Exactly two years ago this day, we received the final decision of the Stockholm Arbitration Tribunal in the case of the gas transit contract concluded on January 19, 2009 between Naftogaz and PJSC Gazprom. The largest commercial arbitration process in human history for contracts (for transit + gas supply), worth a quarter of a trillion dollars and claims on both sides for half that amount, had ended.
It would seem that this story is over. That there are obvious facts confirming that this was a great victory for Ukraine. The greatest economic and legal victory of Ukraine over its key opponent. It would appear clear enough to everyone that what was at stake was not only the amount, comparable to our country’s GDP, but also our independence, warmth in every home, and the issue of national dignity.
But there are still plenty of myths and manipulation around our victory. They are deliberately spread by Ukraine’s external and internal enemies. I propose we take them on. I will be grateful for sharing this.
Myth. The total amount of Naftogaz’s victory was $3 billion. And in the first case concerning the gas supply contract, Naftogaz initially lost.
Fact. According to the arbitration decision, Naftogaz received $5 billion from Gazprom, and successfully repelled Gazprom’s claims worth more than $82 billion.
The total amount of compensation determined by the tribunal in the case of the gas transit contract was $4.63 billion. Immediately after the decision, we received $2.1 billion – through offsetting for gas, which was arbitrated. In other words, in the form of gas. On New Year’s Eve we received $2.9 billion in cash (this amount includes the interest). In total it amounts to $5 billion dollars.
Naftogaz also won a landslide victory in the gas supply case. We have managed to fully repel Gazprom’s claims under the terms of a take-or-pay contract worth more than $80 billion. Furthermore, we managed to have the price of gas reviewed, whereby the arbitral tribunal ruled that we should pay only for the gas actually taken, and in fact for $2 billion less, or in fact twice as much less, than we would have had to pay Gazprom without a revision of the price.
If we had lost, the least Gazprom could have done was to stop paying for transit, crediting those payments to the debt, and initiate claims against the Ukrainian state. As a result, already in 2018, Ukraine would have experienced a severe economic crisis, and state employees would have been left without salaries. The “Fifth Column” and the separatists would triumph. This is what Russia was counting on.
Our enemies deliberately do not want us all to grasp what a deadly threat we have managed to remove. Why? Especially because they wanted to lure us into a trap again.
Myth. The arbitral tribunal made a political decision, citing problems with Ukraine’s economy.
Fact. In its decision, the Stockholm Arbitration Tribunal based itself on the parties’ contractual obligations and on laws, not to on politics or “compassion for Ukraine”.
The arbitral tribunal, including an arbitrator nominated by Gazprom itself, clearly stated in its ruling that Gazprom must pay compensation to Naftogaz for lost profits as result of Gazprom’s failure to meet its contractual obligations. Similarly, with the price revision – the contract provided for the right of the parties to revise the price, but Gazprom illegally refused to do so. Concerning Gazprom’s “take-or-pay” conditions, the arbitral tribunal ruled them unreasonably excessive by the standards of Swedish law, which Gazprom and Naftogaz had agreed to apply. In other words, Gazprom had “tricked” Naftogaz that not only the general principle of “take or pay”, but also the specific terms of the contract, complied with European rules. And under Swedish law, it is impermissible to “deceive” consumers in this way.
Our enemies want everyone to think that we did not win, but that “pity” was felt for us. In fact, in a fair contest, we defended our rights, secured justice, and did not allow Ukraine to be oppressed. At the same time, we must realize that the Ukrainian side had really been “deceived” earlier and draw appropriate lessons from this.
Myth. It is just that Tymoshenko signed bad contracts.
Fact. This is a “verdict” for the system of power that has developed in Ukraine
Tymoshenko agreed with Putin on certain commercial aspects, but the contracts were agreed and signed by Naftogaz and Gazprom. Negotiations and the signing of the contracts were just the tip of the iceberg. Much depended on how the parties then complied with the terms of these contracts, and how the Ukrainian side made use of the opportunities to protect its rights provided by these contracts.
