The ECJ Undermines the Single Market in the Achmea Case.

europas-ecjIn my latest article in The American Interest How the European Court of Justice Undermined Europe I examine the consequences of the Slovakia v Achmea case. In Achmea the ECJ handed down a judgment which had the effect of making unlawful at least all the intra-EU bilateral investment treaties (BITS) across the continent. The tenor of the judgment, (and this argument appears to have significant support within the European Commission) is that the ruling can be extended to all BITS with third countries. The ECJ’s argument focused on the issue of the autonomy of the EU legal order i.e. that investor dispute tribunals necessarily make decisions involving EU law which cannot be reviewed by the Union’s own superior courts. Aside from the argument that such rights of appeal could be put in place, which the ECJ refused to do, there was no recognition on the Luxembourg bench of the consequences of their decision.

One of the major objectives which runs through the case law of the ECJ since it opened its doors in 1952 as the Court of the European Coal and Steel Community has been to promote the integration of the European market. Achmea by contrast is likely to have a significant disintegrative effect. Most of the capital that flows into CEE and Baltic states comes from other EU states, Japan and the US. Those capital flows are protected by a network of BITs across the eastern half of the continent (US firms usually deploying EU vehicles to obtain BIT protection). There is now a real danger that with the removal of BIT protection those flows are disrupted. Given the CEE and Baltic states are recovering from more than 40 years of Soviet occupation, they need to maintain significant capital flows in order to  catch up with the economic development of Western Europe.

A range of problems in the region largely emanating from the Soviet occupation judicial legacy of slow procedures. legal formalism, and politicisation undermine confidence of Western investors. Whilst they are Member State legal systems subject to Union law, there is very little Union law can do to ensure that the rights of investors are protected.

In addition, there is a further problem that if capital flows are disrupted the CEE states may be subject to greater capital leveraging by China, who has already announced a €10 billion infrastructure fund for CEE states. This fund has not been substantially deployed so far, Achmea may provide an incentive to do so.


Are the EU Institutions and the Member States Undermining the Energy Transition?

In my latest article How the European Commission, the European Court of Justice and Member States are Scaring Away Investors in the Energy Sector I argue that the energy transition may be at risk from its own authors. In order to substantially decarbonise the energy sector by 2050 (with a target of 80% decarbonisation) the EU will require approximately $2 trillion worth of capital investment into the energy sector.

In order for that capital to be levered into Europe’s energy markets it is vital that investors are provided with a stable, predictable and transparent markets into which they can safely invest. It highly unlikely that state capital resources on their own can ever be deployed on the scale necessary to achieve the scale of decarbonisation required by the EU and the Member States.

Despite the need for huge capital flows and the inability of the public sector to deliver them on its own the EU and the Member States have not shown any great willingness to encourage such flows. In Slovakia v. Achmea at the beginning of March, the ECJ, threw doubt on the legality of all intra-EU bilateral investment treaties (and potentially all bilateral investment treaties). It is not unreasonable to say that at least there is a significant difference in the quality of court systems across the Member States. The ECJ in one fell swoop undermined the one type of mechanism that operated across the Union to protect investment flows. Meanwhile not to be outdone in Decision 2017/442 the European Commission sought to argue that arbitration awards in cases involving subsidy regimes could constitute payments of non-notified state aid-further undermining the investment arbitration system.

The Member States have lent a helping hand to the EU institutions in undermining investment flows. In Germany, Berlin dragged its heels over compensation for the sudden decision to close its nuclear power station fleet. It was only after being brought before the German supreme court did Berlin agree to negotiate a compensation package. Spain’s equally sudden decision to revise its RES subsidy regime, has resulted in a flood of cases to the courts and arbitration panels, with a further 30 cases waiting in the wings. In the Netherlands, the energy sector has been subject to a double whammy, of new coal fired power stations being closed down without any immediate prospect of compensation. And in the Groningen gas field, rapid production cuts have been imposed on a field that still has significant potential, and raise again concerns over compensation.

Given the Paris Agreement, the oil and gas sector will be substantially phased out between now and 2050. However, if coal power stations are encouraged to be built and not compensated, then the consequence is likely that as a result investors are also less likely to invest in renewables as well. They may well take the view that renewable investment that is welcomed today, will be deemed an albatross tomorrow and end up being treated like the coal fired power stations of yesterday.

