, and crude oil, extracted from NOHD fields” under certain conditions.²⁰⁴

432. In its Second Report, FTI says “[w]e have been instructed to rely on the opinion of Professor Melgunov for the appropriate fiscal terms and applicable rates for export duty ...”.²⁰⁵ Although Professor Melgunov provides an opinion that exports are not possible, neither his First nor Second Reports includes an opinion about the Law on Customs Tariff. Professor Melgunov only mentions it in a footnote in his analysis of NOHDs.²⁰⁶ This appears to be yet another discrepancy between FTI and Professor Melgunov.

433. Since the majority has found elsewhere that it is unlikely that the Willing Buyer would be permitted to export gas, the rate of export duties is moot.

PART 14 - THE RUSSIAN FEDERATION’S CRITICISMS OF THE CLAIMANTS’ VALUATION OF UPSTREAM ASSETS

434. Broadly speaking, the Russian Federation raises three issues regarding GCA’s valuation of the Upstream Assets and whether there is sufficient evidence for GCA to provide an opinion of value:

(a) GCA’s methodology and the application of Petroleum Resources Management System (“PRMS”);

(b) the quality of the evidence that GCA relied upon in rendering its opinion of value; and

(c) the accuracy of GCA’s valuation of the Upstream Assets’ operating costs.

²⁰³ First Zhilin Report, ¶ 69. ↩
²⁰⁴ First Zhilin Report, ¶ 70. ↩
²⁰⁵ Second FTI Report, ¶ 5.52. ↩
²⁰⁶ First Melgunov Report, ¶ 179, footnote 102; Article 3(2) of the Federal Law No. 263-FZ dated 30 September 2013 “On Amendments to Chapter 26 of Part Two of the Tax Code of the Russian Federation and Article 3.1 of the Law of the Russian Federation ‘On Customs Tariffs’” (VM-55). ↩

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435. A theme that runs throughout FTI’s criticisms of GCA is that the Claimants, for example CNG, were unprofitable, money-losing ventures and that the valuation of their assets should be adjusted accordingly.²⁰⁷ The Russian Federation points to NJSC Naftogaz’s consolidated financial statement that:

...the Group’s negative working capital as at 31 December 2013 and 2012 amounted to UAH 53,893 million and UAH 33,208 million, respectively, and for the years then ended the Group incurred net losses in the amounts of UAH 17,957 million and UAH 31,466 million, respectively, and there is uncertainty as to the outcome of significant ongoing litigations for the Group.²⁰⁸

436. It appears to the Tribunal majority that in making these criticisms, FTI has somewhat lost sight of the Tribunal’s mandate, which is to determine the FMV (if any) of the hypothetical sale of the expropriated assets rather than a hypothetical sale of shares in the Claimant companies. Many property-rich, cash-poor companies may lurch into bankruptcy but nevertheless possess assets of great value. That CNG and Naftogaz were unprofitable in the lead up to the Valuation Date is of no relevance when determining the FMV of their assets in a hypothetical sale of those assets to a Willing Buyer.

1. Challenge to the Quality of the Operating Costs Evidence

437. Broadly speaking, the Russian Federation criticizes the Claimants for the poor quality of the information they have produced.²⁰⁹ GCA explained that as a result of the invasion and subsequent takeover of Crimea, the Claimants no longer have the documents and information in their power, possession, or control.²¹⁰ According to the Claimants, the Russian Federation cannot

²⁰⁷ See, e.g., Tr., Hearing on Quantum, Day 5, 71:12-74:8; Presentation of FTI, Hearing on Quantum, slides 8-12; Second FTI Report, ¶¶ 2.9-2.10. ↩
²⁰⁸ NJSC Naftogaz, Consolidated Financial Statements as at 31 December 2013 and 2012 and for Years Ended, 27 February 2015, 5 (CE-832). ↩
²⁰⁹ Second FTI Report, ¶ 2.13: ↩

In this regard, as we explain in paragraphs 4.83 to 4.111, we maintain our view that the financial and operating information upon which GCA relies is poorer than the information we would generally rely on in such a valuation (and poorer than the information upon which a potential buyer would likely seek to evaluate a transaction worth more than USD 4 billion according to GCA’s valuation). This decreases the reliability of GCA’s valuation. (emphasis added)

²¹⁰ Second GCA Report, ¶¶ 94, 101. ↩

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seize documents and information from the Claimants en masse and then object to the Claimants’ limited evidence.

438. The issues regarding the quality of evidence that is available to determine the FMV of the Upstream Assets are as follows:

(1) no historic field level financial accounts have been provided. These would have enabled us (and GCA) to match field level economic models to actual reported figures. Instead, GCA has made numerous unsupported assumptions regarding inter alia sales volumes and operational costs;

(2) no field-level reservoir models or annual reserve accounts have been provided. These would have enabled us to: (i) analyse detailed forecasts, developed prior to the Valuation Date, of how the fields were expected to be developed; and (ii) perform a detailed analysis of gas-in-place Recovery Factors, etc. that were accepted prior to the Valuation Date;

(3) GCA does not provide its work product wherein it calculated gas-in-place, recovery factor, pressure analyses, flow analyses, or reservoir parameters such as porosity. Having access to these work documents would have enabled us to test GCA’s assumptions and conclusions;

(4) no evidence has been provided that work commitments were met under the evidenced Special Permits;

(5) no maintenance records for operating fields have been provided. GCA has not provided evidence of the state of repair of the Upstream Assets, or maintenance activity carried out in order to certify asset integrity. These would have allowed us to determine the level of downtime and maintenance that should be considered in the forecast analyses; and

(6) GCA has referenced CNG quarterly and annual financial performance if reports but provides no evidence of these reports.²¹¹

A. Lack of Historic Field Level Financial Accounts

439. GCA’s DCF analysis estimates future capital expenditures based on financial data field development plans and investment reports.²¹² Information was unavailable about operating costs related to individual fields.²¹³ GCA considered the information about the combined fields was sufficiently accurate because “most fields are gas and are located in relatively shallow water, so

²¹¹ First FTI Report, ¶ 2.63. ↩
²¹² First GCA Report, ¶ 141. ↩
²¹³ First GCA Report, ¶ 142. ↩

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the similarities between the fields are greater than the differences”.²¹⁴ Palasa was the one exception, because it is a deep water development.²¹⁵

440. GCA’s estimate of operating costs are based on CNG’s actual 2012 and 2013 operating costs.²¹⁶ Thus:

i. Fixed costs are assessed based on the number of producing wells at any time. We used the fixed cost parameter of [Ukrainian hryvnia] UAH 280,000 per well per month.

ii. The variable cost for gas production is UAH 8.0/Mcm (e.g., the variable cost for 1 MMcm of gas production is equal to UAH 8,000).

iii. The variable cost for liquids production (applied to both condensate and oil) is UAH 25.0/mt (e.g., the variable cost for 1,000 mt of liquids production is equal to UAH 250,000).²¹⁷

GCA says its use of these parameters matches CNG’s total 2013 operating cost of UAH 332.7 million.²¹⁸

441. The First GCA Report applies this methodology to the Claimants’ Upstream Assets over 151 pages.²¹⁹

²¹⁴ First GCA Report, ¶ 142. ↩
²¹⁵ First GCA Report, ¶ 143. ↩
²¹⁶ First GCA Report, ¶ 144, Table 9; Chornomornaftogaz, Quarterly and Annual Financial Performance Reports from 2011-2013 (CE-914): ↩

²¹⁷ First GCA Report, ¶ 145. ↩
²¹⁸ First GCA Report, ¶¶ 145-146. ↩
²¹⁹ First GCA Report, ¶¶ 153-248, Appendix VII, 209-329. ↩

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442. Even though GCA states that “[n]o information was available about operating costs related to individual fields”,²²⁰ FTI criticizes GCA’s methodology for not using historic field level financial accounts. FTI says that such documents “would have enabled us (and GCA) to match field level economic models to actual reported figures”.²²¹ FTI does not explain why this is a preferred methodology when nearly all the fields are similar. It says that GCA “made numerous unsupported assumptions regarding inter alia sales volumes and operational costs”.²²² FTI does not identify any specific assumptions in GCA’s 151 pages of analysis.

B. Lack of Field Level Reservoir Models and Annual Reserve Accounts

443. The First FTI Report criticizes GCA in the following terms:

no field-level reservoir models or annual reserve accounts have been provided. These would have enabled us to: (i) analyse detailed forecasts, developed prior to the Valuation Date, of how the fields were expected to be developed; and (ii) perform a detailed analysis of gas-in-place Recovery Factors, etc. that were accepted prior to the Valuation Date ...²²³

444. GCA also pointed to its reliance on “extensive field-level subsurface and performance data” to derive its estimates and predictions of future production.²²⁴ It says that the Ryder Scott reserves report data was as of 31 December 2013, meaning that earlier data would not assist the analysis.²²⁵

445. FTI subsequently takes issue with the fact that GCA did not act prudently because it did not “consider contemporaneous field and reservoir models”²²⁶ (emphasis added), which

²²⁰ First GCA Report, ¶ 142. ↩
²²¹ Second FTI Report, ¶ 4.92. ↩
²²² Second FTI Report, ¶ 4.92. ↩
²²³ First FTI Report, ¶ 2.63(2). For context, pages 98 to 466 of Ryder Scott’s first report provide their data about how Ryder Scott estimated future reserves, resources, and income attributable to the Upstream Assets (See Ryder Scott Company, Estimated Future Reserves, Resources and Income Attributable to Certain Interests (CE-895)). GCA addresses Shtormove and Odeske in the body of its report, along with the 17 smaller fields it analyzes in Appendix VII of its first report. ↩
²²⁴ Second GCA Report, ¶ 97. ↩
²²⁵ Second GCA Report, ¶¶ 97-98. ↩
²²⁶ Second FTI Report, ¶ 4.96: ↩

The purpose of GCA’s analysis should have been to determine the forecasts of production, costs, expenses, etc that would have been estimated by a petroleum evaluator as of the Valuation Date. A prudent petroleum

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disregards the fact that the Upstream Assets are in the Respondent’s possession and are inaccessible. FTI states that GCA did not perform their analysis to the standards of a prudent petroleum evaluator,²²⁷ but does not reveal where that standard comes from or what it is based on. The majority concludes that FTI has not provided the Tribunal with any valid critiques of GCA on this issue.

C. GCA Work Product

446. FTI says that it was unable to test GCA’s assumptions and conclusions because GCA did not append its work product to its First Report. This meant that FTI was unable to check GCA’s calculations for gas in place, recovery factor, pressure analyses, flow analyses, and reservoir parameters.²²⁸ In its Second Report, GCA denies this assertion, detailing how this information was provided to FTI.²²⁹ Specifically, much of the work was provided in PHDWin data files that came from both Ryder Scott²³⁰ and GCA,²³¹ along with other data.²³² PHDWin data files allow software owners to analyze oil and gas well performance and carry out economic analysis; the software package is published by TRC Consultants.²³³ FTI says this data was not sufficient to allow it to review GCA’s work.²³⁴

447. Due to the lack of detail about what steps FTI took (if any) to understand the information presented to it, the majority does not accept this criticism of GCA’s work.

evaluator at the Valuation Date would have considered contemporaneous field level reservoir models and annual reserve accounts in performing its analyses.
²²⁷ Second FTI Report, ¶ 4.96. ↩
²²⁸ First FTI Report, ¶¶ 2.63(3), 5.39; Second FTI Report, ¶ 4.97. ↩
²²⁹ Second GCA Report, ¶ 99. ↩
²³⁰ Ryder Scott PHDWin Data File (CE-915). ↩
²³¹ GCA, PHDWin Data File (CE-917). ↩
²³² Adjustments to the Project of Development for Holitsynske Gas Field, 2011, Table 3.26, 150-153 (CE-962); Plan for the Commercial Development of the Shtormove Gas Condensate field, 2012, Tables 3.8-3.10 (CE-957); First GCA Report, footnote 205, referring to Screenshot of MBAL and Prosper Calculations for Odeske (CE-920); Screenshot of MBAL Inputs for Odeske for the Second GCA Report, 14 February 2014 (CE-1090). ↩
²³³ See, e.g., Second GCA Report, i (Glossary) (“PHDWin[:] A commercial software package (by TRC Consultants) used to conduct analysis of well performance and to carry out economic analysis.”). ↩
²³⁴ Second FTI Report, ¶¶ 4.97-4.98. ↩

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D. Whether the Claimants Satisfied Working Conditions

448. FTI’s fourth criticism is that “no evidence has been provided that work commitments were met under the evidenced Special Permits”.²³⁵ GCA’s reply is that it was unaware of any concerns that the Claimants had failed to meet their commitments under the Special Permits. Furthermore, the fact that the Special Permits had been retained and reissued by the Russian Federation suggests that the Claimants were, in fact, in compliance with their work commitments.²³⁶

449. FTI expands on its critique in its Second Report. It says that as part of the due diligence process a hypothetical Willing Buyer would examine the appendices to each Special Permit to determine whether the owner of the Special Permit had complied with the several work commitments listed at the end of each permit.²³⁷ It directs the Tribunal’s attention to one example of how CNG appears not to have complied with a work commitment in one field.²³⁸ FTI does not provide an opinion about whether this example of non-compliance would be material such that it could result in suspension, termination, or non-renewal.

450. The majority agrees with GCA that FTI’s issue in effect requires the Claimants to prove a negative: that they have not failed in complying.²³⁹ FTI shows that there was likely an issue with one field. It does not appear that this issue was material to CNG’s regulator, since FTI does not show any associated regulatory history. The Tribunal majority would expect that if CNG had a history of suspensions or terminations of Special Permits, then there would be evidence of this. FTI has none. Similarly, FTI does not respond to GCA’s observation that the Russian Federation reissued the Special Permits. The majority, therefore, finds that this criticism has not been established.

²³⁵ First FTI Report, ¶ 2.63(4). ↩
²³⁶ Second GCA Report, ¶ 100. ↩
²³⁷ Second FTI Report, ¶ 4.104. ↩
²³⁸ Second FTI Report, ¶ 4.105. ↩
²³⁹ Second GCA Report, ¶ 100 (“GCA is not aware of any concerns that work commitments had not been met, and FTI does not suggest they were not met.”). (emphasis in the original) ↩

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E. Maintenance Records

451. FTI complains that GCA has not accounted for the possibility of extraordinary shutdowns.²⁴⁰ GCA’s Second Report states, “we did not provide maintenance records because we understand from Naftogaz’s counsel that Naftogaz does not have access to this information”.²⁴¹ Further, it points out that repairs and maintenance are accounted for in their operating data and that there was no reason to assume given ongoing production that the facilities were not in good working order. FTI does not point to any factors or evidence that show either a reasonable or probable risk. The majority of the Tribunal considers that a theoretical possibility alone is not sufficient to displace GCA’s likely operations costs.

F. Quarterly and Annual Financial Reports

452. In its First Report, FTI stated “GCA has referenced CNG quarterly and annual financial performance reports but provides no evidence of these reports”.²⁴² GCA highlighted the evidence in its Second Report.²⁴³ In reply, FTI observes that the financial information GCA uses does not contain basic financial statements FTI would expect in audited financial accounts, nor does it provide the details of the relevant accounting standards used. However, FTI does not state what basic financial statements it would expect, nor does it describe what details should be present. In these circumstances, the Tribunal majority is not persuaded of the validity of this criticism.