Russia viewed the supply and transit of gas as one of the most important components of a colonial policy toward Ukraine. Therefore, Russia treated these contracts accordingly. And it is wrong to consider these contracts outside of this context. Russia tried by all means possible to foster Ukraine’s critical dependence on Russian gas.
Ukraine was deprived of the opportunity to import gas from Central Asia. Corruption and populism of Ukrainian politicians were stimulated, leading to inefficient gas consumption, the decline of domestic production, and the existence of intermediaries between Gazprom and Naftogaz.
Experts at Naftogaz, who were supposed to prevent Gazprom from “cheating” its bosses, did not check Gazprom’s assurances of compliance with European rules, and then justified themselves by saying that they thought it had already been agreed “above” and they could not change anything. It was in such conditions that the contracts were signed.
And at the stage of the implementation of the contracts, Naftogaz was in effect placed under the control of Gazprom’s business partners. Therefore, we cannot be surprised by the fact that they did not use the opportunities provided by these contracts to protect the interests of Ukraine.
Myth. Ukraine won primarily thanks to [Surname of a preferred politician or political appointee I like]
Fact. The role of politicians and political appointees at best amounted to either helping or hindering the work of professionals.
I will start with the fact that in the case of victories there many will claim to be its “parents”, but defeat is always an “orphan”. In our case, however, this problem has already exceeded acceptable limits, and now it is a question of combating the parasitic order, which is one of the pillars of the system of power in Ukraine.
From Tymoshenko’s supporters you will hear that they we won primarily because she signed such a good contract. As I have explained, the contract had significant shortcomings, not to mention that she did not actually sign it. The provisions of the contract that allowed us to apply to the Stockholm Arbitration Court and sue under Swedish law are to be credited to Ihor Didenko, the then deputy chairman of Naftogaz, and not Tymoshenko.
Yatsenyuk’s supporters will say that that victory was obtained primarily because Yatsenyuk “went to arbitration” against Gazprom and was the leader of this process. In fact, Yatsenyuk only endorsed the political decision to “start” another arbitration case (not on transit, but on a gas supply contract). And that was later, and at the outset Yatsenyuk sent Kobolev to Moscow to negotiate that Gazprom retain Yanukovych’s “discount” and defer payment of debts. And in the arbitration on the gas supply contract, Yatsenyuk insisted on a legal position, which turned out to be a losing one, and we won because we developed an alternative position.
Poroshenko’s supporters can be heard saying that victory was made possible by his political leadership. Poroshenko himself publicly supported arbitration, but, for example, such authorities during Poroshenko’s presidency as Groysman, Vovk, Demchyshyn, and Nasalik played a negative role in the arbitration process.
From supporters of the current administration you can hear that it was only thanks to the political agreements of the new rulers with Russia that we managed to get money from Gazprom. First, this money, $2.9 billion, is only part of what we won in the Stockholm arbitration. Secondly, Gazprom explicitly stated that it was paying the money because of the arbitration, and for this it was first necessary to win the case. And, thirdly, receiving this money was only a matter of time, as we had seized Gazprom’s assets abroad and were preparing for foreclosure. Moreover, all the delays in payment accrued significant interest. It is particularly strange to hear that it was unbundling somehow helped to obtain this money. Unbundling not only had nothing to do with this, it was very tangential before the transit was continued. Those who say this either do not understand, or deliberately manipulate things.
I am sometimes accused of rarely mentioning Kobolev, the head of Naftogaz, in the context of the victory in Stockholm. Undoubtedly, the chairman of the company is involved in all the victories of the company. But I consciously focus on the professional side, not the political side. Regardless of the specific name of the chairman of the company, who in Ukraine is traditionally appointed by politicians primarily for political reasons, he did not directly manage the team that conducted the arbitration. In addition, each of us makes our own choice about whether to actively change the system of power or try to maintain the status quo.
