Written evidence submitted by Covington & Burling LLP on Behalf of SCM Consulting Limited

I.                   Overview

1. SCM Consulting Limited is part of the SCM group of companies (SCM) owned by Ukrainian businessman and philanthropist, Rinat Akhmetov.  SCM is Ukraine’s largest investment group and has a presence in several European countries (including the United Kingdom) as well as the United States.  SCM’s diverse holdings include some of Ukraine’s largest companies in the steel, mining, energy, minerals, real estate, retail, transportation & logistics, banking & finance, telecommunications, and agricultural sectors. 
2. SCM has been significantly affected by Russia’s aggression against Ukraine since 2014.  In November 2023, an international arbitral tribunal ordered the Russian Federation to pay SCM’s subsidiary, JSC DTEK Krymenergo, a total of approximately $270 million for its unlawful expropriation of the company’s electricity supply and distribution business in Crimea following Russia’s occupation of the peninsula in February 2014.  Mr. Akhmetov has separately brought a claim against Russia for the expropriation of numerous SCM investments in Donbas between 2014 and 2017.  SCM’s steel business, Metinvest, is the owner of the legendary Azovstal Iron and Steel Works in Mariupol destroyed by the Russian military during its siege of Mariupol in the opening months of the current full-scale Russian invasion of Ukraine.  Through The Rinat Akhmetov Foundation, and in partnership with Metinvest and DTEK, Mr. Akhmetov has played an active role in organising the delivery of humanitarian aid to Ukrainian civilians afflicted by Russia’s current ongoing invasion of Ukraine.  Earlier this year, the SCM Group was rated the largest private donor in support of Ukraine’s defence effort against Russia’s full-scale war of aggression in 2022-2023.
3. As both a victim of Russia’s aggression and as a defender of the rights of the Ukrainian people in the face of Russia’s military assault, SCM is a strong advocate for the confiscation of Russian State assets currently immobilised in various G7 and EU jurisdictions as a result of sanctions imposed on Russia following its February 2022 invasion of Ukraine.  This written evidence is submitted by Covington & Burling LLP (Covington) on SCM Consulting Limited’s behalf.  Covington is declared under the US Foreign Agents Registration Act, the EU Transparency Register and Canada’s Lobbyists Registration Act as representing SCM Consulting Limited in relation to efforts to encourage States holding immobilised Russian state assets to confiscate those assets so that they may be used for the benefit of Ukraine and Ukrainian claimants.
4. SCM welcomes the opportunity to contribute evidence to the House of Commons Treasury Committee’s inquiry into the efficacy of the UK’s Russian financial sanctions, in response in particular to the question to be considered by the Committee concerning whether assets frozen as part of the UK’s financial sanctions on Russia should be confiscated, and whether there are legal precedents for such a move.  In this submission, we focus on whether the confiscation of Russian State assets can be justified as a matter of international law.  We do not address the distinct issues arising from the potential seizure of assets privately owned by Russian individuals or non-state legal entities. 
5. In summary, our evidence shows that:
1. Russia is under an international legal obligation to cease its ongoing war of aggression against Ukraine and to pay reparations for all the damage it has inflicted on Ukraine in the course of its wrongful conduct.
2. The UK (and other G7 States as well as EU Member States) are entitled to take countermeasures against Russia as a means of encouraging it to comply with these legal obligations.  A countermeasure is an otherwise unlawful action which is excused under international law if taken for this limited purpose and provided that it complies with certain conditions, including proportionality and reversibility once the target state is back in compliance.
3. The confiscation of Russian State assets immobilised in the UK and other G7 and EU jurisdictions as a result of sanctions imposed on Russia following its full-scale invasion of Ukraine can be justified under international law as a legitimate countermeasure on either of two grounds: 
1. Russia’s war of aggression violates a fundamental obligation of international law owed on an erga omnes basis to all other members of the international community, all of which are authorised to act by taking collective countermeasures designed to bring Russia back into compliance; or
2. The UK (along with other G7 members and EU Member States) is “specially affected” by Russia’s violations of international law.
4. The confiscation of Russia’s State assets can be carried out in compliance with the international law requirements for lawful countermeasures. 

