Compensation Mechanism for Ukraine: An Option for Multilateral Action

[Oleksandr Vodiannikov, PhD, LLM, is a member of Ukraine’s Law Reform Commission and previously served as a member of Ukraine’s Judicial Reform Council and of the Constitutional Commission.]

The cost of war for the Ukrainian economy, infrastructure, and the population is spiraling every day as the ensuing devastation grinds on. The bill to be paid for the reconstruction of Ukraine’s shattered cities, railroads, highways, and factories is still difficult to predict. The war in Ukraine puts national finances in a catastrophic situation with economic policies disrupted, more than 12 million people fled their homes, and around 60% of small- and medium-sized businesses closed or suspended. Where homes, hospitals, schools, family shops or other businesses once stood, there are now piles of rubble and crumbling shells of concrete. Burnt-out buildings, ruined homes, looted residences, plundered farms – these scars of war are ever increasing across the country. 

With the outbreak of this war, Western governments imposed targeted sanctions against Russia, its assets, entities, and persons, including the Central Bank. These assets are a tempting target, but there are significant legal obstacles arising especially from sovereign immunity principles. Conventional ways of recourse in national courts will require both identifying the cause of action against Russia or its respective state institution (e.g. the Central Bank) and overcoming jurisdictional/justiciability issues and in particular sovereign immunity. Laws such as the Foreign Sovereign Immunity Act 1976 (US) and State Immunity Act 1978 (UK) generally foreclose claims against states or their agents and confiscation of state assets. Legislative confiscation or forfeiture of Russian assets by states that froze them with a view to their use for the benefit of Ukraine is likely to raise due process/constitutional concerns. 

For the Ukrainian Government to pursue compensation claims means embarking on hundreds of lawsuits in national courts of dozens of states where Russian assets are frozen, with uncertain prospects of success. For an ordinary citizen who lost his or her home, property, or job, this avenue is simply unattainable.

Therefore there is a need to create a new and innovative mechanism to collect, assess, and ultimately provide compensation for hundreds of thousands of claims against the Russian Federation for direct losses stemming from the aggression against Ukraine. The mechanism should allow for (1) a speedy process for receiving compensation for damages, losses, or injuries as a result of Russian aggression, (2) a one-stop-shop approach, (3) adherence to the rule of law and due process guarantees, (4) cost-effectiveness for Ukraine and other injured states.

Under international law such mechanisms are not unique – the processes to deal with international mass claims have a long history. Most recent examples have been established either by the UN Security Council (UN Compensation Commission) or by agreement between interested states (US-Iran Claims Tribunal, Ethiopia-Eritrea Claims Commission). Both options are unavailable in the case of Ukraine for objective reasons. 

I think the issue should be viewed from a different angle – namely the obligation of all members of the international community with respect to a serious breach of a peremptory norm of general international law – in casu prohibition of aggression. Under the Uniting for Peace formula, the UN General Assembly qualified and condemned the war as aggression by the Russian Federation against Ukraine in violation of Article 2 (4) of the Charter. 

Under the general international law of state responsibility in case of a serious breach of a peremptory norm, all states are under obligation to cooperate to bring to an end through lawful means any serious breach (Art. 41(1) of Articles on Responsibility of States for Internationally Wrongful Acts). This includes giving full force to the international responsibility of a State which is entailed by an internationally wrongful act and which involves legal consequences under international law. The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act. As a corollary, each state is under obligation to cooperate to bring to an end through lawful means the serious breach committed by Russia and bring it to the international responsibility, including full reparation for the injury caused. Therefore it seems legally sound to consider a multilateral response and a compensation scheme under a multilateral treaty.  

When thinking of a workable compensation mechanism there are at least six criteria that must be considered in designing a compensation mechanism: (1) a rationale, (2) function, (3) a source of authority, (4) funding, (5) a defined administrative scheme, and (6) mechanism for managing resources. There are other issues like eligibility criteria, damage methodology, standing, and rules of procedure that are no less important, but not decisive for the design. 

Rationale

The Russian Federation, as the perpetrator of the internationally wrongful act of aggression, is liable under international law for any direct loss, damage, including environmental damage, or injury to Ukrainian or foreign Government, Ukrainian and foreign nationals and corporations, as a result of Russian Federation’s aggression and occupation of certain territories of Ukraine. 