And I want to make it clear to everyone that this victory was made possible primarily through the actions of professionals and contrary to the rules established in the system of power, and not because of them.
Myth. Western lawyers won; the Ukrainian team was useless.
Fact. Western lawyers followed the instructions given to them by Naftogaz, and they were only part of the general team.
This is one of the most dangerous manipulations. But let us get to the point. Take for example film production. The film is shot by cinematographers, actors work in the frame. Much really depends on their professional skills. But no one thinks to say that the screenwriter or director, for example, do nothing and only appropriate fame. After all, in every process there are different levels of responsibility.
In our case, first, it was important to prove with economic calculations that the terms of certain provisions of the contracts were oppressive for Naftogaz. We had to prove Gazprom’s abuse of its monopoly position in the market, justify the revision of the gas price to the market level, the compensation for lost profits, and so on. In addition, my team and I had to look for witnesses and testify in arbitration ourselves. I wrote more about it here: http://bit.ly/2PlorbD
Lawyers had to choose the best legal instruments to defend our position. I do not belittle their merits, but still the responsibility (including potentially criminal, lay with the internal team of Naftogaz).
But what saddens me most is that the arguments about the alleged key contribution of lawyers deprive you and me of the right to be proud of a real and difficult victory, which is very much needed by everyone today. And what is worse – they only foster an inferiority complex in us.
Myth. It was easy to defeat Gazprom.
Fact. Our victory “hung in the balance”. We were one step away from a stunning defeat.
If everything had been so simple, we would have been only happy. But, unfortunately, it does not work like this. For example, the contracts set out in black and white our “take or pay” obligations, which the Ukrainian side agreed to in 2009 and, objectively speaking, we did not fulfill them. The fact that the obligations were oppressive had to be proved so that there was no doubt. Because if there an element of doubt, the general principle that “contracts must be fulfilled” would apply. All this took almost 4 years. We had eight lines of legal defense, and only the last one worked. Our last hope was the rule of Swedish law, which is usually used to protect household consumers who buy irons and washing machines without reading what is written in small print in the accompanying documents. That was the “hair” on which our victory hung, as we, a large company with a group of lawyers, defended ourselves against $80 billion in claims under the world’s largest commercial contracts, clinging to a law that protects ordinary Swedes who buy home appliances for a few hundred dollars without reading the documents.
In the case of the gas transit contract, we demanded compensation for the lack of gas for transit, although everyone clearly understood that the contract did not contain a “ship or pay” rule. From the outside, it looked like we were crazy – we do not want to pay according to the principle of “take or pay”, which is written in black and white in the contracts, but we want Gazprom to pay us on the principle of “ship or pay”, which was not in the contract at all. Even our external lawyers and experts at first could not understand how we could sue Gazprom over the transit contract.
We really had to cling to the provisions of the contract on compensation for damage, which, although standard for contracts, it is usually applied to completely different situations. In addition, we had to prove that the unearned profit is equal to the damage caused. Given the enormous amount of compensation we demanded and were awarded, we had had to prove that in all respects this was not only legal, but economically just. There were thousands of pages in Gazprom’s justification as to why this was not the case. But our arguments, also thousands of pages long, were more convincing. Moreover, if the arbitral tribunal had had doubts, we would not have been awarded anything.
Myth. We refused to buy cheap Russian gas, so there was arbitration. And because of the conflict with Gazprom gas has become more expensive for Ukrainians.
Fact. The contract price for gas in 2014 was higher than in Europe, and it was Gazprom that cut off gas supplies.
As much as some former politicians might like to think, it is not we who refused to buy Russian gas. It was Gazprom that almost doubled the price of gas after Yanukovych fled. And it had the right to do so, because in 2010 and 2013 the contract price was brought to the market level through “discounts”, which the Russian side had the right to cancel unilaterally. At one time, Russia had “hooked” Ukrainian politicians who promised cheap gas.
