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Politics 2020-11-14T04:03:53+02:00
Ukrainian news
In a Month, Ukraine to Be Given the Business in International Arbitration: The Time Limit for Resolving the Co

In a Month, Ukraine to Be Given the Business in International Arbitration: The Time Limit for Resolving the Conflict with Tobacco Companies Is about to Run Out

October is seen as the last month when Ukraine can resolve the conflict with the world’s largest tobacco companies over the unlawful fines imposed by the Antimonopoly Committee of Ukraine and avoid any international arbitration claims seeking compensation for illegal profit expropriation. To prevent the scandal associated with the groundless multibillion-dollar fines imposed by the Antimonopoly Committee of Ukraine on the entire tobacco industry of Ukraine from spilling over to the international level, some influential business associations have called on the Ukrainian authorities to resolve this conflict with no help from the international arbitration institutions. Otherwise, the scandalous international proceedings between Ukraine and the largest tobacco companies worldwide will be another shame for the country that declares the protection of investors but does just the opposite in practice. The arbitration claim to be filed by the companies will be based on the facts of illegal profit expropriation: as a controversial fine, UAH 6.5 billion has been withdrawn from the tobacco market players. Such “Bolshevism” definitely won’t benefit Ukraine’s investment image.

Ukraine is being offered to resolve the conflict in a civilized manner

For the first time in the history of Ukraine, the Antimonopoly Committee of Ukraine—under far-fetched pretexts—has imposed such draconian and unprecedented sanctions against the tobacco companies in the amount of UAH 6.5 billion. The “Big Four”—Philip Morris, JT, Imperial Tobacco and British American Tobacco—have been subjected to the sanctions.

The companies are still challenging the imposed fines in courts—this is the last resort to prove their case. However, the judicial system of Ukraine has sided with the Antimonopoly Committee of Ukraine: in the course of quick judicial proceedings with numerous procedural defects, the judges have simply ignored the volumes of arguments, evidence and international expert reports that prove the groundless position of the Antimonopoly Committee of Ukraine. The judgments are based on the controversial statements of the Antimonopoly Committee of Ukraine that made every creative effort to fabricate an indictment related to market monopolization and tobacco companies’ culpability.

However, it was the Antimonopoly Committee of Ukraine that allowed the dominant seller to appear in the market in 2011–2012 when it granted about two dozen merger clearances to Tedis Ukraine in the tobacco distribution market. Nevertheless, a few years later, in October 2019, the Antimonopoly Committee of Ukraine recognized its market conditions as non-market and anti-competitive. The blame for the situation that has developed due to short-sighted government regulation or deliberate actions has been shifted to the manufacturers and distributors of tobacco products.

The “Big Four” composed of global tobacco manufacturers haven’t yet been able to see justice done in the Ukrainian courts, while the European Business Association reported in early August that “two groups of international tobacco companies have already filed an appeal against Ukraine to protect their rights as foreign investors through international arbitration. Two more companies are looking into filing such appeals in the near future.”

Olga Pischanskaya, the Head of the Antimonopoly Committee of Ukraine, has admitted that these appeals are under consideration by the Ministry of Justice of Ukraine. “We’ve already formed a working group to deal with the issue and assess the arbitral procedure risks,” she said in an interview with Interfax-Ukraine.

Several tobacco companies that are suffering from unlawful pressure put by the Antimonopoly Committee of Ukraine and Ukrainian courts have confirmed that the claim has been filed with the Ministry of Justice. For instance, the Ukrainian division of Imperial Tobacco—with its “Notice of Intent to Raise an Investment Dispute against Ukraine” dated July 24, 2020 and reviewed by the editorial staff—stresses that the claims and sanctions imposed by the Antimonopoly Committee of Ukraine are groundless. In addition, the division calls attention to the fact that the Ukrainian judicial system is blocking their attempts to challenge the unlawful decision in fair and unbiased legal proceedings. The future plaintiff in international arbitration qualifies such Ukraine’s actions as illegal profit expropriation. All these actions for the Ukraine’s part are an obvious violation of its obligations under the Agreement for the Encouragement and Protection of Investments between Ukraine and the United Kingdom (the parent company Imperial Tobacco is incorporated in the United Kingdom; its shares are listed on the London Stock Exchange.) In addition to the Ministry of Justice of Ukraine, the copies, according to the standard practice of such disputes, have been sent to the Government of Ukraine, the Volodymyr Zelensky’s Presidential Office and the Antimonopoly Committee of Ukraine as the instigator in the scandal.

Since the document was submitted at the end of July this year, this means that the final countdown for an amicable settlement of the conflict between the companies, which have come under pressure from the Ukrainian authorities and the judicial system, and Ukraine will have ended at least by the end of October. In case of such proceedings, it’s customary to file a complaint with the Ministry of Justice of Ukraine. Three months is the term to complete the amicable settlement. If a compromise isn’t forged during the above period, the parties have to get ready for a hearing in international arbitration.

The international bodies that resolve investment disputes won’t consider complaints filed by the global manufacturers of tobacco products against the Antimonopoly Committee of Ukraine. Ukraine will be the defendant that allowed unlawful pressure and measures to be taken by its institutions against the companies.