Based on the UNCC precedent, we can define five causes of damage: 

(a) military operations during the period of 24 February 2022 to the date of the end of hostilities. The responsibility embraces the full range of those operations, including land, air, and missile attacks on the Ukrainian territory. Losses resulting from the Ukraine defense operations are likewise the direct consequence of Russia’s attack and invasion. This cause includes, but is not limited to, personal injury and death, damage to infrastructure, state, and private property, environmental damage, etc.

(b) departure from or inability to leave Ukraine (or a decision not to return) during that period. The aggression against Ukraine triggered a huge exodus from Ukraine and forced many persons already outside Ukraine not to return. Their decision to flee was triggered by a justified apprehension about their physical safety after February 24.

(c) actions by officials, employees, or agents of the Russian Federation or its controlled entities or persons during that period in connection with the aggression or occupation. Russian Federation is responsible for all direct losses stemming from its illegal aggression and occupation, including losses caused by its officials’ conduct connected with the invasion and occupation. This includes Russia’s armed and police forces as well as paramilitary forces under Russia’s control – this responsibility is supplementary to Russia’s responsibility under the law of war. 

(d) the breakdown of civil order in Ukraine during that period. It can be anticipated that some claimants who suffered property damage in Ukraine might not know or be able to prove the specific circumstances of their losses. This area of liability, therefore, underscores Russia’s responsibility for the failure to maintain law and order following the invasion and occupation as required under the law of war. 

(e) hostage-taking or other illegal detention, inhuman or degrading treatment, tortures, sexual violence, and extrajudicial killings of the civilian population. 

Function

The compensation mechanism should (1) effect a speedy, fair, and efficient evaluation of the claims made against the Russian Federation and process them in accordance with the principles and rules of international law (full reparation for the injury caused), and (2) make payments to claimants from the funds obtained from Russian assets (as discussed below).  

Source of Authority

Historically the authority for compensation mechanisms has been either the UN Security Council acting under Chapter VII of the UN Charter or sovereign consent to the claims resolution process as part of a peace deal ending hostilities. Both options are not available now due to Russia’s veto power in the UN SG and the ongoing military operations. But the international community is still under the obligation stemming from general international law to give full force to the international responsibility for any gross or systematic breach of peremptory norms. A multilateral treaty could be an option that effectively brings about the obligation incumbent on all states to cooperate to end any serious breach of international law and give full force to the international responsibility of the aggressor state.   

Funding

The funding mechanism to be enacted by this multilateral treaty arrangement should provide for stripping the Russian Federation of immunity, in respect of itself and its property, from the jurisdiction of the compensation mechanism. Such treaty limitation of sovereign immunity proceeds from the assumption that aggressive war, gross human rights violations, crimes against peace, war crimes, and crimes against humanity may no longer be considered as de iure imperii and covered by the Act of State doctrine. The perpetrator state therefore may no longer be entitled to sovereign immunity in cases of a serious breach of its obligation arising under peremptory norms of international law.  

Following the paradigm of the UN Jurisdictional Immunities Convention, to enforce compensation against the Russian Federation, the following assets will be considered as being the Russian assets:

1. Assets belonging to the Russian Federation and its various organs of government; constituent units of the federation or other political subdivisions of the State, which are entitled to perform acts in the exercise of sovereign authority, and are acting in that capacity;

2. Assets of agencies or instrumentalities of the Russian Federation or other entities, to the extent that they are entitled to perform and are actually performing acts in the exercise of the sovereign authority of the State;

3. Assets of private persons or undertakings who facilitate the commission of aggression, aide, abet, or otherwise assist in its commission or directly and publicly incite to commit aggression, continue its commission, and publicly justify it; 

4. Assets of entities, corporations, partnerships, and undertakings that are directly or indirectly controlled by the above. Control shall be constituted by rights, contracts, or any other means which, either separately or in combination and having regard to the considerations of fact or law involved, confer the possibility of exercising decisive influence on an entity, corporation, partnership or undertaking, in particular by:

(a) ownership or the right to use all or part of the assets of an undertaking;

(b) rights or contracts which confer decisive influence on the composition, voting, or decisions of the organs of an undertaking. 