The Member States in particular need to recognise the reality of protecting investment flows. Take the Groningen Field. It is true that the reason for ordering production cuts were the tremors caused by production from that field. The danger here is that an over-reaction reinforces the sense that the Member States do not really appreciate the impact of their decisions on future investment flows. The particular danger here is that decision, combined with the preemptory closure of the coal-fired power stations may undermine the capacity of the Dutch state to ensure continued investment flows.

Without a recognition that the energy transition requires a stable, predictable and transparent investment climate, it will be impossible for the EU as whole to deliver on its ambitious environmental goals.

CAATSA is not the Only Sanctions Act to Worry About


Yesterday the US government published its Section 241 list under the Countering America’s Adversaries Through Sanctions Act 2017 (CAATSA). The 210 persons on the list are not subject to sanctions directly. The US government was required to submit to Congress a list of the most significant senior figures in political and business and amongst parastatal entities.  Clearly though just being on the list is going to cast a shadow over the business operations and movements of the listed individuals. There are however, more direct and immediate concerns for the persons listed under Section 241 stemming from another move by the Trump White House.

What I argue in my latest Statecraft piece Dealing with Trump’s Magnitsky Expansionism is that the largely overlooked Executive Order 13818 (EO) is likely to bring sanctions more rapidly down on members of the Russian elite than CAATSA. In essence, the EO reduces the legal standards for human rights abuses and corruption under the Global Magnitsky Act (GMA) adopted in 2016, and operationalises, even weaponises the GMA. With a lower legal bar to action; a broader range of actors who can be subject to sanction liability and the capacity of Congress to make its own GMA filings, NGOs, civil society and the Russian opposition now have a powerful tool in their armoury.

There is now even a danger that the CAATSA and the enhanced GMA may begin to interact, with one another-in that the Section 241 list could be deployed as a target list for sanctions under the GMA.

The danger for Russian businesses and their Western partners is that the number and scope of potential sanctions is likely to undermine confidence and willingness to go through with transactions. This freezing of business confidence is likely to reinforced by GMA filings, which are likely to occur in small batches, a regular drip, drip drip of GMA filings will act as an ever present concern in dealings with Russian entities for the foreseeable future.

Stockholm Bombshell: The Implications of the Gazprom v. Naftogaz Arbitration

It is clear even from the first ruling that Naftogaz and Ukraine have been substantially strengthened and Gazprom Weakened.


Almost all gas contract disputes between Gazprom and its customers have ended up with an amicable settlement between the parties. The German, French or Hungarian customers may push Gazprom on the pricing, Gazprom pushes back and ultimately everyone settles on a number they can live with-and each side claims victory. Rarely does either side actually intend to seek a final ruling from an arbitrator. However, when Gazprom launched its case against Naftogaz in the summer of 2014 the Russian aim was to push the case to a final arbitration ruling, and with that ruling cripple the Ukrainian company. Gazprom claimed the huge sum of $35 billion plus interest, amounting in mid-2017 to $44 billion, half Ukraine’s current GDP. The claim revolved around the take or pay clauses from the 2009 supply contract agreed in the shadow of the 2009 Ukraine-Russia gas crisis. Gazprom was confident that it would prevail. Much to its shock on the 31st May the Stockholm arbitration tribunal sided with Naftogaz and ruled that the take or pay clause was unenforceable. Although the tribunal has to yet rule on other parts of the Gazprom v. Naftogaz dispute, this central Gazprom claim has been struck out. With limited rights to appeal the ruling Gazprom has few possibilities to reverse the decision. By pushing the case to a final ruling Gazprom has forfeited all leverage over Naftogaz, strengthened the economy of Ukraine while undermining its own financial prospects.

The case against Naftogaz was launched by Gazprom in June 2014. The main claim revolved the alleged failure of Naftogaz to pay for natural gas under the terms of the take or pay clause of the 2009 supply contract. A take or pay clause requires the customer to either use the gas contracted for or pay for it if not used. This clause usually limits the ‘pay for in all cases’ element of the clause to a specific percentage of the total amount contracted. In this contract it was 80% of the 52 bcm that Gazprom agreed to supply Naftogaz. Naftogaz did not on a number of occasions from 2013 take the full amount of gas it was required to under the contract. At first sight the Gazprom claim appeared to be quite strong.