2. Accuracy of GCA’s Operating Costs Analysis

453. The Russian Federation argues that GCA likely underestimated the operating costs and thus likely overestimated the value of the Upstream Assets.²⁴⁴

454. The GCA’s Mr. Seager testified at the hearing that:

Our analysis, set out in spreadsheets provided to Russia, matches the actual operating cost data available for 2013. The approach that we used is industry standard and was also used by Ryder Scott. FTI does not dispute the methodology

²⁴⁰ Second FTI Report, ¶¶ 4.108 et seq. ↩
²⁴¹ Second GCA Report, ¶ 101. ↩
²⁴² First FTI Report, ¶ 2.63(6). ↩
²⁴³ Second GCA Report, ¶¶ 103-104. ↩
²⁴⁴ First FTI Report, ¶ 5.43. ↩

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and has also used it for their own illustrative calculations; they only apply some different numbers.²⁴⁵

He was not cross-examined or otherwise challenged on this testimony.

A. Assessment of Fixed and Operating Costs

455. The Second GCA Report provided a response to FTI’s issue about GCA’s calculation of fixed and operating costs.²⁴⁶

456. FTI appears to have declined the opportunity to further join issue after receiving GCA’s clarification. The Tribunal majority therefore finds this criticism to be unsubstantiated.

457. In its Second Report, FTI also raises issues about operating costs for the first time. Its criticism is that GCA valued the service assets based on their market value, and therefore the operating costs should also have been calculated using market rates rather than the actual operating costs that GCA used.²⁴⁷ In the view of the Tribunal majority, the actual operating costs are the most reliable source of information since the actual costs necessarily reflect a sample of the Crimean market. Accordingly, this is not a valid criticism.

B. Use of Average Fixed and Operating Costs

458. GCA detailed how its cost parameters differed from those of both Ryder Scott and FTI.²⁴⁸ According to GCA, both Ryder Scott and FTI overestimated the operating costs of the Upstream Assets because they mistakenly included Midstream costs in their analyses.²⁴⁹ The Second FTI

²⁴⁵ Tr., Hearing on Quantum, Day 5, 14:10-14:16. ↩
²⁴⁶ Second GCA Report, ¶ 107: ↩

The operating costs provided to and cited by GCA were not available to us on a field-by-field basis, but in the aggregate across all developed fields at the Valuation Date by line item category (i.e., by category of expense). These line items were classified as either relating to fixed costs, costs that vary with gas production, or costs that vary with liquids production. This is standard industry practice and was followed by Ryder Scott, FTI (in its report), and GCA. For all offshore fields, to estimate operating costs going forward, we applied these unit costs to the number of producing wells and the production volumes of gas and liquids (respectively), to derive the total operating cost per field, by year. It is not the case that GCA’s analysis used the “same ... costs” going forward—we used the same cost parameters, adjusted in future years for inflation. This is standard practice in the oil and gas industry. (emphasis in the original)

²⁴⁷ Second FTI Report, ¶¶ 4.65-4.67. ↩
²⁴⁸ Second GCA Report, ¶ 110, Table 5. ↩
²⁴⁹ Second GCA Report, ¶ 111. ↩

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Report suggests that GCA did not account for the operating costs of the Midstream Assets at all.²⁵⁰ At the Hearing on Quantum, Mr. Seager explained that their costs were accounted for in “transportation tariffs reimbursed by those customers.”²⁵¹

459. Mr. Seager was not cross-examined or otherwise challenged on this testimony. The majority therefore accepts GCA’s position that the operating costs of the Midstream Assets are separate, and that they are covered by the transportation tariffs reimbursed by customers.

C. Number of Wells in Odeske Field

460. GCA found that FTI’s operating costs analysis was incorrect because FTI included 22 wells in the Odeske field when there are, in fact, 20 wells. The addition of two further wells would result in increased operating costs that would lower the valuation of this field.²⁵² FTI did not respond to this issue.

²⁵⁰ Second FTI Report, ¶¶ 4.68-4.82. ↩
²⁵¹ Tr., Hearing on Quantum, Day 5, 14:17-14:23. ↩
²⁵² Second GCA Report, ¶ 112. ↩

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D. Onshore Costs

461. In response to the issue raised by FTI, GCA expanded upon how it calculated onshore costs in its Second Report.²⁵³ FTI did not respond to the above clarification in their Second Report.²⁵⁴ The majority therefore accepts GCA’s valuation of onshore costs for the Upstream Assets.

3. Conclusion

462. The majority of the Tribunal is satisfied that the Claimants have met the onus of proving their operating costs on a balance of probabilities. FTI’s criticisms of GCA’s methodology, the quality of the evidence GCA relied upon and suggested errors in the accuracy of GCA’s calculation of the operating costs are not persuasive.

PART 15 - THE QUANTUM VALUATION OF UPSTREAM ASSETS

463. The Russian Federation argues²⁵⁵ that a DCF analysis is industry standard practice and the most appropriate method to value Upstream Assets. It outlines what it regards as the appropriate steps of a DCF valuation in this case:

²⁵³ Second GCA Report, ¶¶ 114-117: ↩

As discussed above, the available data on operating costs provided to GCA do not distinguish between onshore and offshore assets. It was necessary to make a reasonable assumption to account for this fact. We therefore applied all of the fixed costs to the offshore wells.

We took this approach because the cost of operating an onshore field is significantly less than that to operate an offshore field, so it would not be appropriate to assume the calculated offshore per-well fixed costs applied onshore.

Our approach is a simplification, but the overall economic impact is negligible in our view—if it exists at all. Total onshore production in 2013 was about 0.7% of the total production on a gas equivalent basis, and declining. Moreover, by applying all of the fixed costs to the offshore fields, we may have marginally underestimated the field life and value of the offshore fields. In any event, because the onshore assets contribute less than 1% to total value, any variation in the end of life caused by assuming no fixed cost is de minimis and immaterial.

For all the reasons set out above, in GCA’s opinion the operating cost basis established in 2013 forms a reasonable basis for estimating such costs going forward. Had costs been available for individual fields, we would have considered them, but such detail was neither available nor necessary for the valuation of the Upstream Assets. (emphasis in the original)

²⁵⁴ FTI did take issue with the final sentence of Second GCA Report, ¶ 117, but did so in the context of critiquing the information available to GCA: Second FTI Report, ¶ 4.90. ↩
²⁵⁵ Respondent’s Opening Presentation, Hearing on Quantum, slide 60. ↩

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(a) determine a production forecast for the volumes that could be commercially produced;

(b) establish a price forecast for gas, condensate and oil prices;

(c) determine gross revenues on that basis;

(d) apply the relevant fiscal terms; and, finally

(e) apply the appropriate discount rate to the cash flows, accounting notably for country risk.

464. This model was followed by GCA who approached valuation of the Upstream Assets as follows:²⁵⁶

1 Future Production and Costs
GCA identified the volumes of gas, condensate, and oil that a willing buyer stepping into the shoes of NJSC Naftogaz, CNG and UGV could produce from the Upstream Assets and sell.
GCA then identified the costs associated with that production.

2 Gas Pricing
GCA assessed what the market would consider to be a reasonable expectation of the future price that gas could be sold in Ukraine (and, as a result, would factor in a willing buyer’s purchase price calculations).

3 Oil and Condensate Pricing
GCA assessed what the market would consider to be a reasonable expectation of the future price that oil and condensate could be sold (and, as a result, would factor into a willing buyer’s purchase price calculations).

4 Contractual and Fiscal Terms
GCA determined the contractual and fiscal terms applicable to the Upstream Assets. After accounting for these terms, GCA calculated the net revenues that would be expected from the Upstream Assets going forward.

5 Discount Rate
GCA assessed the appropriate discount rate, adjusted to reflect country risk, used to convert the expectations of future net cash flows into a FMV on the Valuation Date.

²⁵⁶ First GCA Report, ¶ 46. ↩

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6 Results of the DCF Analysis
GCA calculated the FMV of future net cash flows of individual assets into a FMV on the Valuation Date for NJSC Naftogaz, CNG and UGV’s interests in those Upstream Assets.

4.1 Upstream Assets

[Image of a map of Crimea showing gas fields]

Source: First GaffneyCline Report, Figure 29 (with the Shtormove field circled)

465. Unfortunately, FTI was instructed by counsel for the Russian Federation to refrain from providing their own valuation. Counsel instructed FTI as follows:

3. In respect of the inappropriate assumptions you identify in respect of (1) and (2), provide illustrative calculations showing the impact of changing those assumptions on the value of one producing field and one prospective resource. For the avoidance of doubt, please refrain for the time being from providing an overall valuation of the Claimants’ purportedly dispossessed assets. It must be made clear that your illustrative calculations in this regard shall be made without prejudice to the Respondent’s position that any investments made before

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1 January 1992 are not subject to any compensation, and thus cannot have any value in these proceedings.²⁵⁷ (emphasis added)

1. Quantifying the Upstream Resources by Petroleum Resources Management System

466. The quantum experts for the Claimants, GCA, and the Respondent, FTI, agree that, in the words of FTI:

the Petroleum Resources Management System ... defines industry accepted standards for classifying and categorizing petroleum resources based on:

(1) uncertainty associated with the quantity of petroleum present in the fields; and

(2) the chance of commerciality, which reflects the project maturity.²⁵⁸

However, FTI disagrees with GCA’s application of PRMS which it states are “higher than a reasonable estimate.” Unfortunately, FTI does not offer a competing estimate.

467. The experts also agree about the basic methodology, as can be seen from FTI’s Second Report:

We agree with GCA that proved plus probable (“2P”) reserves are recognized as the best estimate of the reserves, and that best estimate production forecasts are typically used for economic valuations. Accordingly, our valuation is based on 2P reserves.²⁵⁹

468. According to the Russian Federation however, GCA’s technical assessment is “flawed”²⁶⁰:

(a) the PRMS provides a useful starting point but does not account for the risks and uncertainties that must be factored in the determination of FMV;

²⁵⁷ Letter from Schellenberg Wittmer to FTI Consulting, 2 December 2019 (FTI-154). ↩
²⁵⁸ First FTI Report, ¶ 5.6. ↩
²⁵⁹ Second FTI Report, ¶ A4.6; Petroleum Resources Management System, June 2018, Figures 1.1, 2.1 (FTI 2-2); GCA Presentation, Hearing on Quantum, slide 5; Tr., Hearing on Quantum, Day 5, 8:7-12, 9:4-6; First GCA Report, ¶¶ 69-71. PMRS Version 1.01 was approved for use in June 2018 by the Society of Petroleum Engineers, the World Petroleum Council, the American Association of Petroleum Geologists, the Society of Petroleum Evaluation Engineers, the Society of Exploration Geophysicists, the Society of Petrophysicists and Well Log Analysts, and the European Association of Geoscientists and Engineers. Mr. Seager of GCA helped write the standard. When asked about PRMS’s definitions during his cross-examination, Mr. Seager pointed out that he “was actually on the committee that wrote these definitions, so I’m aware of the discussions that went behind it.” ↩
²⁶⁰ Respondent’s Opening Presentation, Hearing on Quantum, slide 62. ↩

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(b) the level of project maturity impacts the risk and uncertainty associated with reserves, but is not quantitatively accounted for under the PRMS framework;

(c) in line with industry practice, GCA should apply Reserves Adjustment Factors (“RAFs”) to derive risked cash flows;²⁶¹

(d) RAFs are commonly used to account for risk and uncertainty.²⁶²

2. The Use of Reserve Adjustment Factors

469. The Russian Federation says that RAFs should have been used in GCA’s PRMS analysis based on calculations found in a 2013 survey by the Society of Petroleum Evaluation Engineers (“SPEE”).²⁶³ GCA takes the position that RAFs are used almost exclusively in North America.²⁶⁴

²⁶¹ Occidental, ¶ 709 (CLA-187). ↩
²⁶² AmCM, ¶ 436(i)-(ii); Rejoinder on Quantum, ¶¶ 601-631. ↩
²⁶³ See First FTI Report, ¶ 5.29; Second FTI Report, ¶¶ 4.29 et seq.; Thirty-Second Annual Survey of Parameters Used in Property Evaluation, June 2013, Society of Petroleum Evaluation Engineers, 44, Table 25 (FTI-42): ↩

OFFSHORE
RAFs Used for Acquisitions - Respondents Who Use Only RAFs (%)

²⁶⁴ Second GCA Report, ¶ 78. GCA’s Mr. Seager stated in his examination-in-chief (see Tr., Hearing on Quantum, Day 5, 8:7-8:12): ↩

FTI claims that the application of RAFs is common in international valuation practice. This is not the case. In my entire career, which now spans nearly 50 years, I have never used reserve adjustment factors in a valuation opinion. The proper approach is to use the 2P, or best estimate.

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470. In response, FTI cited six cases that have used RAFs to value petroleum reserves. Of these, five are from the United States. One is an investor-State dispute, named Occidental Petroleum v. Ecuador.²⁶⁵ This was admitted by FTI’s expert, Mr. Davis, to be the only practical example outside of North America that FTI cited for in-practice use of RAFs.²⁶⁶ FTI was not able to produce any other practical examples of the international application of RAFs.²⁶⁷ Given how often oil and gas are the subjects of investor-State disputes, the Tribunal majority would have expected if RAFs were common outside the North America, then there to be more than one case to illustrate that point.

471. FTI also cites six publications to demonstrate the use of RAFs internationally but Mr. Davis did not point to the articles as evidence of international acceptance when asked about the issue in cross-examination.²⁶⁸

472. The Tribunal majority notes that Mr. Seager’s London-based valuation experience and current practice appears to be more focused on the international oil and gas market than Mr. Davis’s Texas-based practice and experience, which appears to be largely focused on the U.S. domestic market. The Tribunal majority thus accepts the evidence of Mr. Seager that RAFs are not appropriate in the valuation of the Upstream Assets in this arbitration.

473. Further, the majority prefers the evidence of Mr. Seager that a 2P or best estimate approach based on PRMS is the international industry standard for valuing oil and gas fields. The majority also finds that since Mr. Seager helped write PRMS standards, he is qualified to employ them and

In his cross-examination, Mr. Seager was challenged on his opinion that RAFs are largely a North American phenomenon to which he gave the following explanation (see Tr., Hearing on Quantum, Day 6, 25:1-16):

Q. Mr Seager, geology is the same everywhere in the world: it’s not different in the US than –
A. That’s not relevant. Yes, geology is similar around the world. What matters is this has historically been developed in the United States over many decades, where, particularly the onshore US, there’s dealing with individual landowners who have mineral rights, which doesn’t happen anywhere else in the world. There are, typically, small parcels of acreage that are dealt with, and people are looking at individual wells with different ownerships. And when banks are looking to lend money on one well, they have no other means of recourse to recover that money apart from that well. So, yes, that’s riskier than developments involving hundreds of wells, which is what we’re dealing with offshore Crimea -- offshore and onshore Crimea. (emphasis added)

²⁶⁵ Occidental (CLA-187, FTI2-88). See, e.g., Second FTI Report, ¶¶ 4.30 et seq. ↩
²⁶⁶ Tr., Hearing on Quantum, Day 6, 50:2-50:5. ↩
²⁶⁷ Tr., Hearing on Quantum, Day 6, 53:11-53:14. ↩
²⁶⁸ Tr., Hearing on Quantum, Day 6, 53:11-53:14. ↩

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that he did in fact apply them correctly to the Upstream Assets. The majority further accepts that RAFs are largely a North American phenomenon and rarely used in international practice and they do not need to be considered as part of PRMS. Finally, the majority is satisfied that PRMS can be used as a basis for determining the FMV of oil and gas reserves and that GCA analyzed site-specific risk and uncertainty factors when applying its PRMS evaluation to the Upstream Assets to yield an industry-standard, internationally-acceptable FMV.

3. Whether Risk has Properly Been Taken Into Account by GCA

474. FTI agrees that PRMS defines industry-accepted standards for classifying and categorizing petroleum resources, but disagree with GCA that fair market value could be assessed without a suitable adjustment for geological, mechanical, and development risks and uncertainties.²⁶⁹ FTI refers to GCA’s “unrisked PRMS”.²⁷⁰

475. FTI gives generic examples of possible geological uncertainties.²⁷¹ FTI does not point to evidence that geological, mechanical, and development risks or uncertainties actually exist or existed in the Upstream Assets.