Also, immediately after Yanukovych’s escape, Gazprom began demanding immediate payment of multibillion-dollar debts for gas already supplied and closed the pipeline until we settled. Because, for objective reasons, we could not do so, Gazprom was formally even the first to turn to the Stockholm Arbitration Court to demand money from us. Everyone knows what happened next.
As for “cheap Russian gas”, we did indeed demand in the arbitration a price revision, because it was higher in the contract than in Germany. This was because the contract included a formula linked to petroleum products. In court, we managed to reduce the price of Russian gas for Ukraine. Under the Tymoshenko-Putin contract, the price of gas was $485 per 1,000 cubic meters. According to the arbitration decision – $352 dollars. The financial effect of the price revision was $1.8 billion.
When Russia cut off our gas, no one believed we could find an alternative. But we did it by solving problems with infrastructure, design, financing, and so on. We bought gas from European countries at a lower price than Gazprom.
Yes, the payments are now higher than they used to be. And one former prime minister loves to play this up. But she does not explain to her audience that gas was cheap just because the price for the population was administratively set at a level much lower than the price at which gas was bought from Gazprom. Ukrainians still suffered from this, although not directly, but through the state budget (that is, also our money), and politicians simply hid it.
Myth. All the same, we went to negotiate with the Russians and forgave them their debts.
Fact. We achieved full execution of the arbitration award, and the lawsuits in the new arbitration were exchanged for the continuation of transit.
This myth is indirectly related to our victory, but it has sounded quite often in the last few months, so it needs to be refuted.
First, it is necessary to consider this story comprehensively. The most important (for quite objective reasons) outcome of the lawsuits against Gazprom is the cancellation of our debt obligations. You will agree, it would not be pleasant if our main creditor were the country that occupied our territories and killed 13,000 Ukrainians. Although, of course, the fact that we were able to get $ 5billion in compensation makes this victory even more important.
Secondly, we did not forgive the Russians everything. The Anti-monopoly Committee did cancel the fine against Gazprom as part of the settlement of mutual claims, but this happened only after all Gazprom’s assets in Ukraine were secured, though abroad the balance of this fine was almost impossible to collect.
Our new $12 billion lawsuits are money that still needs to be fought for, potentially for years. And transit is real money now, which, unfortunately, is very much needed by the Ukrainian economy. We were guided by the interests of Ukrainians in their currently existing conditions.
And third, we will not stop suing Russia and defending Ukraine’s interests. An updated $8 billion lawsuit was filed last week against the Russian Federation over Naftogaz’s lost assets in the occupied Crimea.
In addition, as I said, we do not rule out the possibility of new lawsuits against Gazprom itself. In both cases we have promising prospects.
Has not every country its own symbols of victory – for some it is a place of victorious battles, for some it is a place of overthrow of a totalitarian regime, or declaration of independence. Stockholm had every chance to assume an honorable place in our national list of symbols of victory. My team and I also worked hard to make Stockholm a symbol of victory. For some it is now so, for some, unfortunately, not.
I sincerely regret that so many (pro) Russian politicians, journalists, experts, and bloggers have made so much effort to deprive us of this victory. So that we continue to lag because of an inferiority complex, that we do not claim new achievements and lose ourselves in arguing.
But I would like to take this opportunity to emphasize once again that Stockholm is not about a personal case, it is about a national example of how Ukrainians can win if they work in harmony, professionally and honestly.
Finally, Stockholm is about the force of law, not the law of force. After all, by choosing to sue in a country with the rule of law, rather than negotiate with Russia and trade independence, we as a nation have reaffirmed Ukraine’s European choice. Competing with a trickster is useless and obviously a losing matter. Instead, we now know for sure that we are strong enough to compete even with Gazprom and Russia in a fair fight. It is critical for us to absorb this lesson.
Once again, thanks again to our small and professional team. New challenges lie ahead.