While as yet we do not know the details of the arbitration ruling we do know that the 2009 contract was agreed under circumstances where Ukraine and Naftogaz were put under considerable pressure to agree to the contract. In addition, the amounts of natural gas that Naftogaz agreed to take in 2009 was far more than Naftogaz could ever use. Furthermore, the contract included a destination clause which means that Naftogaz could not onsell the gas to third parties. In addition, the pricing mechanism linked resulted in Ukraine paying a far higher price for gas than EU states, even those in Western Europe, despite the significant additional transit costs to bring gas to France, the Netherlands and Germany. A further factor was that the natural gas price in the contract bore no relation to the prices on the gas hubs in the EU states, now increasingly the bench mark for European natural gas prices.

All of these factors clearly fed into the ruling of the Stockholm tribunal. In its first end of May ruling it held that the take or pay clause on which Gazprom’s $35 billion claim rested was unenforceable. It then also held that the destination clause, that prohibited the reselling of gas Naftogaz had bought from Gazprom to third parties, was unenforceable and that the pricing mechanism in future must reflect the pricing on the main European gas hubs.

Potentially for the harm caused by the application of the destination clause and the existing pricing mechanism Gazprom may be facing a damages award against it (which will be decided later on in the proceedings). However, the most significant issue is the striking out of the take or pay claim. This is an enormous relief for Naftogaz and Ukraine. At a stroke a $35 billion ($44 billion with interest) claim is struck out, removing a huge potential liability over the company. The way is now open to restructure Naftogaz and fully liberalise, on EU lines, the Ukrainian gas market. It also makes a liberalised Ukrainian gas market a much more attractive market for foreign investors to enter. Furthermore the removal of the shadow of the Gazprom liabilities strengthens Ukraine’s overall financial position, reducing the perception of sovereign risk and increasing the appetite of the capital markets for Ukrainian debt.

The next main stage of the arbitration case is the Naftogaz claim against Gazprom for approximately $30 billion. This claim was brought by Naftogaz following the June 2014 claim against it by Gazprom and is being dealt by the same tribunal panel. This claim surrounds the scale of fees that Gazprom should pay for transit of gas across Ukraine. The claim involves two principal elements. First, a claim that the transit price is too low. The second claim is that Gazprom was obliged under what are known as a ‘ship or pay’ clause to ship a certain amount of gas through the Ukrainian pipeline system. Under a ship or pay clause a failure to ship the full amount still results in a requirement to make a full contractual payment.

Clearly if Naftogaz were to win this claim, a claim which would amount to almost half Ukrainian GDP, this would further enhance Naftogaz and Ukrainian state finances. The success of this claim would also impose significant financial damage on Gazprom, undermine its financial stability and make it much more difficult for the company to raise capital. The claim would also be enforceable as Gazprom has extensive assets in the West which could if necessary be seized.

However, even if the tribunal does not rule wholly in Naftogaz’s favour Gazprom is in some trouble itself even from this initial ruling. The damage to Gazprom itself can be seen in the immediate fall in Gazprom’s share price following the announcement of the ruling. The prospect that none of the take or pay claim is recoverable will damage the company’s financing standing as major source of revenue has just evaporated. This fear of evaporating revenue will be reinforced by the prospect that defeat on the take or pay clause issue in the Naftogaz case may well encourage other companies across Central and Eastern Europe who have substantial take or pay debts with will now rely on the Naftogaz precedent to seek to challenge the legality of their own debts.

Furthermore, even without any more damages awards against Gazprom the case will make it more difficult for the company to raise capital for major infrastructure projects such as Nordstream 2. The scale of the difficulty of raising capital for Gazprom is likely to depend on how much the company is faced to pay out as the tribunal completes its rulings, expected by late summer and autumn 2017.

For Naftogaz, and Ukraine any significant awards will help improve both the corporate and state financial position, permitting a much more rapid advance to a more liberalised European style gas market. It very much appears to be the case that Gazprom by pushing the case into a tribunal and forcing a ruling has done much to liberalise the Ukrainian gas market on the European model, improve Ukrainian state finances, and ensure a far greater degree of Ukrainian independence and autonomy.

*Dr Riley has been an adviser to Naftogaz but took no part in the arbitration proceedings. This article was first published in Natural Gas World.


Making the Most of An Antitrust Brexit.


Is there any Silver Lining in Brexit from an Antitrust Perspective?

Almost all of the commentary on Brexit from an antitrust perspective is negative. Its all about minimising the costs from duplication of merger assessments and the prospect of legal uncertainty. This is combined with a fear that in the process of Brexit British antitrust will lose its European antitrust moorings. The CMA it is feared will head off in the direction of MMC pre-1973 opaque public interest justifications for merger clearances and market investigations.