476. In their Second Report, FTI states that the lack of “location specific data” about geological and development risks should increase GCA’s risk from 10 percent and 20 percent, respectively, to 50 percent. Mr. Davis of FTI further emphasized his 50 percent risk analysis at the Hearing on Quantum, stating that “[p]robable reserves have a lower likelihood of being produced than Proved reserves, perhaps as low as 50% probability of being produced.”²⁷² (emphasis added)

477. Mr. Seager of GCA testified that his approach reflected the fact that “there was no evidence of any of these issues arising in the assets that we were evaluating”.²⁷³

²⁶⁹ First FTI Report, ¶ 5.3 (1). ↩
²⁷⁰ See, e.g., Second FTI Report, ¶ 4.6. ↩
²⁷¹ First FTI Report, ¶¶ 5.13-5.23. ↩
²⁷² Tr., Hearing on Quantum, Day 5, 79:9-79:11; FTI Presentation, Hearing on Quantum, slide 17. ↩
²⁷³ Tr., Hearing on Quantum, Day 6, 17:25-19:11: ↩

Q. And “construction” echoes the sorts of problems I was referring to earlier, such as drilling and casing the well, and any delay that could arise with mechanical issues or equipment issues; would you agree?

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478. The Tribunal majority accepts Mr. Seager’s evidence that the geologic,²⁷⁴ mechanical, and development²⁷⁵ risks and uncertainties are, in fact, slight and therefore are minor aspects in the current PRMS analysis. Mr. Davis’s (of FTI) testimony about mechanical risks during his re-examination accords with Mr. Seager’s testimony that mechanical risks are low.²⁷⁶

A. That would be covered by article (d). But what the [VALMIN] code says is that you have to consider those, and we considered them and there was no evidence of any of these issues arising in the assets that we were evaluating.

Q. I’m saying: what this provision says is that your valuation report should include an evaluation of the risks and include an analysis including the effects that these risks may have on the valuation?

A. As I’ve said, we looked at the operations. They are very standard oil field operations. We didn’t see any evidence of mechanical problems or delays occurring in the history that was available to us. We did run some sensitivities, is my understanding, and to the extent that you wish to discuss those, I think perhaps my colleague Mr George may be able to shed some light on some of the sensitivities we ran. But overall, that was encompassed in the totality of our evaluation. On the technical aspects, there was nothing that we saw that needed us to include any uplift on capital. In terms of timing, we did consider that. We looked at the proposed time of development in the field development plans, and we were actually fairly conservative. We pushed the timing out, in some cases several years, in order to accommodate the fact that developments may not occur as originally projected in the development plans. So I think we’ve taken all that into account. (emphasis added)

Tr., Hearing on Quantum, Day 6, 15:16-16:2:

Q. And sometimes, if you have a serious issue, this can lead to significant cost overrun, right?
A. As I said before, it can do, but it’s not a common occurrence. Here we’re dealing with a well-established petroleum province. There’s more than 100 producing wells that have been drilled. It’s a very simple hydrocarbon area in which to drill. There’s no high pressures, there’s no high temperatures. It’s basic oil and gas field technology. Yes, of course problems could occur, but I wouldn’t factor that in as a significant factor into an evaluation. (emphasis added)

²⁷⁴ Second GCA Report, ¶¶ 83-86. ↩
²⁷⁵ Second GCA Report, ¶¶ 87-88. ↩
²⁷⁶ Tr., Hearing on Quantum, Day 6, 55:3-25: ↩

Q. Maybe just one point. We heard earlier Mr. Seager say that mechanical issues when drilling a casing well are very rare. What’s your view on this statement?

A. My opinion on that is I think it’s -- you very, very, very commonly experience some small problems or some things that don’t go according to your plan. That’s very common. As a matter of fact, I’ve -- you know, I don’t think I’ve ever seen a well that was drilled that went exactly according to plan. But those very common changes generally had very little or no or negligible effect on the -- on your ability to drill and complete the well, or the cost of the well. And then you have -- you know, sometimes you run into problems. The more frequently -- or less frequently you run into problems that might have, you know, some very small material effect on your ability to drill and complete the well and the cost (inaudible) the well. And then even less frequently than that, you have material problems drilling and completing the well that have a material cost. And then occasionally, and I agree it is very rare, you have tremendous -- you know, tremendous mechanical problems that make it impossible to drill or complete the well. (emphasis added)

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479. It appears that FTI interpreted the absence of evidence about risk and uncertainty to be evidence of their absence from GCA’s analysis. However, according to Mr. Seager the low risk and high certainty reflects the historic information about the Upstream Assets. FTI’s analysis also seems to overlook GCA’s analysis of risk in the First GCA Report, which covers probabilistic evaluation, the risking of contingent and prospective resources, along with a review of historical development and production.²⁷⁷

480. The Tribunal majority accepts that risks and uncertainties are accounted for in GCA’s PRMS calculations and that they in fact reflect the history of the Upstream Assets. The majority prefers to rely on the site-specific risks and uncertainties Mr. Seager described in his cross-examination based on the history of the Upstream Assets rather than the possible risks and uncertainties described by FTI.

4. The GCA Calculation of Past and Future Gas Production from the Upstream Resources

481. After applying PRMS 2018 to develop the resource base,²⁷⁸ GCA then charted the historical and projected the future rate of production.²⁷⁹

²⁷⁷ First GCA Report, ¶¶ 103-140. ↩
²⁷⁸ See Second GCA Report, ¶ 60. ↩

(2) The PRMS Methodology Accounts for Risk and Uncertainty

60. The vertical axis of the PRMS framework (Figure 1 above) accounts for the risk that a certain project (e.g., a field development) will not take place.

1) Projects in the Reserves class are subject to a firm plan and are effectively committed, so the chance of development is taken to be 100%. This applies to all categories of Reserves.

2) Projects in the Contingent Resources class relate to discoveries that may not be developed, or developed in a timely manner, due to one or more contingencies. For this reason, a Chance of Development (Pd) of less than 100% is applied to the success-case forecasts.

3) Projects in the Prospective Resources class relate to exploration opportunities; in other words, to prospects that have not yet been drilled to confirm a discovery. Such projects are therefore subject to a Chance of Geologic Discovery (Pg) (otherwise called geological chance of success) as well as a Chance of Development (Pd).

4) Both Pg and Pd must be estimated using informed professional judgment based on the facts in each case — there is no “formula” to derive the values, but they should be based on sound technical considerations.

²⁷⁹ Claimants’ Opening Presentation, Hearing on Quantum, slide 106, referring to PHDWin Data File (CE-917). ↩

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Historical and Forecast Production in Crimea

[Chart showing historical and forecast production in Crimea from 1975 to 2065. The Y-axis is "Gas (Bcm) & Codensate (Bcme)" from 0.0 to 4.0. The X-axis is years. Two vertical lines mark 1992 and 2014. The legend indicates lines for "Gas (Bcm)", "Gas Forecast (Bcm)", "Condensate (Bcme)", and "Condensate Forecast (Bcme)".]

482. GCA then projected likely gas prices over the expected life of the Upstream Assets:²⁸⁰

²⁸⁰ First GCA Report, ¶ 321, figure 44. See also First FTI Report, ¶ 7.14, Second FTI Report, ¶¶ 6.4-6.33. FTI raised no concerns about calculation of: ↩

1) the price that Naftogaz paid Gazprom under the long-term SPA;
2) the NCG hub price;
3) the Henry Hub futures prices, plus costs to the Ukrainian border;
4) the weighted average import price; and
5) price that could be obtained by selling gas to industrial consumers.

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Figure 44: Outlook for Independent Producer Gas Prices (US$/Mcm)²⁸⁷

[Chart showing gas prices from 2011 to 2033. The Y-axis is "US$/Mcm" from 0 to 500. The X-axis is years. A line graph shows prices fluctuating and then generally rising over the period.]

483. Mr. Zhilin and Professor Melgunov agreed that the Russian FTS would consider Crimea to be an RGSS until such time that it was connected to the UGSS.²⁸¹ As stated earlier in this Final Award, the Tribunal majority rejects the Respondent’s arguments that Krasnodar prices would apply.²⁸² Instead, the Tribunal majority agrees with Mr. Zhilin that the Willing Buyer would rely on the Russian Federation’s 2007 declaration in Resolution No. 333 that gas prices would increase to netback/export parity, which is to say that Russia’s industrial gas prices would move higher to match the prices paid on the global market for industrial use. While implementation has been delayed,²⁸³ the FTS, the Russian regulator, never changed its policy.

²⁸¹ First Zhilin Report, ¶¶ 36, 38; First Melgunov Report, ¶ 90. ↩
²⁸² See also First Zhilin Report, ¶ 53; First Melgunov Report, ¶ 153. ↩
²⁸³ First Zhilin Report, ¶¶ 50-51. ↩

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484. GCA’s analysis of the Upstream Assets under the Russian Scenario starts with the assumption that Ukrainian regulations and pricing would continue to 31 December 2014.²⁸⁴ From 1 January 2015 onwards, GCA assumes that RGSS prices in Crimea would be higher than the UGSS prices in Krasnodar.²⁸⁵ Finally, it bases its prices on the Willing Buyer’s expectation that gas prices would increase to export parity.²⁸⁶ The Tribunal majority accepts GCA’s outlook for prices.

485. In order to estimate future capital expenditures for the purposes of the DCF analysis, GCA obtained the costs for development activities from financial data, field development programs (“FDPs”), and investment reports. Most costs were in UAH, which were converted to USD at the exchange rate in force in early March 2014.²⁸⁷

486. This led GCA to an analysis of the applicable fiscal terms.²⁸⁸

²⁸⁴ Second GCA Report, ¶ 393. ↩
²⁸⁵ Second GCA Report, ¶ 395. ↩
²⁸⁶ Second GCA Report, ¶¶ 401-402. ↩
²⁸⁷ First GCA Report, ¶ 141. ↩
²⁸⁸ According to GCA: ↩

• FTI is in broad agreement with [Gaffney Cline’s] understanding of the applicable fiscal terms;
• Reviewed and applied terms of Special Permits;
• Accounted for applicable royalty rates;
• Accounted for corporate tax and value added tax;
• Did not account for undepreciated tax balances;
• Accounted for terms of production sharing agreement (Permit No. 4478);
• Accounted for terms of joint-venture/joint-operating agreements (Permit Nos. 1632, 2113, 2377, 2378, 2379, 2692, 4594, 4991).

See First FTI Report, ¶ A9.27; First GCA Report, ¶¶ 344-350, Table 39 (CE-1105); Second GCA Report, ¶¶ 20, 287, Table 14; Joint Investment Agreement No. 2847 Between Chornomornaftogaz and Shelton Canada Corporation, 24 July 2003 (CE-56-Am); Joint Operation Agreement No. 1201 Between Chornomornaftogaz and CBM Oil plc, 28 September 2007 (CE-69-Am).

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487. The experts GCA and FTI both proposed a discount rate, which largely differed in the Country Risk Premium (“CRP”).²⁸⁹ GCA arrived at a discount rate range of 12.9 percent to 17.3 percent.²⁹⁰

²⁸⁹ See Second FTI Report, ¶ 3.3: ↩

Nearly all of the difference between our and GCA’s discount rate estimates is attributable to our respective estimates of the premium in the discount rate applicable to reflect risks associated with where the production assets are located and where their potential customers are located (also referred to as the country risk premium or CRP).

²⁹⁰ First GCA Report, Appendix V, Table 88: ↩

Table 88: Country-Risk Adjusted Weighted Average Cost of Capital on the Valuation Date (after the incorporation of Country Risk)

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488. In its “illustrative calculations”, FTI applies a Crimean discount rate—reflecting what it argues is increased risk in Crimea relative to the Russian Federation.²⁹¹ The Crimean CRP that FTI puts forth is based on Crimea’s former status as a part of Ukraine.²⁹² This is at odds with FTI’s general view that the Ukrainian connection should essentially be ignored in the forward-looking economic analysis. As mentioned earlier, the Respondent’s general position is that the Russian energy market and Russian law should apply.²⁹³ This is consistent with GCA’s conclusion that Crimea’s discount rate should be tied to the discount rate of the State (the Russian Federation) that governs the territory.²⁹⁴ In the majority view, the approach taken by GCA is more consistent with the Russian Scenario than is FTI’s resort to a Ukrainian based CRP for Crimea.

489. The Claimants then identified the differences in terms of the quantum analysis between the Ukrainian Scenario and the Russian Scenario.²⁹⁵

²⁹¹ First FTI Report, ¶¶ A7.36-A7.52. ↩
²⁹² Ukrainian Autonomous Republic of Crimea ‘B-’ And ‘uaBBB-’ ratings affirmed, S&P Global Ratings, 20 December 2013 (FTI-96); Autonomous Republic of Crimea Downgraded to ‘CCC uaB-’, S&P Global, 25 February 2014 (FTI-97). ↩
²⁹³ AmCM, ¶ 424. ↩
²⁹⁴ Second GCA Report, ¶ 428. ↩
²⁹⁵ Claimants’ Opening Presentation, Hearing on Quantum, slide 119: ↩

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490. In the end result, GCA valued the Upstream Assets (Russian Scenario) at USD 3.231 million as follows:²⁹⁶

[Table showing valuation of Upstream Assets]

491. In the absence of a competing valuation from FTI, but having given consideration to FTI’s challenges to the GCA analysis, the Tribunal majority fixes the quantum of compensation of the expropriated Upstream Assets at USD 3,231,000,000.

PART 16 - THE MIDSTREAM ASSETS

492. The Claimants owned and/or operated a comprehensive network of onshore pipelines in Crimea to carry the gas to market as shown in Figure 47 of the First GCA Report. The bulk of these pipelines was operated by various Claimant companies, but owned by the State.

²⁹⁶ Claimants’ Opening Presentation, Hearing on Quantum, slide 120. ↩

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Figure 47: Crimea’s Natural Gas Transportation System⁴²⁹

[Image of a map of Crimea showing the natural gas transportation system.]

493. As of the Valuation Date, the Midstream Assets consisted of:

(a) the gas pipeline system operated by CNG, located primarily in the Central and Western parts of Crimea (including the inventory in the pipelines);

(b) the gas pipeline system operated by UTG, located primarily in the Northern and Eastern parts of Crimea (including the inventory in the pipelines);

(c) the underground gas storage facility at Hlibovske (the “UGS Facility”), located in Western Crimea, which was operated by CNG (including the cushion gas inventory); and

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(d) the local distribution pipelines, ancillary equipment, and buildings, owned by UTG and NJSC Naftogaz, which were located throughout Crimea, referenced to as “Book Value Assets”.²⁹⁷

494. CNG’s 854 km pipeline system connected to the UTG network so that CNG could physically transport its gas production to the UTG network.²⁹⁸ UTG operated a 429 km pipeline system, with fill gas inventory, which transported gas to the major cities and towns in Northern and Eastern Crimea.²⁹⁹ This was a relatively new pipeline system and it was connected to UTG’s pipeline system in mainland Ukraine.

