While Russia continues its war against Ukraine with undiminished intensity, the country also steps up its domestic retaliatory measures against Western sanctions and foreign investments alike. Affected investors therefore need to consider their legal options against the Russian measures. As legal remedies in Russia are unlikely to be available for the time to come, investors should assess whether they may have investment treaty claims under Russia’s Bilateral Investment Treaties (“BITs”) and because pursuing these claims is likely the only adequate defence strategy in the present circumstances.

Which Russian measures are targeting foreign investments in the country? 

Since the enactment of the first round of sanctions, Russia has announced and/or adopted a broad range of measures against Western business interests in the country. So far, the four most noteworthy Russian actions are as follows: (i) the threat to expropriate without compensation all Russian assets of Western enterprises ceasing their business operations in Russia; (ii) the announcement to re-register and confiscate Western-made planes flying for Russian airlines and belonging to Western leasing companies; (iii) an executive decree stipulating that intellectual property rights of Western enterprises including patents or trademarks can be used in Russia without the owner’s consent and any right to compensation; and (iv) most recently the order to the Central Bank to ensure that gas supplies to foreign customers will only be paid in Russian rubles.

What are investment treaty claims and how do they function?

Investment treaty claims are claims by foreign investors against the host State (i.e. Russia) for the latter’s breach of its obligations under its BITs to protect foreign investments against political risks. Investment treaty claims are pursued before international arbitral tribunals and, as restitution in kind is often not possible, the remedy most commonly sought are monetary damages.

BITs usually contain: (i) a broad definition of protected investments covering all kind of assets including property rights, shares in companies or intellectual property rights; (ii) a range of material provisions protecting foreign investments against political risks such as unfair treatment or expropriation without adequate compensation; and (iii) the consent of the State parties that a breach of the material provisions can be enforced by way of investor-State-arbitration (i.e. the investor itself can enforce its investment treaty claims against the host State).

Before commencing an investor-State-arbitration, an investor must notify the State of its investment treaty claims which then sets in motion a so-called cooling-off period of several months. In the cooling-off period, the investor and the State can try to find an amicable solution for the claims before an investor-State-arbitration is actually brought.

What BITs are available in relation to Russia?

Foreign investors in Russia may rely on one or more of Russia’s more than 70 BITs, if (at least) one of the following two scenarios applies:

The first scenario is that Russia has a valid BIT with the investor’s home State. This holds true for a number of Western States such as the United Kingdom, France, Germany or Canada. While some of these BITs date back to the last days of the Soviet Union and only provide for an offer to arbitrate investment treaty claims concerning expropriation disputes, they may still be an efficient tool to protect foreign investments in the present situation.

The second scenario is that one of the companies in the holding chain of the investment has the nationality of a country that has a BIT with Russia. This may for example be relevant with investments channeled through Luxembourg, the Netherlands or Singapore, all of which are parties to a BIT with Russia. It is widely recognized in the case law of investment treaty tribunals that such intermediary companies can bring investment treaty claims, even if the ultimate investor is from a third State.

All of these treaties are presently in force and protect existing investments despite the current tensions between Russia and the West. Even if Russia were to terminate its BITs in the near future, it would not be able to unilaterally withdraw or diminish the level of protection currently available. The BITs contain so-called sunset clauses which ensure that the States remain bound by the terms of the BIT for a period of at least five years after the declaration of termination.

What are the chances of success of investment treaty claims against Russia?

The chances of success of an investment treaty claim always depend on a close analysis of the concrete facts. That said, certain hallmarks support the argument that in the present case investors would at least have a good arguable case:

First, Russia’s likely refusal to participate in an investor-State-arbitration (as it has done in some cases in the past) will not be an obstacle for the proceedings. The arbitration rules and domestic laws normally governing investor-State-arbitrations provide for the necessary tools to conduct the proceedings in an efficient manner, even if the Respondent does not participate. 

Second, the foreign investments affected by Russia’s measures belong to the types of assets normally covered by BITs. This holds true for all forms of participation in locally incorporated companies, intellectual property rights registered in Russia such as patents or trademarks or long-term contracts requiring some form of engagement by the investor in Russia.

Third, the Russian measures are directly targeting foreign investments and most of them even expressly aim at the appropriation of foreign assets without any form of compensation. It thus is likely that the measures qualify as an unlawful expropriation under the BITs or, should they be lifted again in the near future, at least constitute unfair treatment contrary to the terms of the treaties.

Fourth, Russia will most likely not be able to invoke the defence of necessity to justify its treaty breaches. Even if this defence were to apply, Russia would be precluded from relying on it as Russia itself bears the responsibility for the present situation.

How could an investment treaty award against Russia be enforced?

If Russia refuses to voluntarily comply with an investment treaty award rendered by a tribunal (as it has done in the past), an investor can enforce its award into assets of the Russian State located outside of Russia and not used for sovereign purposes (i.e. assets belonging to Russia’s commercial sphere). Over the last years, investment treaty awards have been regularly enforced in that way, including awards against Russia. The assets available for enforcement may vary from case to case and can include properties used for commercial purposes, merchant ships, bank accounts or payment claims under long-term supply contracts. Given the current sanctions against Russia it is not unlikely that frozen Russian assets may be destined by the Western States to satisfy its debt to foreign investors similar to the situation after the Iran revolution.

What are the pros and cons of pursuing investment treaty claims against Russia?

Each investor needs to carefully consider a number of factors before deciding whether or not to pursue an investment treaty claim. While different factors may be relevant for different investors, the following factors should be taken into consideration in most cases:

On the one hand investor-State-arbitrations are lengthy and costly proceedings. This is even more so, if a losing State party challenges an award before national courts and/or refuses to comply with an award voluntarily. Furthermore, if the State is confronted with a huge number of claims resulting from BITs and other rules of public international law as it can be expected with regard to Russia, the question of the State’s solvency may become an additional factor to consider.

On the other hand, corporate investors have a fiduciary duty to protect their assets and may thus be required to pursue a valid claim rather than to write off their assets without taking any actions. This may be particularly important in circumstances as in Russia where the investment as a whole is at risk and the waiver of a claim cannot be offset against future business prospects in the country.

Additionally, investors may turn to third party funders to fund the investor-State-arbitrations in exchange for a share of the possible proceeds or to sell their claims against Russia thus maximizing returns now in exchange for a reasonable discount on their damages.

Finally, if investors prefer to abstain from taking a decision for the time being and want to await further developments in the months to come, they may consider safeguarding their position by notifying Russia of their investment treaty claims and thereby commencing the cooling-off period provided for in the BITs. In doing so, they avoid the risk of losing time, signal their willingness to protect their assets if need be and can push back the decision whether or not to actually pursue a claim to a later stage.         

How can we assist?

Addleshaw Goddard has a team of dedicated specialists for pursuing investors’ rights against the host States in investor-State-arbitrations. The team has particular expertise in Eastern Europe generally and Russia specifically. The specialists are also well versed in all matters relating to third party funding. We can therefore assist evaluating any claims against Russia and advise on the best possible way to pursue them to maximize our client’s position.