Is it possible however for the UK free of European regulatory structures to enhance in some respects the operation of its antitrust regime? And potentially could the UK become a regulatory laboratory for development of antitrust policy in Europe? The potential is that the British authorities could take Brexit and turn it into a win win for both Britain and the rest of Europe.

To give two examples. First, once free of the European regulatory structures the UK could seek to significantly enhance its criminal cartel regime. Greater use of plea agreements, director disqualification orders, an enhanced leniency regime and reshaping the civil procedures against companies so they followed immediately on the back of the criminal procedures seamlessly. The overall impact would be to create the most formidable anti-cartel regime in Europe. Given the economic footprint of the British economy (even post-Brexit) the British regulator would end up creating a significant additional deterrent effect against price-fixing cartels that would have a positive effect both in the UK and EU economies.

A second example would be to look again at the issue of exemption decisions in respect of the UK’s restriction of competition provision contained in Section 2 of the Competition Act 1998. Following the abolition of the notification and exemption system in respect of Article 101 in Regulation 1/2003 the UK followed suit and abolished its own notification and exemption system. The UK now has only a limited and little used opinion system.

There has always been a compelling argument that it was a mistake to abolish the notification and exemption system: That the real problem was the over-broad jurisdiction of Article 101. The old pre-2004 notification and exemption system was valuable in terms of legal certainty for business. Post-Brexit the British authorities could envisage bringing back a modernised notification and exemption system which would be  voluntary; where the scope of Section 2 was expressed in more limited terms than  the Commission’s traditional interpretation of the scope of Article 101 (or rather as would then have been Article 81) and would imposed a filing fee to limit the cost implications for the CMA in dealing with  exemption assessments.

This UK experimentation would give EU states the opportunity to see how a modernised notification and exemption system would work to everyone’s benefit. It also may give the UK a competitive advantage by help keeping some business on British shores, as some capital intensive businesses who desire legal certainty make base themselves in the UK to take advantage of exemptions granted by the CMA. However, for the exemption to be valuable in the EU, the CMA would still have to ensure its exemptions kept close to the accepted canons of EU antitrust law. Hence while a notification and exemption system may give the UK a competitive advantage it would also have the effect of helping to anchor Britain close to mainstream EU antitrust law.

*This article originally appeared as the leader in Competition Law Insight, 9th May 2017.

Nordstream 2: A Legal and Policy Analysis: A Brief Review So Far.

10fb193a9699b7d6b5d132f2fcca9d60My CEPS paper published in November examining the legal and policy issues surrounding Nordstream 2 has had over 3000 downloads and sparked significant debate. I will be discussing the legal issues surrounding Nordstream 2 at the upcoming Lennart Meri and Globsec conferences. There is an initial response from Nordstream 2 by Mr Lissek. To my mind however the most substantial response to my paper has been by Professor Kim Talus in his the Application of EU Energy and Certain National Laws of Baltic Sea Countries to the Nordstream 2 Pipeline Project

One of the main contentions is whether EU law applies to Nordstream 2. I find it difficult to see how one can argue as a matter of principle that EU law does not apply at least to the inland waters of the Member States, and their territorial waters, and possibly following the Habitats case to the exclusive economic zone. The key issue I would therefore argue is whether the EU energy law regime envisages the application of the regime to import pipelines. Professor Talus argues robustly and coherently that EU law energy regime is not envisaged as applying to import pipelines. This is clearly a much more compelling argument than that of some of the Nordstream lobbyists who seek to distinguish between import pipelines running on the seabed and those running on land. However, the difficulty with Professor Talus’s argument is that EU law has been applied already to two import pipelines Yamal, and Southstream. More recently parts of the Commission have been much more circumspect and the Legal Service of the European Commission produced a four page note seeking to argue that EU law may not apply to Nordstream 2. It is despite that note difficult to evade the reality that EU law has in fact been applied to import pipelines-and that the Union’s legal regime-in order to ensure uniform application of competitive conditions amongst all market operators requires to be substantially applied to both import and non-import supply pipelines.


Brexit: Causes and Consequences

eu-union-jack-flagsIn this new paper I argue (with Francis Ghiles) that Brexit is the most significant event in Europe since the fall of the Berlin Wall in 1989; that while some of the causes of Brexit are largely home grown, many of them are not and that the consequences are more likely than not to further fragment and divide Europe further absent a significant step up in the quality of leadership that has been provided over the last decade.