495. UTG also owned and operated smaller diameter, shorter pipelines that connected the main gas pipelines to the gas distribution stations (“GDS”). These stations serviced a number of towns in the Northern and Northeastern parts of Crimea. UTG owned the equipment and building at each GDS, the access road to the GDS, and a communications and radio control system that allowed UTG to operate the pipelines and deliver gas to each town distributor.³⁰⁰

496. Naftogaz owned several smaller diameter, shorter pipelines that served as connections from the main pipelines of CNG and UTG to a GDS, supply pipelines from the GDS to several village networks, and a supply pipeline to a thermal power station.³⁰¹

497. In his opening, counsel for Naftogaz made clear that the bulk of the pipelines were operated not owned by the Claimants in his discussion of Slide 122:

²⁹⁷ First GCA Report, ¶ 418. ↩
²⁹⁸ First GCA Report, ¶ 421. ↩
²⁹⁹ Excerpts from EY Accounting Data as of 31 December 2014, 23 July 2015 (CE-353) (listing assets owned and operated by UTG); Excerpts of Kharkivtransgaz 2b(k) Form, 11 March 2014 (CE-447-Am) (listing assets in Crimea operated by Kharkivtransgaz, a division of UTG); Excerpts of Ukrgaztekhzviazok 2b(k) Form, 20 March 2014 (CE-448-Am) (listing assets in Crimea operated by Ukrgaztekhzviazok, a division of UTG). ↩
³⁰⁰ Excerpts from EY Accounting Data as of 31 December 2014, 23 July 2015 (CE-353) (listing assets owned and operated by UTG); Excerpts of Kharkivtransgaz 2b(k) Form, 11 March 2014 (CE-447-Am) (listing assets in Crimea operated by Kharkivtransgaz, a division of UTG); Excerpts of Ukrgaztekhzviazok 2b(k) Form, 20 March 2014 (CE-448-Am) (listing assets in Crimea operated by Ukrgaztekhzviazok, a division of UTG). ↩
³⁰¹ Excerpts from EY Accounting Data as of 31 December 2014, 23 July 2015 (CE-353) (listing assets owned and operated by UTG); Excerpts of Kharkivtransgaz 2b(k) Form, 11 March 2014 (CE-447-Am) (listing assets in Crimea operated by Kharkivtransgaz, a division of UTG); Excerpts of Ukrgaztekhzviazok 2b(k) Form, 20 March 2014 (CE-448-Am) (listing assets in Crimea operated by Ukrgaztekhzviazok, a division of UTG). ↩

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[Image of a map of the Black Sea region showing pipelines in Crimea, with a legend.]

(Counsel for Naftogaz) I will first provide an overview of the investments that the Russian Federation expropriated. These consist of CNG and UTG’s rights to operate transportation pipelines in Crimea, which connected Crimea to the wider Ukrainian gas market and delivered gas to local distribution networks, as well as certain distribution pipelines owned by Naftogaz. These pipelines are highlighted here on the slide. The main pipelines operated by CNG are indicated in red; the main pipelines operated by UTG are indicated in green; and the distribution pipelines owned by NJSC Naftogaz are highlighted in pink. In addition to these pipelines, CNG had a special permit, issued in 1998 under Ukrainian law, to operate a 1 bcm gas storage facility at the Hlibovske field.³⁰² (emphasis added)

498. In addition, there were a number of miscellaneous assets held by UTG and CNG in Crimea, for example, CNG maintained trucks and onshore drilling rigs, and UTG maintained a number of buildings and pipeline vehicles. These investments also form part of the Midstream Assets (the “Miscellaneous Midstream Assets”).

499. According to the Russian Federation, GCA’s Midstream valuation suffers from a fundamental flaw because GCA considers that all the Midstream Assets must necessarily carry value because they are “used”. Russia says that it is a fundamental principle of valuation that an investor’s perception of value is based only on an asset’s ability to generate future returns. An asset does not have value to an investor simply because they are in “use”. Thus, Russia says,

³⁰² Tr., Hearing on Quantum, Day 1, 114:11-25. ↩

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GCA’s misconception motivates their valuation of the Midstream Assets, causing them to apply incorrect methodologies and assumptions that a Willing Buyer would not apply.³⁰³

1. The Approach of the Tribunal Majority

500. A different approach is required for each of the categories of the Midstream Assets:

(a) the Claimants’ Special Permits to use the Midstream pipelines and the UGS Facility owned by the State call for an income approach (as with the Special Permits for the Upstream Assets);

(b) the small pipelines owned by the Claimants will be valued at depreciated replacement value;

(c) the Claimants’ Miscellaneous Midstream Assets will be valued at their depreciated book value, as recorded by Ernst & Young (“EY”).

501. The difference between FTI and GCA’s valuation of the Midstream Assets is set out below:

³⁰³ AmCM, ¶¶ 448-469; Rejoinder on Quantum, ¶¶ 701-754. ↩

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502. CNG’s and UTG’s right to operate the pipelines and CNG’s right to operate the UGS at Hlibovske fall under Article 1.1(d) of the BIT:

rights to engage in commercial activity, including rights to the exploration, development and exploitation of natural resources.

503. The Claimants’ ownership of pipelines and equipment falls under Article 1.1(a) of the BIT:

movable and immovable property, as well as any other related property rights.

504. GCA valued the following Midstream Assets and in the majority Tribunal view, none of them date from Soviet times and thus do not trespass on Article 12 of the BIT.

[Page 141]

[Page 142]

[Page 143]

505. The Russian Federation contends,³⁰⁴ and the Tribunal majority agrees, that GCA’s use of the DRC methodology to value the “Use” Permits and licenses is inappropriate. However, GCA also provides a valuation using the “income approach”. In the view of the Tribunal majority, the “income approach” is correct in the circumstances.

2. Differences Between the Majority and the Dissenting Opinion

506. In her Dissenting Opinion, Professor Stanivuković accepts the theory of the Russian Federation that:

... NJSC Naftogaz and CNG are legal successors to companies founded in the Soviet Union prior to 1 January 1992 that engaged in the same type of commercial activities. All rights and obligations of their predecessors were transferred to them, including the right to operate gas transportation and storage facilities.³⁰⁵

³⁰⁴ AmCM, ¶ 450; Rejoinder on Quantum, ¶¶ 716-721. ↩
³⁰⁵ Dissenting Opinion, ¶ 110. ↩

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507. According to our colleague, this means that they had rights to operate the gas transportation system before 1 January 1992 notwithstanding that they were not incorporated until 1998 and did not invest in the Upstream Assets until 1999 at the earliest.

508. In the majority view, the conclusion that “they” (the Claimants) had “rights to operate the gas transportation system before 1 January 1992” simply ignores the basic premise of Ukrainian corporate law—separate legal personality—as discussed earlier. Equally, the Tribunal majority rejects the Respondent’s theory of “legal succession” that is, in reality, no succession at all.

509. Our colleague also points to restrictions on the sale of property by Agreement No. 76³⁰⁶ but:

(a) insofar as the Claimants’ case is based on rights of use, any restriction on sale of the underlying assets is irrelevant;

(b) the “restricted market” argument simply denies the basis of FMV which presupposes a sale of the assets in an “open and unrestricted market”.

510. Equally, our colleague’s argument based on restriction on the transfer to the Willing Buyer of rights of use presupposes (in our colleague’s scenario) a lack of consent to a transfer which, in the view of the majority, is wholly unrealistic. Only the Willing Buyer would be in a position to generate gas to make use of the Midstream pipelines which would otherwise sit idle, an unacceptable situation in a Ukrainian or Russian winter.

3. Pipelines and UGS Facility

A. The Claimants’ Rights “To Use” State-Owned Midstream Pipelines

511. GCA valued the Claimants’ cost in the Midstream State-owned pipelines by valuing their depreciated replacement cost. As FTI points out,³⁰⁷ and the Tribunal agrees, there is no compelling argument to pay the Claimants the depreciated replacement cost of pipelines that the Claimants did not own.

³⁰⁶ Dissenting Opinion, ¶ 113. ↩
³⁰⁷ Second FTI Report, ¶ 9.29. ↩

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512. On the other hand, FTI also challenges the appropriateness of GCA’s alternative income approach in light of GCA’s acknowledgement that:

On 1 March 2014, the tariff revenue was simply too low to generate the returns necessary to replace the pipeline system as it aged, or to provide a return to the investor.³⁰⁸

513. On this basis, FTI says that, in light of Russian tariffs or the prevailing Ukrainian tariff levels of March 2014, the Claimants’ investment in the use of the pipeline networks had no value.³⁰⁹ In context, however, what GCA actually wrote was:

On 1 March 2014, the tariff revenue was simply too low to generate the returns necessary to replace the pipeline system as it aged, or to provide a return to the investor. Likewise, the income approach undervalues the assets because of the low transportation tariffs in place on 1 March 2014. But both the financial metrics and income approaches reflect historic prices for transport and storage, and not future tariff increases that were anticipated on 1 March 2014.³¹⁰ (emphasis added)

514. GCA (unlike FTI) actually did an “income approach” valuation of the Claimants’ rights to “use” the Midstream pipelines. In the view of the Tribunal majority, the “income approach” is likely the basis on which a Willing Buyer would assess its worth and should therefore be used to value the gas transmission and storage systems operated by CNG and UTG.

515. It is necessary to determine the net present value of net future income streams from the delivery of gas to customers and distribution companies in Crimea beginning in March 2014. GCA based the number of years of projected future income streams on the remaining estimated working life of each pipeline system, being 24 years for CNG and 52 years for UTG.³¹¹ This was appropriate. There is no basis to conclude that the Claimants would have been denied the “use” in that period of time but for the Russian invasion and expropriation.

³⁰⁸ First GCA Report, ¶ 496. ↩
³⁰⁹ First FTI Report, ¶¶ 9.10, 10.19. ↩
³¹⁰ First GCA Report, ¶ 496. ↩
³¹¹ See First GCA Report, ¶ 482. ↩

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516. Using the corporate financial statements, GCA estimated the future cash flows from the operation of CNG’s pipeline and storage system and UTG’s pipeline system based on historic operating profits before interest, tax, depreciation, and amortization (“EBITDA”) during 2012-2013.³¹²

517. FTI notes that “Russian transmission tariffs were significantly lower as at the Valuation Date than Ukrainian tariffs".³¹³ However, the Respondent’s expert witness on Russian oil and gas law, Professor Melgunov, acknowledged that Russia’s FTS sets tariffs on a case-by-case basis. Under Russia’s regulations, the FTS must examine many factors. Professor Melgunov thus concludes that “a hypothetical willing buyer could generally expect to be compensated for its economically justified and documented costs.”³¹⁴

518. In light of Professor Melgunov’s conclusion that the regulator, FTS, would set a tariff based on the Willing Buyer’s economically justified and documented costs which had already been demonstrated to the Ukrainian regulator prior to March 2014, the Tribunal majority believes GCA’s use of prevailing Ukrainian tariffs is a reasonable and conservative basis for calculating the value of the use of pipelines and storage facility in the Russia Scenario. It is not plausible for FTI to argue that the FTS would set tariffs so low as to turn the right to use these assets into liabilities.

B. CNG Cash Flow Estimation

519. CNG’s EBITDA for gas transmission and storage at the UGS at Hlibovske averaged USD 5.76 million per year during 2012-2013, based on its income statement.³¹⁵ This amount was projected annually for the 24-year period representing the weighted average of the remaining useful life of the pipelines operated by CNG. The volume of gas transported and stored in 2012-2013 was assumed (conservatively) to be constant despite the opportunity to increase the number of customers in Crimea.

³¹² First GCA Report, ¶¶ 482-483. ↩

³¹³ First FTI Report, ¶ 9.10. ↩

³¹⁴ First Melgunov Report, ¶ 141. ↩

³¹⁵ Chornomornaftogaz, Quarterly and Annual Financial Performance Reports from 2011-2013 (CE-914). ↩

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520. The cost of maintenance and asset replacements are both operating costs included in the projection of EBITDA. GCA then estimated the resulting annual after-tax cash flow to be USD 5.34 million.³¹⁶

C. UTG Cash Flow Estimation

521. As UTG did not prepare financial data for the pipeline system it operated in Crimea, GCA estimated the EBITDA for UTG’s activities in Crimea using financial aid and operating data of Naftogaz’s gas transportation business in 2012 and 2013.³¹⁷

522. This produced an estimated average EBITDA for UTG of USD 2.84 million. This amount was projected annually for the 52-year period. The volume of gas transported was kept constant.

523. The cost of maintenance and asset replacements are both operating costs included in the projection of EBITDA. GCA applied a corporate tax rate of 18 percent prevailing in 2014 to the projected EBIT (earnings before interest and taxes) for gas transmission to obtain the tax paid. The resulting cashflow was USD 2.71 million for 49 years and USD 2.60 million for the following three years.³¹⁸

524. Discounting the projected cash flows for CNG and UTG by applying an assumed rate of 15 percent provides a value of USD 40 million and USD 18 million respectively. Discounting the projected cash flows for CNG and UTG by applying an assumed rate of 10 percent provides a value of USD 53 million and USD 27 million respectively.

The Tribunal Majority’s Ruling on the Compensation for Pipeline and UGS Facility Usage

525. Thus, using the income approach, GCA estimated the value of the use of the CNG pipeline system plus the UGS Facility at between USD 40 million and USD 53 million. In the Tribunal majority view, the appropriate compensation would be to take the mid-point of USD 46.5 million.

526. In addition, using the same “income approach”, GCA estimated the value of the Claimants’ use of the UTG pipeline systems at between USD 18 million and USD 27 million. The Tribunal

³¹⁶ First GCA Report, ¶ 488. ↩

³¹⁷ First GCA Report, ¶¶ 476-478. ↩

³¹⁸ First GCA Report, ¶ 493. ↩

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majority concludes that the appropriate award would be USD 22.5 million: USD 14.5 million to CNG and USD 8 million to UTG accordingly.

4. Natural Gas Inventories

527. The records show the existence of 1,183 million cubic meters of the Claimants gas expropriated by the Russian Federation. The volume of gas at the UGS Facility on the Valuation Date is not disputed. In its second report, FTI says “[w]e entirely agree with GCA’s description of the gas inventories”³¹⁹ which were found to be as follows:

Value of Gas Inventory (USD MM)

³¹⁹ Second FTI Report, ¶ 9.47 (“We entirely agree with GCA’s description of the gas inventories...”.); Information on the Gas Stored in Crimea, Naftogaz, 18 November 2014 (CE-325): ↩

As at March 1, 2014:
- balance of working natural gas in the storage is 687.7 mcm, including
675.3 mcm of gas owned by National Joint-Stock Company “Naftogaz of Ukraine” priced at USD 255.25 million;
- balance of base gas is 881.0 mcm, including 390 mcm of remaining reserves and 491.0 mcm of injected gas.
So, the total volumes of gas stored in the storage as at March 1, 2014, are 1,568.7 mcm. (emphasis in the original)

Letter No. 04/1-630 of SOE Ukrtransgaz to Chornomornaftogaz, 17 February 2014, 273 (CE-878); Analysis of Underground Gas Storage Network of Ukraine, (CE-529-Am) (stating that residual gas reserves amounted to 388.6 MMcm); Report on gas flow in the Hlibovske UGS for the period 26.03.2014-31.03.2014, 17 April 2014, 2 of PDF (RE-135):

³²⁰ Not assessed by GCA. ↩

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528. It should be noted that GCA (and the Claimants) exclude from the claim an additional 390 million cubic metres of reserve gas from a depleted gas field that GCA concluded could not be substantiated and thus it would have no value to a Willing Buyer.³²¹ This leaves the balance of 1,183 million cubic meters for the Tribunal to deal with.³²²

529. GCA valued the 491 million cubic meters of cushion gas at the UGS Facility as of the Valuation Date. As will be seen, the 675 million cubic meters of “working gas” supply stored at the UGS Facility is valued outside the scope of the GCA reports,³²³ but adopting the same financial parameters.

530. It is necessary to distinguish between “cushion gas” which it was necessary to retain in the storage facility to maintain enough pressure to function and “working gas” which is available to distribute to customers. As explained on the website of Uniper (a major German energy company):³²⁴

The gas held in a gas storage facility is always divided into cushion and working gas. The cushion gas is the volume of gas that is necessary to ensure the minimum storage pressure necessary for optimal gas injection and withdrawal. In caverns, the cushion gas is also necessary to ensure stability.