In line with long-standing principles of international law, the proposed arrangement shall be without prejudice to the privileges and immunities enjoyed by (a) diplomatic missions, consular posts, special missions, missions to international organizations, or delegations to organs of international organizations or international conferences; and (b) persons connected with them. It will also be without prejudice to the immunities with respect to aircraft or space objects owned or operated by the Russian Federation.

Therefore the following resources can be used to settle compensation awards: (1) Russian assets, (2) ‘Compensation surcharges’ on (a) any direct or indirect export into the Russian Federation’s customs territory from the customs territory of contracting states and payable by the importer; and (b) any direct or indirect import from the Russian Federation’s customs territory into the customs territory of contracting states and payable by the exporter, and (3) voluntary contributions from governments, private entities, and persons.

The compensation surcharges imposed by the international treaty should be imposed in the appropriate amounts, on a non-discriminatory basis, on imports and exports of all products directly or indirectly from/to Russian Federation. They are to be collected by contracting states in the form, at the rate specified and according to the other criteria laid down in the treaty. Such surcharges shall be collected independently of the customs duties, taxes, and other charges normally imposed on imports or exports and shall be payable by Russian importers/exporters. Such surcharges may be extended to imports/exports from/to third countries when circumvention of the measures is taking place.

Administrative Scheme

The discussed above mechanism includes essentially two pillars – adjudication of claims and enforcement of awarded compensations. These two pillars should function in close coordination to ensure swift and just settlement of claims for damage inflicted by the Russian aggression. But institution-wise this requires two entities: (1) Compensation Tribunal for Ukraine (CTU), and (2) Ukraine Compensation Facility (UCF). 

The CTU as an adjudicative body should have jurisdiction over (1) claims for direct loss, damage, including environmental damage, or injury to Ukrainian and foreign Governments, Ukrainian and foreign nationals, and corporations, as a result of the Russian Federation’s aggression and occupation of certain territories of Ukraine (i.e. on or after 24 February 2022), (2) questions and disputes concerning or related to interpretation and application of the multilateral treaty arrangement, and (3) judicial review of UCF decisions. The CTU may also have ancillary jurisdiction to declare assets as being directly or indirectly controlled by the Russian Federation, its instrumentalities as well as entities and persons complicit in conducting the aggressive war. Such declaration shall be adjudicated upon submission from the UCF or any contracting state.

States that become party to the treaty of the tribunal would ipso facto accept the jurisdiction of the tribunal over Russia-linked assets and lift immunities under the conditions specified in the treaty. 

The core task of the UCF is to execute awards rendered by the CTU. Such execution will include both direct payments out of funds accumulated at the UCF accounts and forfeiture of Russian assets via agreed speedy procedures at the national level in cooperation with contracting states. The UCF is also to administer funds accumulated from ‘compensation surcharges’ and voluntary contributions and disburse them to compensate for loss, damage, or injury as awarded by the CTU. Finally, the UCF in cooperation with national authorities is to search for, identify and block assets directly or indirectly controlled by the Russian Federation, its instrumentalities, and entities or persons, complicit in aggression. 

Mechanism For Managing Resources

The compensation mechanism, thus, needs four major elements. The first is the UCT and its secretariat. The second is the policy-making body, the Governing Council which usually consists of representatives of the Contracting Parties. States generally are represented on the Governing Council by their ambassadorial permanent representatives in location to be agreed, assisted by experts from their capitals or their missions. The third major element is the UCF Secretariat. As the claim processing and adjudicating will be done by the CTU, the Secretariat will be responsible for the day-to-day operation of the UCF, processing information on and accounting for the assets provided for the disposal of the UCF, and other UCF contributions, and enforcing CTU awards on the territory of contracting states. 

The fourth element in the compensation mechanism’s structure is the fund. There should be a permanent banking facility that will enjoy jurisdictional immunities. The fund will be also used to maintain the UCF and CTU.There is a need to create a new and innovative mechanism to collect, assess, and ultimately provide compensation for hundreds of thousands of claims against the Russian Federation for direct losses stemming from the aggression against Ukraine and the occupation of its parts. The international community may not wait till hostilities end to pursue accountability for Russia’s aggression against Ukraine. The culprit shall pay the bill and for that, we need a multilateral solution for what is indeed a global concern.