Arbitration Award of July 7, 1998, Mr. Franz Sedelmayer vs. The Russian Federation

3.6 Interest

3.6.1 Positions taken by Parties

The Claimant has claimed interest on the compensation awarded at rate of 30 per cent per annum. The interest should run from November 25, 1996, that is two weeks after the Statement of Claim was submitted, alternatively from the date of the Arbitral Award, until full payment has been made.

As ground for the interest rate claimed, the Claimant has pointed at Article 4 (2) of the Treaty. According to the Claimant, it follows from this Article that the interest 114rate applied in Russian Federation is to be applied on compensation under the Treaty, since the expropriation took place in the Russian Federation. Proceeding from the fact that the expropriation was physically effectuated in 1996, the applicable interest rate should be the Russian interest rate applied in 1996. The average interest rate on loans in St. Petersburg during 1996 was 30.1 per cent per annum for loans in USD and 30 per cent per annum on loans in DEM.

Should the Tribunal find that the Treaty is not applicable to this dispute, the Claimant has claimed interest at a rate of 12.18 per cent per annum. This claim is based on generally accepted principles in public international law concerning compensation for expropriated property. According to the Claimant, it follows from such principles that penalty interest shall be calculated in accordance with the law of the country in which the expropriation took place, i.e. in this case Russian law. Russian law on penalty interest refers to the interest rate valid at the creditor‘s permanent residence, that is Germany.

The Respondent has stated that, since the Claimant has not substantiated the legality of his claims, he is not entitled do any interest. If the Tribunal chooses to proceed from Article 395 of the Civil Code of the Russian Federation, the latter specifies the interest rate accepted in the creditor‘s country. In this case, SGC International alone can be a creditor, and consequently, interest should accrue at the rate effecitve in the USA. The interest rate allegedly effective in the Russian Federations has been put at 30 per cent, which, which is a gross overstatement.

3.6.2 Evidence submitted by the Parties

The Claimant has submitted a Certificate issued by the Commercial Agricultural and Industrial Bank of St. Petersburg, dated October 15, 1997. According to this Certificate, the average interest rate on foreign-currency credits granted by the bank during 1996 amounted to 30.1 per cent for credits in USD and 30.0 per cent for credits in DEM.

The Claimant also has submitted a list prepared by the German Bundesbank concerning interest on loans and on credit balances. In this list it is stated, inter alia, that, with regard to credit to be repaid in instalments of DEM 10,000 to 30,000, the effective average interest per year in January 1996 was 12.18 per cent and the span of interest rate 10.56-13.97 per cent. When it comes to current account credits, amounting to DEM 1-5 million, the effective average interest per year in January 1996 was 8.15 per cent and the span of interest rate 6.50 - 10.75 per cent.

3.6.3 The Tribunal’s Conclusions

In Article 4(2) of the Treaty it is stated, among other things, that compensation due to measures of expropriation shall include interest at the rate that is in effect in the territory of the respective Contracting Party, accrued until the date of payment.

In the Tribunal’s opinion, it follows from the stipulation quoted that the Claimant is entitled to interest on such amounts of compensation as shall be paid by the Respondent.

As to the rate of interest, Article 4(2) must be interpreted so that interest shall be calculated according to the rate applicable in the country where the expropriation took place. Since, in the present case, the measures of expropriation were taken in the Russian Federation, the rate which was in effect in Russia at the time of the expropriation is the relevant one.

In the Tribunal’s opinion, the meaning of the phrase "the rate which is in effect” is not quite clear. As has been alleged by the Claimant, the phrase may be interpreted so that it refers to the interest rate which is in fact applied in the country in question. Another possible interpretation, which is in line with the Respondent’s, is that the relevant rate of interest is the rate which shall be applied under the laws of the country where the expropriation took place.

If the latter interpretation is accepted, that would mean that the default interest rate as set forth in Article 395 (1) of the Civil Code of the Russian Federation, part I, is applicable. In the said Article it is stated that the amount of interest shall be determined as the rate of bank interest on the day of performance of the monetary obligation or respective part thereof which existed at the place of residence of the creditor, and if the creditor is a juridical person, at the place of its location. In the event of the recovery of a debt in a judicial proceeding the court may satisfy the demand of the creditor by proceeding from the bank interest on the date of presenting the suit or on the date of rendering the decision. Since, in the present case, the creditor is resident in Germany, the relevant rate of interest would be the rate applied there.

In the present case, compensation shall be paid in another currency than rubles. It seems, then, less appropriate to apply the rate of interest which is used in Russia. It must be assumed that such interest rate is adapted to Russian currency.

In view of what has now been said, the Tribunal finds that the second alternative described above shall be chosen. The rate of interest which was used in Germany at the time in question shall, thus, be applied. When taking into account what is stated in the list prepared by the German Bundesbank and the amount of money which has to be paid, the Tribunal finds that the interest rate shall be 10 per cent.

The Treaty is silent on the question when interest shall start running. The Tribunal finds, however, that the date mentioned by the Claimant as his first alternative is consistent with what is said in the above-mentioned Russian law provision. Interest shall, thus, start running from November 25, 1996.

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