³²¹ First GCA Report, ¶ 501: ↩

We consider that the remaining reserves in the previously depleted gas field (i.e., gas that remained in the field when production ceased, prior to use of the depleted field as a storage facility) cannot be substantiated and would not have been valued by a willing buyer. We have therefore not included the 390 MMcm of remaining reserves in the previously depleted gas field as inventory to be valued.

³²² First GCA Report, ¶ 503: ↩

³²³ First GCA Report, ¶ 498, footnote 485 (“we also understand that an NJSC Naftogaz stored 675 MMcm of natural gas of the facility, but this volume of gas is being valued outside the scope of this report.”). ↩

³²⁴ Energy storage-Underground gas storage, Uniper (FTI-57). ↩

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A. The Cushion and Fill Gas Issue

531. FTI says GCA wrongly valued the UGS Facility separately because the “cushion gas” is not an asset that the Willing Buyer could sell, but rather a necessary input would require to operate the storage facility.³²⁵ According to FIT, GCA’s approach is analogous to charging a buyer the full market price of a car, and then charging them an additional amount for the cost of the wheels.³²⁶ FTI explains:

A willing buyer would not pay an additional amount for the wheels, which are a necessary input for operating the car. If the seller wants to sell the wheels separately, he must deduct its value from the market price of the car, to avoid “double counting.”³²⁷

532. However, in the majority view, the “car” analogy is not apt because in this case the Willing Buyer is not “buying” the car but only “renting” the use of the UTG Facility. In a rental car situation, the renter hires the vehicle but is responsible for supplying the gas. In the event, the Russian Federation expropriated the gas and must pay for it.

B. The Working Gas Issue

533. The Claimants argue entitlement to compensation for the cost of working gas both as direct and consequential damages. The “direct” damages argument is a straightforward application of Article 31 of the ILC.³²⁸ The Russian Federation took the gas and the Russian Federation must pay for it.

534. If the replacement of working gas is treated as a consequential loss, Naftogaz must prove (i) the amount of damages, (ii) that the damages (Naftogaz’s purchase of replacement gas) were reasonably caused by the Russian Federation’s expropriation of NJSC Naftogaz’s 675-million

³²⁵ First FTI Report, ¶ 9.16. ↩

³²⁶ First FTI Report, ¶ 9.16. ↩

³²⁷ First FTI Report, ¶ 9.19. ↩

³²⁸ ILC Articles, Article 31 (CLA-72-Am). The parties agree that Art. 31 of the ILC Articles sets out the relevant legal test: ↩

1. The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act.
2. Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.

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cubic meters of gas³²⁹ and (iii) that the loss was reasonably foreseeable. In the view of the majority, the Claimants have satisfied all three preconditions.

535. According to the Claimants:

NJSC Naftogaz in 2014 was a net importer of gas. It needed to purchase gas months in advance of knowing actual demand in order to ensure that demand could be met, especially in anticipation of the next winter “withdrawal” season. NJSC Naftogaz imported large volumes of gas throughout the year, including during off-peak months to fill storage facilities. NJSC Naftogaz would then use the stored gas to meet demand during the winter months.³³⁰

Expropriation of the 675 million cubic meters of gas caused the need for replacement. Moreover, it was entirely foreseeable by the Russian Federation that if it took the Claimants’ gas, the Claimants would have to replace it. In any case, international law requires the taker to pay for what is taken.

536. In terms of pricing, Naftogaz relies on a preliminary invoice from Gazprom of 8 April 2014 and a subsequent invoice dated 13 May 2014.³³¹

537. The Claimants allege that as a result of the Respondent’s seizure of Naftogaz’s 675,260.598 thousand cubic meters of working gas stored at the UGS Facility, Naftogaz’s quantum of

³²⁹ Memorial on Quantum, ¶ 97; AmCM, ¶ 491. ↩

³³⁰ Reply on Quantum, ¶ 168. See also 2014 Annual Report, 76 (CE-145) (“Naftogaz received only 13.9 bcm from Ukrainian state-owned producers at a regulated price set below the market level” and in order “[t]o cover the remaining needs of households, Naftogaz imported about 8.2 bcm of gas at market prices in 2014.”). ↩

³³¹ Preliminary Invoice No. 10 from JSC Gazprom to NJSC Naftogaz, 8 April 2014 (CE-830); Invoice No. 15 from JSC Gazprom to NJSC Naftogaz, 13 May 2014 (CE-1057); Contract No. KP Between OJSC Gazprom and NJSC Naftogaz For the Purchase and Sale of Natural Gas in 2009-2019, as amended, 19 January 2009 (CE-843). According to Naftogaz, it purchased replacement gas from Gazprom under its contract with Gazprom. The translated portion of the May 2014 Gazprom invoice states in its relevant part: ↩

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replacement gas was USD 491.52 per thousand cubic meters.³³² It therefore seeks damages of USD 331,904,089.³³³

538. In 2014, NJSC Naftogaz began putting gas into storage in April—as it usually does.³³⁴ Russia’s expropriation of gas already in storage in April 2014 meant that NJSC Naftogaz needed to import more gas for injection into storage than it would have otherwise.³³⁵

539. The Russian Federation denies any causal link between its seizure of NJSC Naftogaz’s working gas on 11 April 2014 and NJSC Naftogaz’s purchase of gas from Gazprom later that month. Russia asserts that:

• (a) NJSC Naftogaz has not shown that it purchased gas from Gazprom to replace the stored gas that Russia expropriated;
• (b) NJSC Naftogaz intended to deliver the stored gas to Crimean consumers, could no longer do so, and therefore had no need to replace it;
• (c) Russia’s expropriation of NJSC Naftogaz’s gas occurred after the end of the winter withdrawal season, meaning that NJSC Naftogaz did not need to purchase replacement gas to supply consumers in April 2014;
• (d) NJSC Naftogaz did not need to purchase additional volumes under a high-priced contract with Gazprom, Contract No. KP, and could have chosen a lower-priced alternative;

³³² Chornomornaftogaz-NJSC Naftogaz Natural Gas Storage Agreement No. 14/2932/13, 15 April 2013 (CE-129-Am); Preliminary Invoice No. 10 from JSC Gazprom to NJSC Naftogaz, 8 April 2014 (CE-830); Invoice No. 15 from JSC Gazprom to NJSC Naftogaz, 13 May 2014 (CE-1057). ↩

³³³ Reply on Quantum, ¶ 179. ↩

³³⁴ National Energy and Utilities Regulatory Commission of Ukraine, Resolution No. 1398, “On the Approval of a Standard Form Contract for the Storage (Injection, Storage, Off-take) of Natural Gas”, Secs. 2.5, 2.7, 1 November 2012 (CE-1111): (specifying that the “gas injection period” normally commences on 15 April of any given year). ↩

³³⁵ That Naftogaz did not need to satisfy Crimean demand because of the Russian Federation’s annexation of the territory is irrelevant; the Russian Federation seized both the territory (reducing demand to an extent) and also the gas producing investments in that territory (reducing supply more than the reduction in demand). ↩

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• (e) Gazprom would have delivered the same volumes to NJSC Naftogaz in April 2014 regardless of the Russian Federation’s expropriation of the gas; and
• (f) NJSC Naftogaz had other sources of gas it could have used to supply its customers, e.g., other gas in storage.³³⁶

540. In its Rejoinder, the Russian Federation focuses on causation. First, it denies that there is a causal connection between Naftogaz’s purchases from Gazprom in April 2014 and the seizure of the gas at the UGS Facility. It emphasizes a passage from Clayton v. Canada, “[a]uthorities in public international law require a high standard of factual certainty to prove a causal link between breach and injury".³³⁷ The Respondent also asserts that it could not have foreseen that Naftogaz would purchase more gas in April 2014 under its contract from Gazprom as a result of the Respondent’s seizure of the UGS Facility.³³⁸ Finally, it states that the Claimants have used the wrong volume quantification because the is not seized until 11 April 2014, several weeks after the Valuation Date of 17/18 March 2014, and so the amount of the UGS Facility was by that point reduced from 675,260.598 to 668,131.764 thousand cubic meters.

The Tribunal Majority Ruling on the Compensation for the Expropriation of 1,183 (1,176) Million Cubic Meters of Gas

541. The Claimants claim compensation for 1,183 million cubic meters expropriated by the Russian Federation. The Respondent concedes that there were 1,176 cubic meters of gas in the UGS Facility and pipelines.

542. Broadly speaking, the Russian Federation took the gas and it should pay for it.

543. The Claimants have established that Naftogaz needed to replace the gas taken by Russia to meet its requirements in areas of Ukraine other than Crimea. Gazprom was the regular supplier.

³³⁶ AmCM ¶¶ 501-511. ↩

³³⁷ Rejoinder on Quantum, ¶ 788, citing William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware v. Government of Canada, PCA Case No. 2009-04, Award on Damages, 10 January 2019, ¶ 110 (RLA-145). ↩

³³⁸ Rejoinder on Quantum, ¶¶ 801-803. ↩

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544. Under Naftogaz’s contract with Gazprom, the price of gas from time to time was determined by a price formula, which was indexed to the price of gas to oil product prices. This formula includes, inter alia, variables for oil price changes.³³⁹ Pursuant to Addendum 29 of the contract, the parties agreed to a temporary discount in the first quarter of 2014 that applied from 1 January 2014 two 31 March 2014. The price, subject to the formula, was USD 268.50 per thousand cubic meter at the Valuation Date.³⁴⁰ In applying the formula to the gas price, GCA calculated that on the Valuation Date, 17 March 2014, the purchase price for gas under Addendum 29 of Naftogaz’s contract with Gazprom was USD 272.00 per thousand cubic meters.³⁴¹ The Tribunal majority accepts the calculation as appropriate.

545. By contrast, GCA’s weighted average cost of gas imported from one of Naftogaz’s German supplies, NCG, in 2013 was USD 401.30 per thousand cubic meter for delivery at the Ukrainian border.³⁴²

546. Further, according to GCA, transport and storage tariffs of USD 17.00 per thousand cubic meter would need to be added to the cost of replacing the cushion gas, for a total cost of USD 289.00 per thousand cubic meter.³⁴³ GCA did not add the transport and storage tariff of USD 17.00 to the pipeline fill gas.

547. FTI did not disagree with GCA’s gas pricing on the Valuation Date. Rather, FTI’s analysis focused only on whether GCA’s calculation led to “double counting” cushion and fill gas.³⁴⁴ The

³³⁹ First GCA Report, ¶ 258, citing Contract No. KP Between OJSC Gazprom and NJSC Naftogaz For the Purchase and Sale of Natural Gas in 2009-2019, as amended, 19 January 2009 (hereinafter “Gazprom GSA”) (CE-843): ↩

Under the terms of the Gazprom GSA, the price paid for gas delivered at the Ukrainian- Russian border was determined by a price formula. The price formula indexed the price of gas to oil product prices, specifically gas oil (a distilled oil product used primarily by industry) and heavy fuel oil (a heavy oil product burned in a boiler or furnace). The formula included variables that could be used to moderate the impact of oil price changes (the “k” factor) and account for variations in the energy content of the gas supplied by Gazprom and any negotiated discounts (the “Factual Price”).

³⁴⁰ First GCA Report, ¶ 259, citing Gazprom GSA, Addendum No. 29, 17 December 2013, T-0072-T-0073 (СЕ-843). ↩

³⁴¹ First GCA Report, ¶¶ 259, 503, footnote 489 (Px = [USD] 268.5 * 8155 (LHV for March 2014)/8050 = [USD] 272/Mcm based on the Gazprom GSA (CE-843); Naftogaz supplied the LHV.). ↩

³⁴² First GCA Report, ¶ 264. ↩

³⁴³ First GCA Report, ¶ 503. ↩

³⁴⁴ See First FTI Report, ¶¶ 9.14 et seq.; Second FTI Report, ¶¶ 9.44 et seq. ↩

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Tribunal majority rejects FTI’s position on this point. In the result, however, the only opinion of value as to gas pricing from Russian-supplied gas on the Valuation Date comes from the First GCA Report.

548. To value the amount of gas in the UGS Facility, the imported gas must be transported to a storage facility, injected and stored underground. Based on transportation and storage tariffs in effect for March 2014, this would add USD 17.00 per thousand cubic meter to the imported price of gas³⁴⁵ for a total cost of USD 289 per thousand cubic meter. This yields a value for the natural gas inventory in the UGS Facility of USD 142 million, and for the pipeline fill of USD 4 million. Therefore, the total value of the cushion gas and pipeline fill is USD 146 million.

549. In the opinion of the Tribunal majority, the Claimants have not established a claim to the higher price of USD 491.52 per thousand cubic meter charged by Gazprom in April for the Working Gas inventory at the UGS.

550. However, the Russian Federation admits it seized 668.13 million cubic meters of gas.³⁴⁶ The majority accepts the reduced figure of 668.13 million cubic meters. The Claimants have therefore established their burden of proof under Art. 31 of the ILC Articles. The majority finds that GCA’s rate of USD 272 per thousand cubic meter is the most appropriate figure. (As GCA’s lowest figure, this rate does not include the USD 17 for import charges, since it is unclear to the majority whether the replacement gas came from Gazprom, Europe, or domestic source.) Therefore the majority finds that the Working Gas should be valued at USD 181,731,839.81.

³⁴⁵ Changes in Tariffs for Natural Gas Transportation, Distribution, and Supply (CE-935). GCA converted the UAH denominated tariffs to US dollars at the average exchange rate during 2Q 2014; the general transportation tariff of UAH 93.9/Mcm plus the injection and storage tariffs of UAH 35.1/Mcm and UAH 37.6/Mcm respectively. 166.6/9.605 = [USD]17/Mcm (rounded). Historical Exchange Rates, Fxtop.com, 17 March 2014. ↩

³⁴⁶ Rejoinder on Quantum, ¶ 804: ↩

Finally, the Respondent notes that the Claimants still rely on the wrong volumes of gas for the purpose of their calculations, namely 675,260,598 cubic meters. As the Respondent has previously pointed out, however, there were only 668,131,764 cubic meters of gas stored in the UGS facility as of 1 April 2014. Considering that the seizure occurred on 11 April 2014 according to the Claimants themselves, the relevant volumes are those that were in place at the UGS facility at that date, and not as of 1 March 2014, as wrongly alleged by the Claimants.

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551. The correct prices to apply are those prevailing as of the Valuation Date of 17 March 2014 as follows:

Value of Gas Inventory (USD MM)

552. FTI did not make an equivalent analysis. The Tribunal majority accepts as appropriate the valuation of gas inventory of USD 327,731,839.81.

5. Miscellaneous Midstream Assets

553. In 2014, EY performed an audit of assets owned by NJSC Naftogaz and UTG and identified their date of commissioning and historical cost.³⁴⁷

554. GCA has included in its valuation USD 50 million for what it calls the “Miscellaneous Midstream Assets”.³⁴⁸ It describes these as “a number of miscellaneous Midstream Assets, reflecting investments in gas distribution.”³⁴⁹ As the name implies, GCA has valued these assets at their depreciated value in accounting documents.³⁵⁰

555. FTI says there are two issues with the valuation:

³⁴⁷ First GCA Report, ¶ 505; Excerpts from EY Accounting Data as of 31 December 2014 (CE-353). To assist with these calculations, GCA reformatted and organized the data into an electronic spreadsheet. GCA Review of EY Accounting Data as of 31 December 2014, Tab “OC” (CE-1000). ↩

³⁴⁸ First GCA Report, Table 75. ↩

³⁴⁹ First GCA Report, ¶ 504. ↩

³⁵⁰ First GCA Report, ¶¶ 504-509. ↩

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• (a) first, it is not clear that these assets generate any revenue beyond those which are captured elsewhere in GCA’s valuation. FTI sees no evidence that additional revenues could have been earned from the “Miscellaneous Midstream Assets.” Without evidence of such revenues (and the corresponding value), FTI considers it inappropriate to assign value to the Miscellaneous Midstream Assets;
  
  in the view of the Tribunal majority, FTI’s objection to the lack of recorded income in respect of the expropriated assets is simply a function of FTI’s inappropriate use of DCF methodology. In the majority view, the Russian Federation chose to take physical possession of these assets and must pay for them whether they generate an income stream or not.
• (b) second, according to the Respondent,³⁵¹ accounting values do not generally provide a good measure of economic value. There is no reason to believe that the accounting data upon which EY relied provide a reasonable basis with which to assess the market value of the underlying assets to the Willing Buyer;
  
  in the Tribunal’s majority view, the depreciated book value of these assets is an appropriate measure in circumstances where the Russian Federation took possession of the assets in mid-February 2014, well in advance of the Valuation Date, to the exclusion of the Claimants. If the Russian Federation considered the GCA valuation excessive, the Russian Federation is in possession of the assets and the related documentation and could have supplied different information.