II.               Russia’s Liability Under International Law

6. As the perpetrator of an unlawful war of aggression against Ukraine, there is no doubt that Russia is liable under international law for the damage it has inflicted upon Ukraine. The question is not whether Russia is obligated to compensate Ukraine but from what sources that compensation will be provided.
7. The estimated $300 billion’s worth of assets of the Russian Central Bank and other Russian State institutions that have been immobilized by G7 and other like-minded nations are one important and legally available source of such funds.
8. The G7’s REPO task force has already publicly declared that these immobilized funds should not be returned to Russia until there is a resolution of the conflict that addresses Russia’s violation of Ukraine’s sovereignty and territorial integrity, including a satisfactory mechanism for Russia to pay for all the damage it has caused.[1]  In its most recent statement, the G7 has encouraged the EU to enable the use for Ukraine’s benefit of the confiscated extraordinary revenues (i.e., interest) generated by central securities depositories gained from Russia’s immobilized sovereign assets.[2]  Prime Minister Sunak has called for greater boldness “in seizing the hundreds of billions of frozen Russian assets”.[3]
9. In light of Russia’s violations of international law, seizure of its State assets would be excused (i.e., would not give rise to a legitimate complaint under international law on Russia’s part) if confiscation of these assets was presented as a countermeasure designed to encourage Russia to cease its violations of international law and make due reparation to Ukraine.

III.            Justifications for the UK to Invoke the Countermeasures Doctrine

10. We set out below two alternative bases on which the UK may seek to rely when invoking the countermeasures doctrine.  However, whichever basis the UK may prefer, it (and its G7 and EU partners) have already immobilised and deprived Russia of the ability to make use of its State assets.  This interference with Russia’s ability to dispose of its assets would arguably already constitute a violation of international law unless justified as a countermeasure.  It follows that the UK and its partners are already implementing countermeasures in response to Russia’s illegal war at a significant scale.  The question that remains is whether policymakers will take those countermeasures a step further by actually confiscating the assets and transferring the resulting funds to Ukraine. 

11. The UK would be justified in invoking the countermeasures doctrine on the basis that either: (i) Russia’s actions violate obligations owed to the international community as a whole (i.e., “erga omnes”) thus entitling every member of that community to take countermeasures; or (ii) the UK, along with its G7 partners and EU Member States, meets the requirements of a “specially affected State”.

A.                Seizure of Russia’s State Assets as a Collective Countermeasure in Response to its Violations of International Law Obligations Erga Omnes

