How Ukraine’s Justice Ministry plans to get compensation from Russia, explained

3 October 2022, 03:59 PM
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Iryna Mudra assures that the Ministry of Justice is working on a mechanism for obtaining compensation from Russia (Photo:minjust.gov.ua)

Iryna Mudra assures that the Ministry of Justice is working on a mechanism for obtaining compensation from Russia (Photo:minjust.gov.ua)

Deputy Minister of Justice Iryna Mudra reveals what is being done to obtain compensation from the aggressor country, what are the difficulties, and why there are fewer sanctions against Russians in Ukraine than in the EU or the United States

Russian invaders cause destruction in Ukraine every day — residential buildings and infrastructure facilities suffer from them. According to the World Bank, Ukraine already needs $350 billion, and this amount is constantly growing. Russian officials have repeatedly stated they will refuse to pay reparations. 

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In an interview with NV Business, Deputy Minister of Justice Iryna Mudra explained how Ukraine would get the money, and whether Brussels and Washington are ready to hand over seized Russian assets for this purpose. 

According to the World Bank, about $350 billion is needed to restore Ukraine due to Russian aggression. Every day this amount is growing. Assets belonging to Russia, Russian state companies and oligarchs are being seized all over the world. Will these funds be enough to compensate for the losses?

Unfortunately, there is no single unified register of frozen or blocked assets of sanctioned persons. Therefore, it is impossible to talk about any exact figures. We are more or less aware of the data on the reserves of the Central Bank of Russia. At the beginning of the war, Russia managed to increase its international reserves. As of Feb. 1, they amounted to $630 billion in equivalent. The package of economic sanctions against the aggressor state, which was introduced on Feb. 27, among other things, also included the blocking of operations related to the management of the Central Bank's reserves.

China and Germany were the main countries in which the Russian Central Bank kept its reserves. About 30% of its assets in foreign currency and gold are stored there. The is in on the United States, Japan, the United Kingdom, Switzerland, France and other countries. The next day, the United States, Japan, the UK and neutral Switzerland joined the EU's tough sanctions against Russia. As a result, Russia lost access to the part of its reserves placed in the West and Europe and denominated in almost all reserve currencies, except for the Chinese yuan.

Russia cannot manage about half of its reserves, which is from $300 to $400 billion. This amount is available in various jurisdictions, except China. And it is close to the amount of losses determined by the World Bank. The other half is in China and Asian countries.

Now there is no mechanism that would allow for confiscation of Russian assets. Moreover, in many countries the right to private property is enshrined in the constitution. How do you plan to solve this problem, especially when it comes to the assets of private individuals — Russian oligarchs?

Yes. The issue of recovery of private assets is very painful and delicate for our European colleagues. They are making some concessions in this direction. For example, now the European Parliament is working on the adoption of a directive on the recovery and confiscation of private assets, which, among other things, criminalizes the violation or circumvention of sanctions or failure to provide information on compliance with the imposed European sanctions by sanctioned persons. That is, this directive will establish the grounds for the blocking and confiscation of assets of individuals who are trying to evade sanctions or not comply with the restrictive regime. This has not existed in Europe until recently.

Might the property of Russian oligarchs be sold off?

As far as I know, not a single penny of the seized Russian assets in Ukraine has been transferred to the budget of Ukraine. What is the reason for this?

The competence of the Ministry of Justice in this case is somewhat limited. We act as the central authority, which, having received the decision of the National Security and Defense Council, appeals to the Supreme Anti-Corruption Court with a claim for the recovery of assets to the state treasuries. The first lawsuit has already been filed and the first decision has been made. The Cabinet of Ministers should determine the ways to sell or manage the recovered assets.

On Aug. 23, the arrested yacht of Russian oligarch Dmitry Pumpyansky was sold in Europe, and the funds went to JP Morgan. There is a risk that some of the assets will be sold before Ukraine can get to them. Do you take these nuances into account?

If the sanctioned persons have contractual obligations, they must fulfill them. In fact, the situation is similar to the one when the borrower takes a loan and does not repay the money, and the lender can collect the collateral. I have not studied this case specifically, but based on the information in the public domain, JP Morgan, acting as a creditor of Pumpyansky, collected his asset, which had been pledged to the bank. Such situations, of course, are possible, and these are normal relationships between creditors and debtors.

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What is the ministry doing now to get compensation from Russia? Do you have any examples in international practice?

This is quite a complex question. Speaking about Ukraine, there is already the first case of the recovery of assets of a Russian businessman. These are real estate, apartments, non-residential premises, land plots, corporate rights. Now the Ministry of Justice is preparing a number of lawsuits that will be filed after the decision of the National Security and Defense Council to block the assets of former President Viktor Yanukovych and some other odious persons. This is what we’re doing in Ukraine.

To work in the international arena, a working group was established under the chairmanship of the Head of the Office of the President of Ukraine Andriy Yermak to develop international legal mechanisms to compensate for the damage caused to Ukraine as a result of Russia’s aggression. This working group has developed and approved the concept of the confiscation mechanism.

This concept is based on the example of the compensation mechanism that was created to compensate for losses after the occupation of Kuwait by Iraq in 1991. We took this example as a basis. The mechanism should be developed by the key states where Russian assets are located. It should be spelled out in a multilateral international treaty, under which an international compensation commission will be established. It will consider applications for compensation from citizens, business and the state. Its decisions should be implemented primarily at the expense of Russian assets.

Who cooperates with you?