556. As noted below, the Claimants’ efforts to examine the marine assets were rebuffed by Russian armed men. UTG called the former Director of the Kharkivtransgaz Main Gas Pipeline Directorate, Mr. Petr F. Slesar, to testify about the seizure of UTG’s assets and the efforts made to preserve them:

Attempt to Safeguard Certain Ukrtransgaz Assets in Crimea
At the time that the Russian Federation annexed Crimea and after, I held the position of Director of the Kharkivtransgaz MGPD of Ukrtansgaz [sic] and was

³⁵¹ AmCM, ¶¶ 482-483. ↩

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in regular communication regarding production issues with my direct report Andrei Sarabeyev, the manager of the Feodosia production facilities.
On 20 or 21 March 2014, I ordered Mr. Sarabeyev and a mechanic from the Feodosia production facilities to remove all of Ukrtransgaz’s equipment in Crimea to Kherson, in continental Ukraine. This equipment included, for example, emergency response and restoration equipment, lifting machines, and excavation equipment that I listed above.
In response to my order, drivers and mechanics began transporting the machines, equipment and materials north, to continental Ukraine, in a convoy of more than 20 vehicles.
Mr. Sarabeyev reported to me that the convoy moved approximately 100 kilometers from Feodosia when armed men in the Crimean town of Dzhankoy stopped the convoy. Mr. Sarabeyev further reported to me that the armed men wore military uniforms without insignia. They refused to allow the convoy to proceed farther towards continental Ukraine and then impounded the convoy in a police lot. I understood from Mr. Sarabeyev that the convoy was released 10 days later but was permitted only to return to Feodosia.³⁵² (emphasis added)

557. The Claimants contend that they should not be faulted for their inability to ascertain the condition of these assets on the Valuation Date. In the absence of any competing analysis from FTI, the Tribunal majority ought to accept the GCA calculations.

558. USD 35 million out of USD 50 million of GCA’s valuation relates to UTG.³⁵³ This value is largely connected to gas supply pipelines, gas distribution stations (which connect supply pipelines to local distribution networks), and communications and radio equipment that allowed UTG to operate the pipelines and deliver gas to LDCs.³⁵⁴

The Tribunal Majority’s Ruling With Respect to Miscellaneous Midstream Assets

559. The Tribunal majority accepts the Claimants’ explanation³⁵⁵ that their assets in Crimea and their supporting documentation were taken by the Russian Federation. As a result, Naftogaz now cannot access the assets or produce additional appraisals to support its valuation as of the Valuation Date. As the Russian Federation is the source of this problem, Russia is not in a position to credibly complain about it.

³⁵² WS Slesar, ¶¶ 6-9. ↩

³⁵³ First GCA Report, Table 75. ↩

³⁵⁴ First GCA Report, ¶ 507. ↩

³⁵⁵ Reply on Quantum, ¶ 160. ↩

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560. On the basis of the Claimants’ financial statements, GCA valued the Miscellaneous Midstream Assets at USD 50 million comprised as follows:³⁵⁶

Table 75: Value of Miscellaneous Midstream Assets (USD MM)

561. The Tribunal accepts these calculations as correct and awards compensation accordingly.

562. In the result, the Tribunal majority accepts as correct the following valuations of the Claimants’ Midstream Assets:

PART 17 - SERVICE ASSETS

563. To assist with its exploration, production, and development activities, CNG maintained a fleet of four “jack-up” drilling rigs, 22 marine vessels, and 3 helicopters.

564. The Claimants relied on the expert opinion evidence from Mr. Bill Cline of GCA to establish the FMV of the Service Assets. The Respondent did not cross examine Mr. Cline.

³⁵⁶ First GCA Report, Table 75. ↩

[Page 160]

1. Inspection of Service Assets

565. The Second FTI Report puts forward the following issues with the Second GCA Report:

Working condition
In the First GCA Report, GCA assumed “that each drilling rig, marine vessel and helicopter was in good working order and in sound seagoing/airworthy condition – in terms of both its hull and machinery – as could be expected for a vessel/aircraft of its age, size and type.” GCA also assumed that “each of the Service Assets was undamaged, fully equipped, fully maintained, and has valid certificates to operate”. However, GCA provided no evidence that these assumptions were correct nor any explanation as to why these assumptions are appropriate.³⁵⁷ (emphasis added)

566. Paragraph 295 of the Second GCA Report points out that “the [Service] [A]ssets were being used and guarded by the Russian Navy.³⁵⁸ The Claimants say they are entitled to have this equipment treated as in good working order because they were not allowed to make a personal inspection. This point is also made in the Reply on Quantum.³⁵⁹

567. The Second GCA Report cites at footnote 331 a letter from Chornomornaftogaz to Naftogaz that attached a report from the State Border Guard Service of Ukraine (i.e., the Ukrainian Coast Guard).³⁶⁰ The letter itself is dated 20 December 2016 and its subject is “... [the] collection of evidence to prove the seizure of sites and property by the Russian Federation and its illegal industrial activity”.³⁶¹ The report comes from the acting Head of the State Guard Service of

³⁵⁷ Second FTI Report, ¶ 8.23. See also ¶ 8.11(3) (“GCA assumed without basis that the vessels are in ‘good working condition’ ...”). ↩

³⁵⁸ Second GCA Report, ¶ 295: ↩

In GCA’s view this criticism is misplaced for a number of reasons: (i) there is no reason to assume that the assets in Crimea would somehow have suffered higher deterioration and depreciation than the (very large) population of rigs and marine vessels around the world that comprise the body of comparable market values; (ii) the assets are being used and guarded by the Russian Navy, suggesting they are both in good condition and of value, respectively; (iii) the rigs were all planned into future operations at the time of expropriation (so their loss or absence would require acquisition of replacement equipment); and, finally (iv) inspection records suggest that, up until the point of their expropriation, the vessels were regularly inspected and certified.

³⁵⁹ Reply on Quantum, ¶ 104 (“Upon inspection, however, Naftogaz discovered that they were being used in oil field operations by State Unitary Enterprise of the Republic of Crimea “Chernomorneftegaz” (the “Russian Chernomorneftegaz”), under guard by the Russian Navy, suggesting they were then in good working condition.”). ↩

³⁶⁰ Second GCA Report, ¶ 295 (note, the foot mistakenly cites document (CE-1030); the correct citation is found in the Reply on Quantum and is document (CE-377). ↩

³⁶¹ Letter of S. Nezhnova to A. Kobolyev No. 997/16, 20 December 2016, T-0001 (CE-377). ↩

[Page 161]

Ukraine, Mr. Servatiuk, and reflects the 32-hour mission of the Ukrainian Coast Guard ship “Hryhorii Kuropiatnykov”, which took place between 30 November and 1 December 2016. The ship’s manifest shows that there were many observers aboard, including prosecutors, government officials, representatives from the Claimants, and media.³⁶² The report details Russian preparations for “armed response.”³⁶³

³⁶² Letter of S. Nezhnova to A. Kobolyev No. 997/16, 20 December 2016, T-0004 (CE-377). ↩

³⁶³ The Ukrainian Coast Guard’s report states in its relevant parts (see Letter of S. Nezhnova to A. Kobolyev No. 997/16, 20 December 2016, T-0004-T-0006 (CE-377)): ↩

1.2.1. On December 01, 2016 at 04:20, at the point defined by coordinates 45°21′4″N and 30°52′N″2E, a target was identified and recognized as SEDR “Tavrida” (IMO: 8763373, according to Certificate of Ownership ПВ 003547, this vessel belonged to PJSC “NJSC Chornomornaftogaz,” and as such, it should have been under the national flag of Ukraine but actually flied the flag of the Russian Federation (the RF)). The rig was occupied by armed and other unidentified people. This fact was photo-documented.
As the coast guard ship “H. Kuropiatnykov” detected and approached the SEDR at a distance of approximately 40 cbl picked up radio talks, ordering the armed people to cover their actions and evidencing their subordination to a single authority in command. These data were confirmed by radio interception as registered in the ship’s logbook. Further visual observation of the site identified signs of preparation of the said persons for an armed repulse.
The numerous attempts to contact SEDR “Tavrida” made at 07:52 using radio station ICOM-602, Channel 16, elicited no response from SEDR “Tavrida.”
1.2.2. On December 01, 2016 at 05:15, at 45°18′4″N, 30°50′8″E, another target was detected and recognized as the tugboat “Fedor Uriupin” (IMO: 9443499, going without any flag). The tugboat was contacted by radio at 08:12, using radio station ICOM-602, Channel 16, and it responded that the boat was involved in an accident rescue operation in the area of the Odessa Gas Field and had no radio contact with the nearby SEDRs. Further, from 08:14, in violation of international maritime law, the tugboat crew refused to continue radio communication and acted in a way creating preconditions for navigational accidents and preventing the legitimate activities of our ship.
[The rig “Ukraine” was sited at 06:20 and did not respond to radio contact]
1.2.4. On December 01, 2016 at 07:55, at point of coordinates 45°16′5″N, 30°51′7″E, a target was identified and recognized as the coast guard ship (CGS) “Pytlivyi” of the Black Sea Fleet of the Russian Federation (pennant No. 868, call sign “Bugel-868,” based in Sevastopol). During a radio contact with CGS “Pytlivyi” established at 08:00 using radio station ICOM-602, channel 16, the Russian warship warned against approaching the SEDR closer than 10 cbl, citing a security zone it had established there. The argument that it was impossible for the Russian Black Sea Fleet warships to establish any security zones around SEDRs in the E(M)EZ of Ukraine, the commander of that ship gave no answer. Further, CGS “Pytlivyi” started dangerous manoeuvring, crossing the course of our ship and cutting it off from the drilling rigs and satellite platforms, which made CGS “Hryhorii Kuropiatnykov” changed its course to avoid collision and pass clear of each other at a distance of 1 cbl. The dangerous manoeuvring by CGS “Pytlivyi” made it impossible for the inspection group to approach the SEDR and land on it. By its dangerous manoeuvres, CGS “Pytlivyi” obviously breach the requirements of navigational safety and good maritime practice.
[The rig Petro Hodovanets was not cited]

...
The impossibility for the inspection groups from the ship of the State Border Guard Service of Ukraine to come aboard the SEDR (SP) to conduct a full set of legitimate control procedures (due to the threat of armed response on the part of the armed persons and the warship of the Russian Federation Black

[Page 162]

568. Given the Russian Federation’s threats of armed violence, the Tribunal majority considers it unrealistic to expect any further investigations, since further investigations would have endangered the lives and safety of the H. Kuropiatnykov’s crew and passengers. Even though FTI itself describes these assets as being “guarded by the Russian Navy”,³⁶⁴ it appears to conclude (at least implicitly) that GCA should have disregarded the hazards posed by the Respondent’s Black Sea Fleet.³⁶⁵ In the view of the Tribunal majority, the FTI criticism is unjustified.

2. Jack-Up Drilling Rigs

569. Jack-up drilling rigs are rigs built on a floating hull with legs that extend to the seafloor.³⁶⁶ CNG seeks compensation for four jack-up drilling rigs. The four rigs are described below:

• (a) the Petro Hodovanets³⁶⁷ (B312) was built in 2010 and purchased by CNG on 29 March 2011;³⁶⁸
• (b) CNG purchased the Ukraine (B319) on 2 November 2011, before this rig was built.³⁶⁹ It was constructed in 2012;

³⁶⁴ Sea Fleet), which in turn posed a threat to the persons, who were not members of the crew, aboard the coast guard ship on duty). [sic] (emphasis added) ↩

³⁶⁵ Second FTI Report, ¶ 8.25(3). ↩

Second FTI Report, ¶ 8.26 (“Therefore, unless GCA can show that the vessels were definitely in good working condition, undamaged, fully equipped and maintained then a discount should be applied.”).

³⁶⁶ Second GCA Report, ¶ 382. ↩

³⁶⁷ Also known as Petro Godovanets or Pedro Godovanents. ↩

³⁶⁸ Supply Contract for Self Elevating Floating Drilling Unit B312 between Highway Investment Processing LLP and National Joint-Stock Company “Chornomornaftogaz”, 29 March 2011 (CE-1218); Reissued Certificate of Ownership No. 003316 for the “Petro Hodovanets”, 17 October 2014 (CE-316). See also Classification Certificate of B-312, 1 October 2010 (FTI-145). ↩

³⁶⁹ Sales Contract for Self Elevating Floating Drilling Unit between JSC “Rigas Kugu Buvetava” and National Joint-Stock Company “Chornomornaftogaz”, 2 November 2011 (CE-1219); Reissued Ship’s Patent No. 002657 for the “Ukraine”, 17 October 2014 (CE-317). See also ‘Ukraine’ Certificate of Classification, American Bureau of Shipping, 14 January 2013 (FTI-146). ↩

[Page 163]

• (c) Construction of the Tavrida began in Astrakhan, USSR in 1991³⁷⁰ and was completed in either Mykolaiv³⁷¹ or Kherson, Ukraine³⁷² in 1995; it was purchased and delivered in March of that year.³⁷³ On 18 August 1998, CNG acquired it upon its formation;³⁷⁴

³⁷⁰ Reissued Ship’s Patent No. 002626 for the “Tavrida”, 1 September 2014 (CE-281) (“Year and place of construction 1991 м. Астрахань, добудова - 1995, Україна м. Миколаїв”); Reissued Certificate of Ownership No. 003527 for the “Tavrida”, 1 September 2014 (CE-282) (“Year and place of construction 1991 м. Астрахань, добудова - 1995, Україна м. Миколаїв”); Certificate of Ownership No. 003527 for the Tavrida, 8 April 2015 (RE-87). ↩

³⁷¹ See, e.g., Reissued Ship’s Patent No. 002626 for the “Tavrida”, 1 September 2014 (CE-281) (“Year and place of construction 1991 м. Астрахань, добудова - 1995, Україна м. Миколаїв”). ↩

³⁷² But see Riglogix, Rig Fundamentals: Petro Godovanets, Nezalezhnist, Tavrida, and Sivash, 6 of PDF (CE-923): ↩

Note that the Mykolaiv Shipyard and the Kherson Shipyard are both near the Dnieper’s estuary.

³⁷³ Riglogix, Rig Fundamentals: Petro Godovanets, Nezalezhnist, Tavrida, and Sivash, T-0006 (CE-923). ↩

³⁷⁴ Charter of National Joint-Stock Company “Chornomornaftogaz”, 18 August 1998, T-0003(CE-1229): ↩

4.2. The Company is the successor to the Chornomornaftogaz state production enterprise for oil and gas production, storage, and transportation.
4.3. The Company’s property consists of fixed assets and working capital owned by it as well as assets whose value is reflected on the independent balance sheet of the Company.
4.4. The Company owns:
- property transferred into its ownership by the Founder;
- products made by the Company in the course of commercial operations;
- income generated by its own commercial operations (including foreign trade provided for by these Articles of Association);
- dividends accrued on shares (membership interests, equity units) that have been transferred to or are owned by the Company;
- inventions, patents, or technologies resulting from the operations of the Company;
- other property acquired in a way that does not contravene the law.
The risk associated with damage to or loss of its own property as well as property made available to it for use shall be borne by the Company. The Company shall possess, use, and dispose of property belonging to it under the right of ownership in accordance with its purpose and objects.