12. Customary international law, as partially codified in the International Law Commission’s Articles on State Responsibility adopted by the UN General Assembly in its Resolution 56/83 of December 12, 2001 (Articles on State Responsibility), permits injured States to suspend their performance of international law obligations towards a State “which is responsible for an internationally wrongful act in order to induce that State to comply with its obligations.”  This rule clearly encompasses countermeasures taken by Ukraine, which is the State most immediately injured by Russia’s aggression. The UK and other States would, however, also be on firm ground if, at the request of Ukraine, they seized Russian State assets as a means of reinforcing the pressure on Russia to comply with its international obligations. 
13. The Articles on State Responsibility recognise that, when the obligation being violated is owed to the entire international community – as is the case with the prohibition on wars of aggression – every other State has a legal interest in ending the non-compliance, even if those States are not technically “injured” within the meaning of the Articles.  The Articles left open, for future development in light of developing State practice, the issue of whether, in such circumstances, these other States may take countermeasures in the collective interest at the request of the injured State. A powerful argument for recognizing such collective countermeasures as legitimate under international law is that limiting the right to injured States would benefit only powerful States that can resort effectively to such self-help and disadvantage weaker States that do not have similar recourse.
14. Accordingly, such collective countermeasures are not ruled out by the Articles on State Responsibility, even if the International Law Commission believed there had been too little State practice before 2001 to allow the International Law Commission to codify collective countermeasures as part of customary international law. In reality, however, the adoption of collective countermeasures by third States in response to a fundamental violation of international law had been a far more common occurrence since 1945 than was appreciated by the International Law Commission. A few illustrative examples of this State practice include:[4]
1. trade restrictions and the termination of landing rights in violation of existing treaty commitments in response to acts of aggression such as the Soviet Union’s invasion of Afghanistan in 1980 and Iraq’s invasion of Kuwait in 1991;
2. comprehensive trade embargoes and flight and port entry bans in violation of existing treaty commitments in response to South Africa’s policy of apartheid in 1960-1964;
3. suspending financial assistance to Greece in violation of the 1962 EEC-Greece Association Agreement, in response to Greece’s continuing human rights violations in 1967-1970; and
4. arms embargoes, travel bans and freezing assets of several leading regime officials (including the president) directed at Syria due to the humanitarian catastrophe unfolding in that State since 2011.
15. In the exceptional circumstances created by Russia’s invasion of Ukraine, the UK and other likeminded States need not hold back from taking action that would contribute to the further development of customary international law on collective countermeasures. On the contrary, the current situation provides a solid basis for other States to introduce appropriate countermeasures to address a fundamental challenge to international peace and security—unlawful and unprovoked aggression perpetrated by a Permanent Member of the UN Security Council which then abuses its veto to block an effective UN response.
16. Critically, if presented as a countermeasure, seizure of Russian State assets would have no implications for international law on sovereign immunity because countermeasures are, by definition, otherwise unlawful actions that are excused as a means of bringing another State’s violations of international law to an end.
17. If, however, the seizure of Russia’s State assets were to be characterised as a countermeasure in the collective interest (as opposed to a measure taken by States specially affected by Russia’s violations of international law, as discussed below) it would be prudent that, before the G7 and likeminded States take action, Ukraine issue an express and formal written request to seize and transfer, under an agreed international mechanism of compensation, the Russian State assets to Ukraine and Ukrainian claimants.

