As a result of the armed aggression of the Russian Federation against Ukraine, Ukrainian businesses are suffering losses every day. Energy, logistics, agriculture, and other industries have suffered property losses of tens of billions of dollars. For example, according to the Kyiv School of Economics, the agricultural sector alone suffered direct losses from Russian aggression amounting to about $80 billion as of February 2024.

However, Ukrainian businesses currently have limited opportunities to receive compensation. Ukrainian court decisions awarding large sums of compensation are likely to be unenforceable neither in Ukraine nor abroad. Protecting interests in international arbitration and investment institutions can be time-consuming and expensive.

The international compensation mechanism has not yet been launched, and the Register of Losses currently accepts claims from individuals only under subcategory A3.1 "Damage or destruction of residential real estate," although there is a separate category C "Claims of legal entities (other than those included in category B)," which will also cover business losses.  

However, at this stage, Ukrainian companies can already take measures that would facilitate the receipt of compensation in the future, in particular in terms of recording the damage and its assessment. Damage assessment is one of the most important procedures that can be carried out to guarantee compensation for losses, regardless of the mechanism chosen.

Legal requirements

One of the first documents to address the issue of assessing the damage caused by Russian aggression was theProcedure for Determining the Damage and Losses Caused to Ukraine as a Result of the Armed Aggression of the Russian Federation, approved by the Cabinet of Ministers on March 20, 2022 (hereinafter — the Damage Determination Procedure). This Procedure defines the areas of compensation for losses, including economic losses of enterprises, and identifies the main indicators to be assessed.

At the same time, the Procedure stipulated that the methodologies for assessing certain types of losses should be approved by the central government authorities. In particular, in the case of business losses, clause 18 of the Damage Determination Procedure stipulated that the relevant methodology should be approved by a joint order of the Ministry of Economy and the State Property Fund of Ukraine (hereinafter — SPFU).

Pursuant to this provision, the Order of the Ministry of Economy of Ukraine and the SPFU No. 3904/1223 of October 18, 2022, approved the Methodology for Determining the Damage and Amount of Losses Caused to Enterprises, Institutions, and Organizations of All Forms of Ownership as a Result of Destruction and Damage to Their Property in Connection with the Armed Aggression of the Russian Federation, as well as Loss of Profit from the Impossibility or Obstacles to Conducting Business (hereinafter — the Methodology). 

This document is currently the main document for businesses to assess and record the damage caused. The methodology provides mechanisms for assessing losses from armed aggression, lost profits due to the inability to conduct business, and the need to restore property as of the date of assessment.

Such an assessment may be carried out to determine damages in criminal proceedings, to file claims for compensation, and to file lawsuits in courts, including international courts.

For the purpose of the assessment, the Methodology establishes the requirement to provide documents containing information on:

• source data required for the assessment (information from property registers and documents of loss assessment commissions);
• information sources (results of inspection of the object of valuation using technical means, market data, acts of damage assessment, and other sources); 
• a document, as defined by law, confirming that the loss, ruination, or destruction of property occurred as a result of the armed aggression of the Russian Federation.

According to the Methodology, documents and evidence for assessing damages must confirm that the damage to property occurred as a result of armed aggression and allow tracing the causal relationship between the state of the property before and after the aggression.

Additionally, SPFU has also developed indicative lists of documents that can be used in assessing damages and documents confirming that the loss, ruination, or destruction of property occurred as a result of the armed aggression of the Russian Federation.

Procedures for recording and assessing losses in respect of certain types of business property are additionally regulated. For example, the facts of damage or destruction of buildings and structures as a result of aggression are recorded in accordance with the Procedure for the Implementation of Urgent Work to Eliminate the Consequences of the Armed Aggression of the Russian Federation Related to Damage to Buildings and Structures, approved by the Cabinet of Ministers Resolution No. 473
of April 19, 2022.

At the same time, the degree of suitability of buildings and structures for further use is determined by the results of a technical inspection in accordance with the Procedure for Inspection of Commissioned Construction Objects, approved by the Cabinet of Ministers of Ukraine No. 257 of April 12, 2017. 

Who can perform the assessment?

There are currently no special requirements for entities assessing damage caused by the Russian Federation. In accordance with the requirements of the Methodology, the assessment of damages is carried out through an independent assessment of damages or is the result of a forensic examination (expert study).

An independent assessment of losses is carried out on the basis of an agreement between the appraiser and the customer of such assessment.

Appraisers are registered individual entrepreneurs and legal entities with at least one appraiser who have obtained a certificate of an appraiser in accordance with the Law "On Appraisal" and perform an independent appraisal in compliance with national property appraisal standards and International Property Appraisal Standards, taking into account the specifics determined by the Methodology.

Based on the results of the evaluation, the appraiser prepares a report in a summary or full form. The full form of the appraisal report is prepared, in particular, for submitting claims to international judicial institutions and must comply with international appraisal standards or globally recognized standards, if their use is required by the relevant international body.

Another method of assessment is forensic examination, in accordance with the Law "On Forensic Examination" and procedural law, taking into account the Methodology, and all the procedures for this assessment provided for by the Methodology are reflected in the expert opinion.

There is also a separate procedure for reviewing damage assessment reports by appraisers with two or more years of experience. The review is mandatory if the object of valuation is state or municipal property. In this case, the review is provided by the SPFU or its regional offices or local governments. 

In other cases, the review of the loss assessment report is carried out at the request of a person interested in an impartial critical review of the assessment in the presence of conflicts, disputes, etc., and is conducted by expert councils of self-regulatory organizations of appraisers.

Recommendations for further action

In order to ensure a proper assessment of the damage and scope of losses caused by the armed aggression of the Russian Federation to business, based on the analysis of the current regulatory framework, it is currently advisable to follow the following algorithm of actions:

1. Collect all documents confirming the ownership and book value of the damaged property.
2. Ensure the collection and documentation of all evidence confirming the damage to property caused by the armed aggression of the Russian Federation and allowing to trace the causal link between the condition of the property and the consequences of hostilities, including contacting the State Emergency Service and local authorities to draw up damage reports, filing applications with law enforcement agencies, recording the damage, and entering data into online registers.
3. Conduct a damage assessment with the involvement of certified appraisers, taking into account the requirements of the approved Procedures and Methodologies, and review the report to confirm compliance with these requirements.
4. When conducting the assessment, check whether the data is accurately and fairly presented. International practice shows that compensation is often not awarded due to speculative estimates, a lack of or unreliable evidence, errors, or unconvincing assumptions.

Conclusions

A proper assessment of damages is an important element of the damage compensation process. Even the mechanisms that already exist in Ukraine set standards for its conduct and requirements for the procedure and content of the assessment.

At the same time, it should be borne in mind that regardless of the size of the assessment and the actual amount of losses incurred by the business, they will not be compensated in full. The experience of previous compensation processes, in particular the UN Compensation Commission, shows that in such cases, a certain fixed compensation or partial compensation is awarded, depending on the amount of damage.

In this regard, it is worthwhile to take a conscientious approach to the process of assessing damages and not set as a goal the largest or most inflated amount. In addition to the impossibility of compensation in full, this may call into question the admissibility of the claim for damages in general. 

It has not yet been determined what kind of estimates of losses and damage to enterprises will be acceptable under the international compensation mechanism. At the same time, assessments made in accordance with the procedure described above can be submitted at least in the category of "other evidence." And whether and to what extent this assessment will be taken into account will depend, among other things, on the integrity of its implementation.