War damage in Ukraine: Ukrainian businesses have limited legal options
About the author: Olga Kostyshyna is head of international arbitration at LCF Law Group

When EU and G7 leaders struck a deal in the first half of 2024 to use the proceeds from frozen Russian assets in order to aid Ukraine, it was widely welcomed as an important step. However, progress has since stalled. Meanwhile, the issue of more comprehensively compensating Ukraine for the damage caused by Russia’s invasion remains unresolved and continues to be subject to postponements. Despite this lack of clarity, it is already clear that Ukraine is facing long-term challenges as it looks to repair and rebuild. With no firm decision from the international community on the financing of Ukraine’s recovery, Ukrainian businesses have limited options as they seek to address the negative impact of the war.

1. Filing Lawsuits in State Courts

One potential advantage of filing lawsuits is that Ukrainian businesses can apply to a Ukrainian court in the Ukrainian language, and can substantiate their claims using Ukrainian law. However, the disadvantages here likely outweigh the advantages, most notably the fact that any judgment must be enforced in order to actually recover compensation. One way of addressing this may be to apply to foreign courts. Judgments in the state courts of foreign countries are recognized and enforced on the principle of reciprocity, as there is no single unified procedure in place. Recognition and enforcement of a judgment may be denied if it violates the public policy of the country where recognition is sought. It is therefore crucial to clarify how foreign courts might choose to assess the position of Ukrainian courts regarding factors such as the limitations of Russian jurisdictional immunity and inability to participate in proceedings, as well as whether the position of the Ukrainian courts is at odds with the position of the foreign state.

2. Applying to the Register of Damages

An addition option is submitting an application to the Register of Damages. There are a number of potential issues here, not least the lack of clarity over when this mechanism will actually be up and running. It is worth emphasizing that in line with the current time frame, a special commission to consider individual claims is scheduled to be established by the end of 2025. Business owners need to be aware that business damage has been placed in the third and final category, behind damages suffered by individuals and damages to critical and social infrastructure, cultural heritage, and the environment. It is therefore reasonable to assume that damages to businesses will also be compensated in this order. In other words, business owners are likely to find themselves at the back of the queue. There are also set to be some restrictions regarding the periods covered. The Register of Damages can only be used to submit applications for compensation for damages incurred after February 24, 2022. As a result, any damage incurred prior to this date during the first eight years of Russian aggression in the Crimea, Donetsk, and Luhansk regions of Ukraine will not be covered. The process for submitting claims is also not yet clear, nor is the methodology for assessing claims. In addition, the Registry Board has not yet decided whether it is possible to record losses in foreign currency, given the rise in inflation in Ukraine.

3. Arbitration Against Russia

A third potential route available to Ukrainian business owners seeking to address material damage caused by Russia’s full-scale invasion is initiating investment arbitration against Russia. This is a complicated, time-consuming, and expensive process, but it does offer a few potential advantages compared to the other two options outlined above. Firstly and perhaps most importantly, there is already a positive precedent in the form of successful arbitration procedures relating to the 2014 Russian occupation of Ukraine’s Crimean peninsula. These Crimean arbitration processes resulted in favorable rulings for Ukrainian banks and enterprises. Crucially, they also confirmed that Russia can be held legally liable for the expropriation of assets in Russian-occupied areas of Ukraine. Secondly, unlike the Register of Damages, Russia can be sued in relation to losses incurred before February 24, 2022, if the losses were caused in areas of Ukraine that were under the effective control of the Kremlin. When it comes to calculating damages, experts may be engaged to assess amounts due according to international standards. Damages can be set and fixed in a foreign currency, with interest charged until the final execution of the award. An arbitral award can be recognized and enforced in all jurisdictions where Russian assets are located and are subject to sanctions measures.

These three approaches offer Ukrainian businesses some options to consider as they seek to secure material compensation for the damage caused by Russia’s war. Business owners may choose to pursue one or several of these options in parallel, depending on the strategy they develop together with qualified legal advisors.

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