15 February 2019

Finance for Impact Director, Thierry Senechal, was nominated in 2018 as Tribunal-Appointed Expert by the Permanent Court of Arbitration in the Hague on two cases with a mandate to investigate the extent of economic damage related to the Annexation of Crimea by Russia in 2014.

The economic analysis took place over the course of a year. In particular, we had to analyze the political circumstances in the Crimean Peninsula before the annexation and the effects of sanctions on the regional economic zone, including Crimea, Ukraine and Russia. We reviewed the general economic outlook of Crimea before the annexation, because it influenced how hypothetical investors may perceive investment opportunities and risk in Crimea and, therefore, it had an impact on developing an economic forecast post-annexation. Equally important was assessing the weight Ukrainian and Russian markets exerted on Crimea. We demonstrated that the economic conditions in Ukraine and the region before the annexation showed economic indicators deteriorated, demand slowed, and per-capita income and industrial output both fell. These market conditions hurt the Crimean economy.

Regarding the impact of sanctions, we argued that they had a range of impacts on Russia and the newly-annexed Crimea, contributing to the collapse of the Russian ruble in mid-2014 and sapping confidence in the Russian economy. Independent of the political situation, the fall in the crude oil price further added to the economic difficulties of Russia in 2014 and after. In Crimea, sanctions had many negative effects, including: food product prices increased (income growth after annexation was eaten up by high inflation); the ruble’s appreciation affected consumer choice; and tourists from outside Russia were prevented from visiting Crimea.

Finally, we reviewed the notion of country risk. We indicated there is no agreed-upon and systematic method to estimate country risk. We developed a conceptual framework for fulfilling the arbitrators’ and/or the parties’ goal of developing a satisfactory approach to country risk. We advocated that such an approach should be clearly principles-based, internationally consistent and converged. Such a framework is needed to give coherence to the application of country risk and application of country risk premium when required. We sought to explain options available to arbitrators and parties when deciding on the applicability of specific country risk premium.