See also Charter of PJSC “State Joint-Stock Company “Chornomornaftogaz”, 6 March 2013, Articles 3.1, 3.6 (СЕ-128-Am):

3.1. The Company is considered established and acquires the rights of a legal entity from the date of its state registration.
...
3.6. The Company is the owner of:

[Page 164]

• (d) A 1979 Russian-built rig named the “Sivash”. The Sivash was built in Astrakhan in 1979.³⁷⁵ Like the Tavrida, the Sivash was acquired by CNG in 1998.³⁷⁶

570. In the Amended Counter-Memorial, the Russian Federation alleges “the two ‘old’ jack-up drilling rigs [were] purchased [by CNG] long before 1992 ...”.³⁷⁷ The Russian Federation appears to be mistaken as to when the Tavrida was built since according to both the Ukrainian ship’s patent and the independent third-party database Riglogix, construction of the Tavrida was not complete until 1995.³⁷⁸ Furthermore, its construction was finished in Ukraine, rather than in Astrakhan— as the Respondent seems to suggest.³⁷⁹

571. CNG called Volodymyr I. Korchak as a fact witness. In 2014, Mr. Korchak was CNG’s Head of the Engineering and Technological Control Service with specific focus on its self-elevating jack-up drilling rigs, the Petro Hodovanets and the Ukraine. In his Witness Statement, Mr. Korchak described how the jack-up rigs came into the possession of the Russian Federation:

- property transferred to it by the founder and shareholder into ownership, as a contribution to the charter capital;
- products produced by the Company as a result of economic activity;
- income received from own economic activity (including foreign economic activity provided by this Statute);
- inventions, industrial designs, names, other objects of intellectual property rights, including technologies obtained as a result of the Company’s activities. (emphasis added)

³⁷⁵ Reissued Ship’s Patent No. 002641 for the “Sivash”, 2 September 2014 (CE-296); Reissued Certificate of Ownership No. 003547 for the “Sivash”, 2 September 2014 (CE-297); Riglogix, Rig Fundamentals: Petro Godovanets, Nezalezhnist, Tavrida, and Sivash, 0008 of PDF (CE-923): ↩

³⁷⁶ Charter of National Joint-Stock Company “Chornomornaftogaz”, 18 August 1998, T-0003 (CE-1229); Charter of PJSC “State Joint-Stock Company “Chornomornaftogaz”, 6 March 2013, Articles 3.1, 3.6 (CE-128-Am). ↩

³⁷⁷ AmCM, ¶ 264: ↩

In addition to the compensation for the two “old” jack-up drilling rigs purchased long before 1992, Claimant Chornomornaftogaz also claims compensation for two “newer” jack-up drilling rigs purchased in 2011. These are the “Pedro Godovanets” and the “Ukraine” rigs. Those purchases occurred in highly questionable circumstances.

³⁷⁸ Riglogix, Rig Fundamentals: Petro Godovanets, Nezalezhnist, Tavrida, and Sivash, T-0006 (CE-923). ↩

³⁷⁹ Certificate of Ownership No. 003527 for the Tavrida, 8 April 2015 (RE-87) (‘6. Place in year of build Astrakhan, 1991”). ↩

[Page 165]

In mid-April 2014, when I arrived at one of the self-elevating jack-up drilling rigs on which I worked, I encountered a group of armed men on the rig. The men had various types of weapons, including Kalashnikov light-machine guns, Degtyaryov light-machine guns, Dragunov sniper rifles, anti-tank guided missiles, night-vision devices, and other military armaments.
From mid-April 2014 until early 2015, armed men with similar weapons were at all times present on the rigs on which I worked. The men identified themselves as members of various airborne divisions of the Russian Armed Forces, including divisions based in Pskov, Tambov, and Kostroma. The men explained to me that they were expecting Ukrainian forces to try to regain control over the rigs and thus were present to prevent the Ukrainians from retaking them. The men were relieved by a new group of armed men every 15 to 20 days.³⁸⁰ (emphasis added)

572. Regarding the Petro Hodovanets and the Ukraine, the Russian Federation highlights that both rigs were at the centre of a corruption prosecution. Each was purchased for USD 400 million, about double their FMV, and the excess funds were siphoned by corrupt Ukrainian government officials—notably Ukraine’s former president, Mr. Viktor Yanukovych (said to be mentored by Moscow),³⁸¹ among others.³⁸² According to the Russian Federation, it follows that since “the BIT only offers protection to investments that have been made in accordance with the legislation of the host state”,³⁸³ these rigs cannot be protected investments under the BIT, meaning CNG is barred from seeking compensation as a matter of “international public policy”.³⁸⁴

573. In the view of the Tribunal majority, the “illegal transaction” argument is ironic given the armed seizure by the Russian Federation itself in March-April 2014 as witnessed and described by Mr. Korchak and others.

574. More importantly, CNG is not seeking compensation based on the amount that it paid for the Petro Hodovanets and Ukraine, nor should it be permitted to do so in a FMV valuation. Instead, CNG relies on the valuations performed by GCA to determine the amount of compensation.³⁸⁵ In the First GCA Report, GCA determined the value of these two rigs based on

³⁸⁰ Witness Statement of Volodymyr I. Korchak, ¶¶ 3-4 (translation). ↩

³⁸¹ See, e.g., Mikhail Zygar, All the Kremlin’s Men: Inside the Court of Vladimir Putin (2016) 274-279 (CE-719). ↩

³⁸² AmCM, ¶¶ 264-275 (“According to the evidence gathered in the investigation, some USD 95 million were transferred to accounts controlled by former president Viktor Yanukovych...”). ↩

³⁸³ AmCM, ¶ 376. ↩

³⁸⁴ AmCM, ¶¶ 375-390. ↩

³⁸⁵ Memorial on Quantum, ¶¶ 69 et seq, citing First GCA Report, s. IV; Reply on Quantum, ¶ 108 et seq. ↩

[Page 166]

prevailing rates for hire and the equity value of major drilling companies.³⁸⁶ This research was based on the Riglogix database, which, according to GCA, “is the most widely used and cited aggregator of data, including contracts and day rates, for offshore drilling rigs.”³⁸⁷

575. The Russian Federation’s experts from FTI agree with GCA that, “[t]he FMV of the two modern rigs should be based on their second-hand value, which can be estimated based on the prices at which comparable drilling rigs were sold”. Second, the experts agree it is fair to assume that these two rigs were in good working order, since they were less than five years old in March 2014.³⁸⁸ Third, they both agree that no adjustment is needed to the valuation based on the location of the rigs in the Black Sea.³⁸⁹ Thus, FTI “agree[s] with GCA’s approach to valuing the modern drilling rigs and consider that no adjustments are necessary”.³⁹⁰ FTI says they, “consider that GCA’s approach to valuing the remaining Service Assets is not unreasonable”.³⁹¹

³⁸⁶ First GCA Report, ¶¶ 389-395. ↩

³⁸⁷ First GCA Report, ¶ 383. ↩

³⁸⁸ First FTI Report, ¶¶ A14.14-A14.15. ↩

³⁸⁹ First GCA Report, ¶ 385: ↩

In reaching our assessment of market transactions, we took into account that CNG’s drilling rigs were located in the Black Sea, and that there would presumably be a material time and cost consideration in returning the rigs to service markets in the rest of the world. This is due to having to remove parts of the rigs’ legs to transit under the bridges on the Bosporus Strait. However, the same is also true for any prospective competitors wishing to enter the Black Sea market. While there might be periods in which meaningful adjustments may be required to adjust for Black Sea-resident rigs versus those in the rest of the world, in our view these two aspects would tend to offset one another. Accordingly, we applied no premium or discount to our assessment of the rigs’ value.

First FTI Report, ¶¶ A14.19-A14.20:

An OECD report on the offshore vessel market splits demand for jack-up rigs by location. The report shows that, in 2013, total demand for jack-up rigs was 395 units. Of this demand, only 13 rigs were for Eastern Europe & Former Soviet Union, of which the Black Sea market is a subset. Therefore, the demand for rigs in the Black Sea was just 3% of the demand in the global market. The small size of the Black Sea market is further illustrated by the fact that none of the transactions in rigs which GCA has relied on for its valuations of either the modern or old rigs related to rigs located in the Black Sea.

However, as at March 2014 there was also limited supply of high specification jack-up rigs in the Black Sea of 12 to 14 rigs. As this supply is similar to the demand for rigs as at March 2014, in this instance, despite the smaller size of the market, we consider it is not necessary to apply a discount.

³⁹⁰ First FTI Report, ¶ A14.21. ↩

³⁹¹ Second FTI Report, ¶ 8.4: ↩

As stated in Our First Report, we consider that GCA’s approach to valuing the remaining Service Assets is not unreasonable, and have therefore not discussed them further in this report:
(1) the two modern drilling rigs (although we disagree with GCA’s cross-check);

[Page 167]

576. FTI does not, however, agree with GCA’s hybrid cost-market analysis.³⁹² GCA responded in the Second GCA Report, pointing out that the hybrid cost-market approach leads to a lower valuation of USD 200 million per rig rather than FTI’s suggested weighted-average, which would yield a value of USD 230 million.³⁹³ In reply, FTI denied that its approach would lead to a higher valuation. But it did not explain how, why or where GCA erred in applying FTI’s own model.

577. Moreover, FTI does not provide its own separate opinion of value for these two rigs, while at the same time stating they “see no major issue with GCA’s valuation based on these comparable transactions.”³⁹⁴

578. The Tribunal is left with GCA’s opinion that the Petro Hodovanets and the Ukraine each had a value of USD 200 million on 18 March 2014.

579. Notwithstanding the lack of information about the Tavrida’s condition, FTI agrees with GCA’s valuation of the Tavrida, which results in a valuation of USD 34 million.³⁹⁵

(2) Tavrida, the other old drilling rig; and
(3) the three helicopters. (emphasis added)

³⁹² First FTI Report, ¶¶ A14.22-A14.23. ↩

³⁹³ Second GCA Report, ¶ 293: ↩

Notably, and as explained in the First GCA Report, in using the cross-check methodology, GCA slightly reduces the value provided by the comparable market transactions approach. GCA’s comparable market transactions approach (with which FTI concurred) indicates a weighted- average valuation of [USD] 230 million for each new rig and [USD] 34 million for the Tavrida (together a total of [USD] 494 million or approximately 10% above the high end of GCA’s valuation). In other words, FTI, by agreeing the comparable market transactions approach and rejecting GCA’s “cross-check” methodology would be suggesting a higher valuation of the drilling rigs.

³⁹⁴ Second FTI Report, ¶ 8.4, footnote 370. ↩

³⁹⁵ First FTI Report, ¶¶ 8.11, A14.27-A14.28: ↩

For Tavrida, GCA uses the weighted average price of the rigs in the comparable transactions, but made no adjustment for the non-competitive status of the rig because it is newer than most of the rigs sold in comparable transactions. GCA concludes that the appropriate value of Tavrida is USD 34 million. We agree that the non-competitive status of the rig should be taken into account.

*****

For Tavrida, GCA has used the weighted average price of the rigs in the comparable transactions, making no adjustment for the potentially below average condition of the asset as a result of its non-competitive status. GCA has explained that this is because “Tavrida is newer than most of the rigs that were sold in the review period”. We consider that this is an appropriate method of taking into account the non-competitive status of the rig.

[Page 168]

580. GCA values the oldest rig, the Sivash, as having a value of USD 16 million despite its non-competitive status.³⁹⁶ GCA defines non-competitive status as “they are not available for hire in the general marketplace and are therefore less exposed to competition and constant pressure to be upgraded and maintained.” GCA observes in both its reports that the Sivash “continued to feature in the forward drilling plans of Chornomornaftogaz”.³⁹⁷ The Sivash is listed for “[d]ecommissioning and upgrading for servicing the Subbotinsky NR”,³⁹⁸ suggesting that CNG planned to use the Sivash in 2015 onwards.

581. Although FTI agrees with GCA’s approach in valuing this rig³⁹⁹ by “taking the low-end of the range of values to take account of the age of the Sivash is appropriate”,⁴⁰⁰ it says that “GCA made no adjustment for [its] non-competitive status”⁴⁰¹ citing the Sivash’s “potential poor condition” (emphasis added).⁴⁰² As pointed out above, threats of armed violence by the Russian Federation’s Black Sea Fleet and members of Russia’s airborne divisions made it impractical for the Claimants to inspect these assets. Consequently, the Tribunal majority is not persuaded by the Russian Federation to speculate that the Sivash’s condition was indeed “poor” as of the Valuation Date.⁴⁰³

Consequently, we agree with GCA’s approach to the valuation of Tavrida. (emphasis added)

³⁹⁶ First GCA Report, ¶ 399, citing, Chornomornaftogaz, Drilling Schedule 2012-2014 (CE-1003): ↩

With respect to the 1979 Russia-built “Sivash,” there are few rigs of this age still in operation in the international contract drilling market. A review of the 383 jack-up drilling rigs that were active in the first quarter of 2014 shows that only approximately 13% of the units were older than the Sivash. By way of comparison, the oldest two jack-ups in the world’s largest drilling contractor’s fleet were built in 1986 and 1991 (with a 2011 refit). However, despite its age and non-competitive status, the Sivash continued to feature in the forward drilling plans of Chornomornaftogaz. Its value is accordingly assessed towards the lower end of the range observed in the 2013-2014 transactions, which we consider would be [USD] 16 million.

³⁹⁷ See Chornomornaftogaz, Drilling Schedule 2012-2014 (CE-1003). ↩

³⁹⁸ See Chornomornaftogaz, Drilling Schedule 2012-2014 (CE-1003); First GCA Report, ¶ 399; Second GCA Report, ¶ 295. ↩

³⁹⁹ First FTI Report, ¶ 8.12. ↩

⁴⁰⁰ First FTI Report, ¶ A14.29. ↩

⁴⁰¹ First FTI Report, ¶ 8.12; Second FTI Report, ¶ 8.8 (“However, our point stands that GCA has not made any additional adjustments for the non-competitive status of Sivash.”). ↩

⁴⁰² First FTI Report, ¶ A14.30. ↩

⁴⁰³ Chornomornaftogaz, Drilling Schedule 2012-2014 (CE-1003). ↩

[Page 169]

582. The Tribunal majority accepts GCA’s opinion that the Sivash was worth USD 16 million on 18 March 2014.⁴⁰⁴ FTI does not provide a separate opinion of value in either of its reports.

3. Marine Vessels

583. CNG’s fleet consisted of 22 marine vessels. Seven of these were built in or after 2009; the 15 vessels built before 1992 were acquired by CNG on 18 August 1998 as part of CNG’s charter capital.⁴⁰⁵ GCA assigned no value to four of the vessels: Krepkii-1, Krepkii-2, Shkval, and Chronomorets-15.⁴⁰⁶ The table on the next page provides details about the fleet.

