Protecting capital where the courts are unreliable: what actually works

Every assessment of Ukraine as an investment destination arrives at the same conclusion about the courts: they are the weakest part of the system and the single largest source of risk that cannot be priced accurately.

That is correct, and it is also not a reason to stay out. Substantial foreign capital has operated in Ukraine profitably for two decades. What those investors did was structure around the problem rather than assume it away.

Holding structure

Most significant foreign investment into Ukraine is held through an intermediate holding company in a jurisdiction with reliable corporate law and a strong bilateral investment treaty with Ukraine — historically Cyprus, the Netherlands and Austria have been the most common.

This is not primarily about tax. It is about the governing law of the shareholder agreement, the forum for shareholder disputes, and the ability to invoke treaty protection. A shareholder dispute between two parties in a Dutch holding company is resolved under Dutch law in a Dutch forum, regardless of where the operating asset sits.

Arbitration clauses

Ukraine is a party to the New York Convention, which means foreign arbitral awards are enforceable there. That is a meaningfully different position from relying on a Ukrainian court to decide the merits.

The practical guidance is to specify institutional arbitration — the ICC, the SCC in Stockholm, the LCIA, or the Vienna centre — with a seat outside Ukraine and a defined governing law. This is standard in large contracts and is often omitted in mid-sized ones, which is a mistake worth correcting at the drafting stage.

The limitation is cost. International arbitration is expensive enough that it is not a realistic remedy for disputes below a substantial threshold, which is why the other mechanisms matter more for mid-sized business.

Treaty protection

Ukraine has bilateral investment treaties with a large number of countries, and the Energy Charter Treaty applies to energy-sector investment. These provide protection against expropriation and unfair treatment by the state, enforceable through investor-state arbitration.

They protect against state action, not against a commercial counterparty, and they only apply if the investment is held through a qualifying jurisdiction — which is one more reason the holding structure matters.

What actually protects a mid-sized investment

For most companies the legal mechanisms are a backstop rather than a working tool, and the real protections are operational.

Control of the things that cannot be taken: the customer relationships, the brand, the technical knowledge, the supply of a critical input. A local partner who takes the assets but cannot serve the customers has taken very little.

Majority ownership with clear board control, or a minority position with genuine veto rights over the decisions that matter — never a 50/50 structure, which is the configuration that produces the most deadlocks and the worst outcomes.

Staged investment tied to milestones, so that exposure grows as the relationship proves itself rather than all at once at the beginning.

Direct banking relationships and direct control of the company seal, the registration documents and the bank signatures. A surprising share of disputes in this region come down to who physically controls the corporate documents.

The honest summary

None of this makes the court risk disappear. It makes the realistic worst case a commercial loss rather than a total loss, and it puts the counterparty in a position where cooperating is more profitable than defecting.

That is the actual objective. In any jurisdiction with weak enforcement, the goal is not to be able to win in court — it is to structure the arrangement so that no one has a strong incentive to take you there.

Related in this archive

• After Crimea: the trade geography that changed in three weeks
• What a foreign company actually does when a country goes into crisis
• Black Sea logistics: how cargo actually moves, and what happens when a route closes
• Ukraine Annual Review 2014: the year everything deferred came due

Drafting a contract I always ask myself the same thing: if I have to enforce this clause, where do I go and how long does it take. If the answer is uncertain the clause does not exist. What actually protects a mid-sized investment is not the arbitration clause but your partner wanting to keep working with you — law is the last resort and the relationship is the first line of defence.