No right to a fair trial

The Ukrainian judicial system has long acquired ill fame among both local and international investors. However, we now have a “window of opportunity” that will enable the country—with its pride intact—to end the scandal. To recap, some Ukrainian divisions of global manufacturers have paid the fines under pressure from the courts and the Antimonopoly Committee of Ukraine—this is a tactical move that has helped them avoid any penalties. The representatives of the “Big Four” have no intention to stop.

Imperial Tobacco is preparing to challenge the first instance judgment and the decision of the Antimonopoly Committee of Ukraine, which laid the foundation for the fine, and achieve the lifting of financial sanctions in the Economic Court of Appeal in October. This is the last chance for Ukraine to avoid a global shame. All in all, this requires little effort: a fair trial and non-interference of influential politicians, media and deputies. As the tobacco companies highlight in their warnings about international arbitration claims, no fair and unbiased justice in Ukraine is the key reason for their appeal to international arbitration institutions.

One of the principal complaints is as follows: the court paid no attention to reviewing the decision of the Antimonopoly Committee of Ukraine, as it made false conclusions based on its own assumptions and causal relationships that are often violated. The officials of the Antimonopoly Committee of Ukraine didn’t even have to prove their case and validity of claims against the tobacco market players to the court. The court rejected hundreds of pages of arguments provided by the companies and economic evaluation reports from the leading Ukrainian and European institutions as well as just copied the text of its decision from the unproven charges of the Antimonopoly Committee of Ukraine.

The pinnacle of such a suspicious rush is a one-time rejection of the plaintiffs’ motions and a subsequent decision being literally made during the judge’s one-minute (!!!) stay in the deliberation room (please take into account that this is a complex case with unproven arguments of the Antimonopoly Committee of Ukraine and seventeen (!!!) volumes of materials.)

The amount of fines and the logic behind their imposition is still a mystery for the companies that have been illegally fined. For instance, Imperial Tobacco Production Ukraine has been fined, although it has nothing to do with the distribution of tobacco products. It’s an exclusively manufacturing division that generates 100% of its profits by selling products to its own distribution company—Imperial Tobacco Ukraine—and exporting its own tobacco products to more than 20 countries worldwide. Simply put, the company has been fined for the activities in the cigarette wholesale market, but it doesn’t even conduct such activities in Ukraine. In fact, we’re talking about an artificial doubling of financial sanctions.

The companies affected by the Antimonopoly Committee of Ukraine and the judicial system couldn’t efficiently defend themselves against the charges from the Antimonopoly Committee of Ukraine, since they didn’t gain full access to the evidence used to support those charges. Moreover, during the trial, the arguments provided by the tobacco companies’ representatives weren’t given sufficient attention, as the court ignored the independent economic analyzes and evaluation reports from the authoritative international consultants in economics and competition, leading Ukrainian experts and recognized legal scholars in the field of antitrust regulation and EU law. With their reports, the experts unanimously supported the legal position of the companies and recognized the charges of the Antimonopoly Committee of Ukraine as unlawful.

In addition, the expert reports helped establish the fact that it was unprofitable for the tobacco market players to monopolize distribution, which they were charged with, since it narrowed down the opportunities to compete for the buyers. At the same time, the Antimonopoly Committee of Ukraine didn’t prove or substantiate its statements that the concentration of the cigarette distribution market was beneficial to their manufacturers. An obvious significant redistribution of market shares between various manufacturers and damages to some of them—when they had to work with the only monopoly distributor—just confirm that the market experiences serious competition and doesn’t grant power to the cigarette manufacturers. However, the court and the Antimonopoly Committee of Ukraine simply ignore such obvious facts.

These important points show that the companies have an extremely strong legal position to recover compensation from Ukraine in international arbitration. It seems that the Ukrainian judicial system has done its best to drive Ukraine into a legal dead end.

A point of no return hasn’t yet been passed

Due to the international arbitral procedure, Ukraine will suffer losses twice: firstly, following the judicial proceedings in international arbitration, the country, its budget and taxpayers will be obliged to return UAH 6.5 billion expropriated from the industry (this amount is comparable to about a third of the Pension Fund’s deficit); secondly, according to the European Business Association, the arbitration proceedings initiated by the global business flagships against Ukraine “will attract great attention of the international community, while the cases will spill into public view in the global media and become important for other potential investors, thus having extremely detrimental consequences for the investment environment of Ukraine.”

The European Business Association has called on the Ukrainian government “to respond appropriately to the reports made by the international investors from the United States, Great Britain, Switzerland and the Netherlands regarding the investment dispute with Ukraine, according to the decision of Antimonopoly Committee of Ukraine, and to approach this issue impartially in compliance with the legislation of Ukraine and international treaties.”

The attention of many international companies, which do or are only planning to do business in Ukraine, is now riveted on this case. The solution to the conflict will be a powerful signal for the international community whether it’s possible to do business in Ukraine and whether there is law and a fair trial here. The investors are hoping that the issue will be resolved while preserving business relations between the strategic investors and the country without significant losses for the investment environment of Ukraine.

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