⁴⁰⁴ First GCA Report, ¶ 399. ↩

⁴⁰⁵ Charter of National Joint-Stock Company “Chornomornaftogaz”, 18 August 1998 (CE-1229); Charter of PJSC “State Joint-Stock Company “Chornomornaftogaz”, 6 March 2013 (CE-128-Am); Response to Matters Raised in the Rejoinder on Quantum, 7 September 2020, 11-13. ↩

⁴⁰⁶ First GCA Report, ¶ 404, Table 52. ↩

[Page 170]

Table 52: Summary of CNN’s Marine Vessels

⁴⁰⁷ There was a dispute about the Alaid and whether it was part of CNG’s fleet on 18 March 2014; based on the evidence, GCA reduced its valuation from USD 500,000 to USD 80,000 as scrap. GCA summarizes the Alaid’s valuation in footnote 343 to ¶ 299 in its Second Report. ↩

[Page 171]

584. Of these 22 vessels, about 75 percent of the estimated USD 55–67 million value is made up of the six newest vessels:

585. GCA’s analysis in the First GCA Report is based on a database that lists the prices of 179 supply vessels, 130 tugs, and 138 crew boats, produced in a Microsoft Excel spreadsheet.⁴⁰⁹ Aside from the median vs. mean issue described below, which FTI says would reduce the values, FTI appears to agree with GCA’s approach to five of the 22 vessels:

⁴⁰⁸ First GCA Report, ¶¶ 402-403: ↩

We made exceptions for the newer and higher value vessels noted in paragraph 403 below, which were based on contemporary pricing and interpolation among other marine industry/oilfield support equipment.
Of the 22 vessels, we consider that the most significant sources of value are:
i. the laybarge ([USD] 20 million);
ii. the relatively new and large Indonesian-built support vessels (together, worth [USD] 16 million); and
iii. the newer special purpose support/crew boats (together, worth [USD] 11 million).

⁴⁰⁹ OceanMarine Brokerage Services Database, 17 August 2017 (CE-929). ↩

[Page 172]

586. Regarding the median vs. mean issue, FTI says that were the mean average to be applied to supply boats, this would reduce their price from USD 2.4 million to USD 1.2 million.⁴¹⁰

587. Recalling that GCA found four vessels to be worthless, this means that the remaining seven vessels in CNG’s fleet have a combined value of about USD 3.9 million, one of which (Alaid) was reduced to scrap value:⁴¹¹

⁴¹⁰ Second FTI Report, ¶ 8.22. ↩

⁴¹¹ Second GCA Report, ¶ 299, footnote 343: ↩

FTI asserts that the Alaid was “no longer an asset of CNG at the Valuation date.” But we understand from Naftogaz’s counsel that the document FTI cites in support of this conclusion did not actually remove the Alaid from CNG’s balance sheet. This said, the document FTI cites does suggest that the Alaid was possibly in poor working condition. We have therefore taken a conservative view and valued the Alaid as scrap. At the Valuation Date, scrap metal prices ranged between [USD] 300–350/mt. We calculate the weight of the barge at approximately 255 metric tons. The scrap value of the barge was therefore likely between [USD] 77,000 and [USD] 89,000. We assess value of the Alaid at the slightly narrower range of between [USD] 80,000 and [USD] 85,000. Fair Market Value Assessment of the Alaid for the Second GCA Report (14 Feb. 2014) (CE-1100). Our original calculation of the Alaid’s value was [USD] 500,000, and revising our calculation to factor in the value of the Alaid as scrap metal instead does not change our overall assessment of the value of the Service Assets.

[Page 173]

A. Working Condition

588. The Tribunal majority rejects FTI’s objection to GCA’s assumptions regarding the Service Assets being in good working condition⁴¹² in light of the armed exclusion by Russia of the Claimants’ employees effective February 2014, a month before the Valuation Date.

B. Mean vs. Median

589. FTI states that it “consider[s] the median of the values is a better estimate of the FMV as it excludes outlying high-value vessels”⁴¹³ and the “the averages are significantly skewed to the upside due to a small number of very high value vessels” FTI suggests that a median value would be “more appropriate”;⁴¹⁴ therefore, it takes issue with GCA’s use of mean values.

590. The Tribunal majority notes that FTI is careful with its words. It does not say that mean values are inappropriate, neither does it say mean values are unreasonable, nor does it say that mean values are inaccurate. FTI only says in its second report that the median value would be a “better estimate”:

Had GCA used median instead of mean, its valuation of the vessels would have been lower in the 2017 database and 2020 database. For example, in the First GCA Report, GCA valued supply boats at USD 2.4 million each based on the mean value of comparable transactions. Had GCA used the median value of comparable vessels, it would have calculated a value of USD 1.2 million. (emphasis added)

⁴¹² See, e.g., First FTI Report, ¶ A14.34 (“We also consider it necessary to apply a discount to account for GCA’s unfounded assumption that all vessels are in ‘good working condition”’); Second FTI Report, ¶ 8.26 (“Therefore, unless GCA can show that the vessels were definitely in good working condition, undamaged, fully equipped and maintained then a discount should be applied.” (emphasis in the original) ↩

⁴¹³ First FTI Report, ¶ A14.33: ↩

For these five vessels, GCA uses average values obtained from Ocean Marine’s Brokerage Services Database. However, we consider there are two problems with these values. First, GCA uses values as at August 2017 rather than as at March 2014. Second, the averages are significantly skewed to the upside due to a small number of very high value vessels. We consider the median of the values is a better estimate of the FMV as it excludes outlying high value vessels. (emphasis added)

⁴¹⁴ Second FTI Report, ¶ 8.21: ↩

In the Second GCA Report, GCA did not comment on whether it would indeed be more appropriate to use median rather than mean. GCA has been inconsistent in presenting the results of parts of its 2020 revaluation of the vessels. For some vessels it presents both a mean and median, and for others it presents only a mean. It is not clear whether GCA agrees that median is a more appropriate measure than mean.

[Page 174]

591. Thus, it appears that according to FTI a “better” estimate means a “lower” estimate. FTI does not say that a lower estimate would be a “more accurate” value, nor does it cite an authority to show that lower, median-based estimates are the preferred or dominant methodology in this field.

592. CNG’s expert, Mr. Bill Cline of GCA, addressed his use of median averages during his examination-in-chief:

The second criticism: FTI suggests that I should have used median rather than mean values, and that’s not an unreasonable criticism or observation. However, I looked at and considered both measures, and I selected the method I thought most appropriate and representative of the data. I should point out that sometimes the mean would be higher than the median, and vice versa on other measures, i.e. there was no systemic bias on my selection of measures. And perhaps to assist the Tribunal and put the issue in perspective, let me just illustrate.

In our first report, I valued the tug boats at their mean of [USD] 1.2 million each, versus a median of [USD] 700,000 each. Likewise, I valued the supply boats at [USD] 2.4 million, versus a median of [USD] 1.2 million. Now, the total effect of this difference for the entire fleet is [USD] 4.5 million. Now, does FTI have a point? Sure they do. But it’s narrow and immaterial.⁴¹⁵ (emphasis added)

593. FTI’s expert did not challenge Mr. Cline’s conclusion that the difference between the median and mean averages “for the entire fleet” is “narrow and immaterial.” Rather, Dr. Amor testified “the valuation of [GCA] of the service assets is not unreasonable” and FTI “agree[s] on the vast majority of the value in the service assets” even though they “continued to believe that you should apply median discounts to the Marine vessels.”⁴¹⁶ As mentioned, the Russian Federation chose not to cross-examine Mr. Cline at all.

⁴¹⁵ Tr., Hearing on Quantum, Day 5, 58:1-19. See also Tr., Hearing on Quantum, Day 5, 59:8-17: ↩

I would submit that my election of averages and weighted averages in this case was and is appropriate to the facts observed in the marketplace. I would also observe that while FTI has criticised the usage of means for the marine vessels, which comprise about 11 [percent] of the value attributed to the service assets, it expressed no objection to the use of means for the remainder, or 90 [percent] of the service assets valuation. In any event, the differences between the measures are just not all that significant when assessing the value of the fleet. (emphasis added)

⁴¹⁶ Tr., Hearing on Quantum, Day 5, 115:5-10, 115:17-19: ↩

(Slide 42) So as Dr Moselle said earlier, in general we think that the valuation of [GCA] of the service assets is not unreasonable. We had some minor points around the valuation of the Sivash. We also continue to believe that you should apply median discounts to the marine vessels.

[Page 175]

C. GCA’s 2020 Database Valuations Are Appropriate

594. In the First GCA Report, GCA used a database maintained by Ocean Marine Brokerage Services from 2017.⁴¹⁷ FTI criticized GCA for using a 2017 database when the Valuation Date was in 2014.⁴¹⁸ GCA accepted that it would be preferable to have a 2014 database but doubted such a thing exists. In its Second Report, GCA used that same database as of January 2020.⁴¹⁹ It explained, “[t]he database is ‘live’ and constantly being updated as vessels are listed, removed or sold. As a result, the current January 2020 database is not identical to the database that existed in mid-2017. Notwithstanding this, as will be evident in the following paragraphs, the value ranges of the vessels remain comparable to those derived in mid-2017.”⁴²⁰ Furthermore, GCA opined that both the 2017 and 2020 databases were conservative since “values of oilfield-related marine equipment have decreased markedly since 2014” providing a graph plotting this decline, which also featured in Mr. Cline’s PowerPoint presentation at the Hearing on Jurisdiction and Liability:

*****

But nonetheless, I think as GaffneyCline said earlier today, we do agree on the vast majority of the value in the service assets. (emphasis added)

⁴¹⁷ OceanMarine Brokerage Services Database, 17 August 2017 (CE-929). ↩

⁴¹⁸ First FTI Report, ¶ A14.33 (“GCA uses values as at August 2017 rather than as at March 2014.”). ↩

⁴¹⁹ OceanMarine Brokerage Services Database, 22 January 2020 (CE-1113); Marine Vessels Audit for Second GCA Report, 14 February 2020 (CE-1120). ↩

⁴²⁰ Second GCA Report, ¶¶ 297, 304: ↩

GCA accepts and shares FTI’s observation that it would be preferable to use a contemporary 2014 database rather than a 2017 database (or more recent 2019 data). However, we were and are unable to locate a reliable source of that vintage and further consider that use of the 2017/current database is acceptable and reasonable for the purpose of this valuation. Indeed, we would even consider that using this database is conservative in light of the fact that the values of oilfield-related marine equipment have decreased markedly since early 2014.

[Page 176]

Figure 6: CERA-IHS Capital Cost Index (2000–2020)³⁴²

[Chart data]

• Chart Title: Upstream Capital Cost Index
• Y-Axis Label: Cost Index (2000=100)
• Y-Axis Values: 80, 100, 120, 140, 160, 180, 200, 220, 240, 260
• X-Axis Values: 2000, 2002, 2004, 2006, 2008, 2010, 2012, 2014, 2016, 2018, 2020
• Data Point: Q3 2019, 183
• Source: IHS Markit
• Copyright: © 2019 IHS Markit

595. The Second FTI Report does not dispute the market decline in oilfield-related marine equipment, neither does it dispute the use of the live database as a methodology, nor does it point to the existence of historic databases, which FTI appears to suggest do indeed exist but do not name. Whether a historic database exists remains unknown. Ultimately, FTI concludes that, “[r]egardless, we have assessed GCA’s 2020 database. We consider that whilst GCA’s comparable approach is reasonable, GCA should have used a historic database consistent with the Valuation Date.” (emphasis added) ⁴²¹

596. Again, the Russian Federation decided not to cross-examine Mr. Cline, leaving his evidence unchallenged on the record. Therefore, the Tribunal majority decides not to displace the valuation of the marine vessels at USD 60,580,000, which is the sum of the 22 marine vessels described above.

⁴²¹ Second FTI Report, ¶ 8.18. ↩

[Page 177]

4. Helicopters

597. Before 18 March 2014, CNG owned three helicopters. All three were made by AgustaWestland (“AW”).⁴²² The first, an AW109C (Aircraft 754//UR-CNG), was built in Italy in 1990⁴²³ and commissioned by CNG on 29 July 2004 for UAH 14,378,873.⁴²⁴ This aircraft is a lightweight, twin engine, eight-seat multi-purpose helicopter.⁴²⁵ GCA values this asset at USD 700,000. FTI agrees that GCA’s valuation is reasonable.⁴²⁶

598. The other two AW-made helicopters are AW139s (Aircraft 244//UR-CNW and Aircraft 787//UR-CNH). These are 15-seat medium-sized twin-engine helicopters that are, according to GCA, “widely used in oil and gas operations support.”⁴²⁷ GCA commissioned Aircraft 244 on 4 March 2013 at a cost of UAH 111,000,864.51.⁴²⁸ It was built in 2012.⁴²⁹ GCA values this helicopter at USD 10 million.⁴³⁰ Again, FTI agrees that this valuation is reasonable.⁴³¹

⁴²² First GCA Report, Table 48. ↩

⁴²³ Contract No. 754 for Compulsory Insurance, 19 July 2013 (CE-1220). ↩

⁴²⁴ Excerpt from BDO Accounting Report for Chornomornaftogaz, 13 October 2013, T-0024 (CE-135). ↩

⁴²⁵ Leonardo Company, AW109 Power, 2017 (CE-955). ↩

⁴²⁶ First FTI Report, ¶ A14.39: ↩

As the helicopters had all been purchased by CNG within the last five years as of March 2014, we consider that it a reasonable assumption that they were in a “good working condition”. Therefore, we consider that GCA’s valuation for the helicopters is reasonable. (emphasis added)

See also Second FTI Report, ¶ 8.4 (3):

As stated in Our First Report, we consider that GCA’s approach to valuing the remaining Service Assets is not unreasonable, and have therefore not discussed them further in this report:
...
(3) the three helicopters. (emphasis added)

See also AmCM, ¶ 446 (“As for the three helicopters, the value of these assets should indeed be assessed on historical transactions for similar helicopters.”), citing First FTI Report, ¶¶ 8.17, A14.39; this appears to constitute the entirety of the Respondent’s submissions on the helicopters. See, e.g., Rejoinder on Quantum, ¶¶ 691-700 (the helicopters go unmentioned).

⁴²⁷ First GCA Report, ¶ 407; Leonardo Company, AW139, 2017 (CE-954). ↩

⁴²⁸ Excerpt from BDO Accounting Report for Chornomornaftogaz, 13 October 2013, T-0024 (CE-135). ↩

⁴²⁹ Contract No. 244 for Compulsory Insurance, 15 February 2013 (CE-1221). ↩

⁴³⁰ First GCA Report, ¶ 409. ↩

⁴³¹ First FTI Report, ¶ A14.39; Second FTI Report, ¶ 8.4(3). ↩

[Page 178]

599. The other AW139 (Aircraft 787) was built in 2011⁴³² and commissioned on 17 August 2012 at a cost of UAH 108,877,255.⁴³³ The experts do not dispute about this valuation either.⁴³⁴ Therefore, the expert witnesses agree that the three helicopters should be valued at USD 19.7 million.

600. In summary, it appears that GCA’s valuation conclusion for the Service Assets has been accepted by FTI, notwithstanding its comments or disagreements on elements of the underlying methodologies.⁴³⁵

PART 18 - THE LOCAL DISTRIBUTION COMPANIES

601. The Claimants’ interest in the LDCs consists of the following:

• (a) Naftogaz’s 25 percent shareholding in Sevastopolgaz;
• (b) Naftogaz’s 25 percent shareholding in Krymgaz; and
• (c) CNG’s 15.45 percent shareholding in Krymgaz.

602. The LDCs distributed gas to customers, delivering it from main pipelines to consumers using small distribution pipelines. The LDCs received a supply tariff in exchange for these services.⁴³⁶ In short, they are utility companies that small consumers rely on to supply their gas.⁴³⁷

603. Both of the LDCs had had negative cash flows in 2012-2013, as illustrated below in a table from FTI’s first report:⁴³⁸

⁴³² Contract No. 787 for Compulsory Insurance, 2 August 2013 (CE-1222). ↩

⁴³³ Excerpt from BDO Accounting Report for Chornomornaftogaz, 13 October 2013, T-0024 (CE-135). ↩

⁴³⁴ First FTI Report, ¶ A14.39; Second FTI Report, ¶ 8.4(3). ↩

⁴³⁵ Second GCA Report, ¶ 305. ↩