B.                Seizure of Russia’s State Assets by Specially Affected States

18. The Articles on State Responsibility recognize that a State may be injured and therefore entitled to adopt countermeasures against a State in breach of its international obligations where the State adopting the countermeasures is specially affected by the breach.  This could be the case when a multilateral treaty is violated or when an obligation arising under customary international law and owed to a multitude of States is breached.  The right to adopt countermeasures in this situation is uncontroversial and arises from the status of the adopting State as an injured State.
19. The International Law Commission’s Commentaries on the Articles on State Responsibility (Commentaries) note that the concept of the “specially affected State” and its articulation in the Articles on State Responsibility was borrowed from Article 60 of the Vienna Convention on the Law of Treaties (VCLT).
1. Under Article 60(2)(b) of the VCLT, a party specially affected by the breach of a multilateral treaty may invoke the breach as a ground for suspending the operation of the treaty between itself and the defaulting State.
2. The negotiating history of the VCLT shows that the concept of the specially affected State was adopted in this context as a means of preventing other, uninjured States from taking unilateral advantage of the violation to escape from their treaty obligations.[5]
20. Similarly, in the context of countermeasures, limiting the group of States that can claim to be injured to either the direct victim of a violation of international law or those States that can show that they are specially affected by the violation, has the effect of narrowing the scope for abuse by other States. Notwithstanding the above, the fact that some of the factors pointing towards the UK as specially affected by Russia’s violations of international law are also applicable to other States (such as other G7 States and Member States of the EU), does not disturb the conclusion that the UK may consider itself to be specially affected.
21. The Commentaries indicate that “the special impact that a State must have sustained in order to be considered ‘injured’” is to be “assessed on a case-by-case basis, having regard to the object and purpose of the primary obligation breached and the facts of each case.” 
1. According to the Commentaries, “[f]or a State to be considered injured, it must be affected by the breach in a way which distinguishes it from the generality of other States to which the obligation is owed.”
2. The Commentaries give the example of a case of pollution of the high seas in breach of the UN Convention on the Law of the Sea which particularly affects “one or several States whose beaches may be polluted by toxic residues or whose coastal fisheries may be closed.”
22. This is consistent with the State practice in this field.  For example, in 1983, the UK, Japan, the US and Canada suspended flight permits for Aeroflot, as a countermeasure in response to the downing by the USSR of a Korean airliner in breach of the Chicago Convention on International Civil Aviation.  What distinguished these States from the generality of parties to the Chicago Convention was that their own nationals had been killed in the incident.
23. When applied to the facts of Russia’s unprovoked invasion of Ukraine, it can be seen that the UK qualifies as specially affected within the meaning of the Articles on State Responsibility. As recognized by the UN General Assembly in its Resolution ES-11/1, adopted on 2 March 2022, the primary obligation breached by Russia’s full-scale invasion of Ukraine is the prohibition on wars of aggression, a fundamental norm of customary international law and a key provision of the UN Charter.
1. The object and purpose of this prohibition, as reflected in the preamble to the UN Charter, includes “sav[ing] succeeding generations from the scourge of war” and “maintain[ing] international peace and security.” 
2. These broad goals necessarily encompass the more specific objectives of avoiding the humanitarian suffering associated with war, including the displacement of people, as well as the costs of reconstructing economies ravaged by destructive military action. 
24. On each of these metrics, Russia’s invasion has affected the UK in a way that differentiates it from members of the international community outside the G7, the EU and NATO.
25. First, Russia’s demonstrated readiness to launch unprovoked military action against a neighbouring State specially affects the UK.
1. As a member of NATO, the UK is specially affected through the collective security arrangements that bind it to come to the defence of NATO States directly neighbouring Russia in the event of a military attack.
2. Consistent with their special interest in the security of this region, the leaders of the G7, including the UK, adopted a Joint Declaration of Support for Ukraine in July 2023, committing each member to enter into new bilateral security commitments with Ukraine in response to Russia’s aggression.  Notably, the EU and its Member States indicated in the Joint Declaration their willingness to join this effort.
3. Also consistent with this special interest, the overwhelming majority of the financial, political and other support that Ukraine has received to help it resist the Russian military onslaught has come from G7 States, including the UK.
26. Second, the UK is specially affected by the disproportionate burden it bears in housing and caring for refugees displaced from Ukraine as a result of Russia’s invasion.
1. The EU, as well as the UK, have absorbed millions of Ukrainian Refugees, as proximate friendly States wishing to alleviate the humanitarian crisis caused by Russia’s actions.
2. News reports and UNHCR statistics indicate that, since the crisis began, G7 and EU States have absorbed at least 4.7 million Ukrainian refugees, approximately 75 percent of the total externally displaced Ukrainian population as of 31 December 2023.
27. Third, the G7 and EU are specially affected because, in addition to bearing the great majority of the financial burden of supporting the Ukrainian economy over the two years since Russia began its invasion, they will be expected to pick up a similar proportion of the cost of reconstructing Ukraine in the future if Russia does not pay reparations.
1. According to Germany’s Kiel Institute, 97.2 percent of financial aid to Ukraine (i.e., grants, loans and loan guarantees) between January 2022 and October 2023 has been funded by the G7 and EU. Among the G7, the UK is a very significant contributor. For example, as of May 2022, the UK contributed EUR 2.33 billion (i.e., over 10%) of the estimated approximately EUR 19 billion of financial aid provided by the G7 to Ukraine that year.
2. G7 and EU States have traditionally accounted for the large majority of overseas development assistance.  The OECD Development Assistance Committee (DAC) reports that the G7 and EU States provided 86.4 percent of official development assistance in 2022 among all countries surveyed by the OECD, or $212 billion in total.  The DAC reports that the UK individually contributed $397,000,000 of this amount.[6]
3. This pattern can be expected to replicate itself when the time comes to reconstruct Ukraine and is likely to be reinforced by the reluctance of other significant world economies to participate for political reasons.  To the extent Russia fails to pay the reparations it owes Ukraine as a result of its unlawful invasion, it is therefore reasonable to assume that, as a member of the G7, the UK will be expected to help cover the major part of the shortfall.