Currently, our working group is actively working in the legal field. The best world experts in public international law are involved. So, what has been done in these two months? Members of the working group meet with the leadership of the Ministries of Foreign Affairs, Ministries of Justice, Ministries of Economy of France, Germany, Belgium, the Netherlands, United Kingdom, and Switzerland. We met with the EU in Brussels, and with the Council of Europe in Strasbourg. And of course, we are negotiating with representatives of the United States. That is, these are the countries that, in our opinion, are the main parties to this international multilateral treaty and, in fact, the assets of the Russian Federation are located there.

We’re trying to get support for this compensation mechanism both at the bilateral level and in international organizations, such as the UN and the Council of Europe and the EU. Our working group presented its concept at the Committee of Ministers of the Council of Europe and at the event during the High-Level Week in the UN GA. There are plans to create a commission and a fund that will be replenished with the assets of the Russian Federation. And a special tribunal on aggression.

And how many experts work in this compensation commission?

There are about 25-30 people in the working group. But if we’re talking about academics, each of them has a very large staff of lawyers in their universities where they teach. Representatives of Columbia University joined us, Yale and Oxford universities are also involved. We have great legal resources. The issue we have raised is not trivial and not simple, if we are talking about the protection of property rights and sovereign immunity. Of course, we would like to have a consensus of the heavyweight legal community in order to prescribe these issues correctly in the international treaty that we plan to conclude.

Are countries ready to transfer Russian property to Ukraine?

How will the mechanism work? Do you know how these assets will be transferred to the fund? This is probably the most difficult question.

Yes, we’re actually working on it. And this is the topic of negotiations with our partners, because we must find a legal basis and make it so peremptory that states can confiscate Russian assets and transfer them to this fund.

There will be three pools of assets. Sovereign assets, for example, are the funds of the Central Bank. Russia started this war and all these mass atrocities, so it should be held accountable. Russia has an obligation under international law to pay reparations. If it does not do it voluntarily, then a mechanism of compulsory payment of reparations at the expense of its own property should be found. This is the first pool of assets. The second pool is the assets of so-called alter egos, for example, state-owned companies. They do not belong to private companies, because their ultimate beneficiary is the Russian Federation. But they are not sovereign assets either. There is also the question of how they will be transferred. We’re talking about such companies as, for example, Rosatom, Gazprom. The most difficult is private property, which is protected by the relevant doctrines. This is at the level of European resolutions, European conventions, at the level of constitutions of individual countries.

Currently, at this stage, European and American officials have less desire to carry out the civil confiscation of such assets. They are preparing to expand the list of grounds for criminal liability of persons who circumvent or violate sanctions, but they are not ready to confiscate assets civilly. In order to do this in Ukraine, we have developed and adopted a law and are carrying out the procedure in court. And the same can happen in other countries. Germany would have to change its constitution, and this is not their priority now.

Confiscation of Russian assets is a political decision. Do you see the readiness of countries to take this step?

The political decision is the main one. The lawyers will find a way. The main thing is the desire and political will of our partners. The entire diplomatic corps of the Ministry of Foreign Affairs and the Office of the President are working on this. We pay a lot of attention to this issue in the working group established by the Presidential Decree.

Direct communication, persuasion, explanations that we’re doing this exclusively within a legal framework plays an important role. Everyone recognizes and agrees that the one who caused all this destruction, all these losses and damage, must pay for them. And not the taxpayers of this or that country, who, although ready to help us, but not in the amount that Ukraine needs. According to the World Bank, $350 billion is needed for the restoration. The government believes that $750 billion is needed for the full reconstruction and restoration of the country. Of course, they’re not ready to invest such funds.

The process of compensation for losses is very long. When can such a fund be formed?

We want to start negotiations on the agreement this year, immediately after receiving the UN General Assembly resolution. We would like to complete the negotiations this year. But we understand the objective reality. We will strive to agree on the terms of such an agreement next year, in the first half of the year, and then the formation of the fund would begin. The main thing is to create a legal framework for this.

Mikhail Fridman seems to be ready to invest in his bank in exchange for the partial lifting of sanctions. I understand that such a scheme would be appealing to other Russian oligarchs. Do you consider such a possibility? Do you communicate with the oligarchs? Are they ready to really finance the reconstruction of Ukraine?

I’m ready to answer for the Ministry of Justice. No, we’re not discussing anything with them, and it is not in the competence of the ministry. I also saw it in the press, in various media. But I have no information that this is being done, conducted or discussed.

Does Ukraine influence the list of people against whom sanctions are imposed? If so, why is this sanctions list shorter in Ukraine than in the EU and the United States?

Each country decides on the imposition of sanctions in line with its legislation. In particular, they take into account the impact on the economy, and the possibility of achieving the goal of imposing sanctions. In Ukraine, sanctions are applied on the basis of the Law of Ukraine On Sanctions. According to Part 2 of Article 1 of the said Law, they may be applied by Ukraine to a foreign state, a foreign legal entity, a legal entity controlled by a foreign legal entity or a non-resident individual, foreigners, stateless persons, as well as entities engaged in terrorist activities.

Thus, sanctions may be applied to Ukrainian citizens and Ukrainian legal entities that do not fall under the above conditions only if there are facts indicating that they are engaged in terrorist activities.

The range of persons to whom sanctions may be applied in Ukraine and other states, including the EU, may differ. Ukraine takes into account the application of international sanctions and is currently working to reflect them.

While applying national sanctions, Ukraine also has the right to initiate similar sanctions against other states. As far as I know, both the Ministry of Foreign Affairs and the National Agency on Corruption Prevention form lists of those against whom Ukraine considers it appropriate to impose sanctions and share them with international partners.

Therefore, this is a process of mutual dialogue, and all parties understand that the successful implementation of sanctions policy is possible in case of joined effort, mirroring sanctions restrictions at the national level to achieve the main goal — to put pressure on the aggressor state, weakening its economic potential with the demand to stop military actions and compensate for the damage caused.

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