IV.             Compliance with the Requirements of Lawful Countermeasures

28. The seizure of Russian State assets can be carried out in a manner that complies with the various conditions for countermeasures prescribed by the Articles on State Responsibility.
1. According to Article 51 of the Articles on State Responsibility, the countermeasure must be “commensurate with the injury suffered, taking into account the gravity of the internationally wrongful act and the rights in question.”  The World Bank estimates that, as of 31 December 2023, the cost of reconstruction and recovery in Ukraine had grown to $486 billion.[7] Barring unanticipated developments, this figure will continue to rise rapidly every week.  It follows that the seizure of the estimated $300 billion in Russian State assets believed to be immobilized worldwide cannot be considered disproportionate to the havoc wreaked in Ukraine by Russia.
2. Article 49.3 of the Articles of State Responsibility requires that, as far as possible, countermeasures should be “taken in such a way as to permit the resumption of performance of the obligations in question.” If the countermeasure is considered to be the suspension of Russia’s sovereign immunity during the pendency of Russia’s violations of international law, respect for that immunity could readily be restored by a subsequent act once Russia has brought itself into compliance with its obligation to cease its war of aggression and pay compensation to Ukraine. Alternatively, if the countermeasure is considered to be the seizure and transfer of immobilized Russian State assets, the transfer of such assets to Ukraine could be accomplished on terms requiring Ukraine to return a commensurate portion of the value of the assets in the unlikely event that Russia overpaid the reparations due to Ukraine for the damage inflicted by its unlawful conduct.
3. Under Article 52.1(b) of the Articles on State Responsibility, the countermeasure should generally be notified to the target State in advance, and the State proposing to adopt the countermeasure should offer to negotiate with the target State. Any legal instruments adopted by third States (e.g., the UK) authorizing the seizure and transfer of Russian State assets as a countermeasure could readily incorporate provision for Russia to be notified in advance of the seizure and given the opportunity to negotiate the cessation of its invasion and the payment of reparations to Ukraine.
4. Finally, Article 53 of the Articles on State Responsibility specifies that a countermeasure must be terminated when the target State has complied with the international obligation whose previous breach was the reason for the imposition of the countermeasure.  As indicated above, in the event that Russia ceases its military actions against Ukraine and pays in full the reparations due to that country, States taking countermeasures would give renewed effect to Russia’s sovereign immunity and, if necessary, could arrange for reimbursement to Russia of any resulting overpayment of the compensation due to Ukraine.

V.                Conclusion

29. Notwithstanding the unsubstantiated claims of some observers that the confiscation of Russian State assets is fraught with legal risk, a clear justification for such action exists in the international law of countermeasures.  In any event, the UK and its partners have already imposed wide reaching financial and trade sanctions on Russia the  legitimacy of which under international law similarly rests on the countermeasures doctrine.    
30. To the extent that vague warnings of legal peril are a cover for policy concerns about the practical consequences of confiscating Russian State assets, those concerns are misplaced too.  By acting in concert with its G7 partners and with EU Member States, the UK can substantially reduce any risk that the measure would have a negative impact on the pound sterling or that it would have a disruptive effect on financial markets.  Conversely, early action on this issue would have a significant positive advantage, as a demonstration of G7 and EU resolve at a time when such resolve is sorely needed.
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March 2024