Possible claims against Russia for expropriation of foreign investments

On April 8, 2022, a bill was introduced in the Russian Duma (Parliament) that would allow Russia to expropriate the property of foreign nationals from “unfriendly” countries – those that have imposed sanctions on Russian entities and individuals.1 This news follows a bill presented the day before that would impose criminal penalties for the implementation of anti-Russian sanctions in Russia,2 as well as a number of other actions taken in recent weeks to retaliate against foreign companies.

This note discusses the legal remedies available to foreign investors in Russia who are affected by measures affecting their investment – ​​including those amounting to expropriation.

1 RUSSIAN REPRISALS AGAINST FOREIGN INVESTORS

In response to the sanctions imposed by the United States, the EU, the United Kingdom, Switzerland and other states against Russia following its illegal invasion of Ukraine, Russia has adopted or is considering measures that will affect many foreign investments in Russia.

Hundreds of companies – including many in the consumer services, energy and construction sectors – have decided to leave Russia or suspend or reduce their activities there, for legal/compliance reasons , morals and/or reputation. They are now potentially the target of retaliatory legislation that could harm or even result in the expropriation of their remaining assets in Russia (including real estate, stakes in local businesses, intellectual property rights, etc. .).

On March 7, 2022, the Russian government approved an expanded list of countries and territories considered hostile or “unfriendly”, namely the United States and Canada, most European countries – i.e. the 27 EU Member States plus Albania, Andorra, Iceland, Liechtenstein, Monaco, Montenegro, Norway, San Marino, Switzerland and United Kingdom (including Jersey, Anguilla, British Virgin Islands and Gibraltar) – as well as Australia, Japan, Micronesia, New Zealand, Singapore, South Korea and Taiwan.3

Shortly after, it was announced that Russia was preparing a law that would effectively allow it to nationalize certain foreign companies that have either left Russia or taken steps to shut down their operations there.4 This bill “relating to the external administration of the management of a company” would apply to companies having (1) more than 25% of participation (directly or indirectly) “linked” to “hostile” States (including including place of registration and place of main economic activity); and (2) a book value of more than one billion rubles (approximately $12 million as of April 2022) and/or more than 100 employees. If passed, this law could be retroactive to February 24, 2022.

The expropriation bill submitted to the Duma on April 8, 2022 is even more drastic. The target of the bill would be the property of Ukrainian oligarchs in Crimea – but the scope of the draft text is much broader. Foreign states and foreign persons (including corporations) associated with “hostile” states. The draft expressly stipulates that the seizure is carried out without compensation and that the right of ownership is terminated.

Russia has also issued several decrees imposing restrictions on financial transactions, particularly with regard to “hostile” states and foreign currencies.6 These could impact foreign investors wishing to repatriate assets located in Russia.

Other measures target actors in specific sectors. In the the aviation industrywhere foreign lessors own more than half of Russia’s commercial aircraft fleet, Russia has passed laws allowing Russian airlines to continue using foreign planes and is considering legislation allowing airlines to keep the aircraft leased in the event of the termination of lease agreements with “hostile” state entities, as well as a decree that would subject the decision to return aircraft to lessors to government approval and allow payment in rubles.7 In the media spacethe Russian government has blocked or restricted access to certain social networks, digital platforms and technology software companies providing private communication channels,8 and a Moscow court even declared the American company Meta Platforms, the parent company of Facebook and Instagram, to be an extremist organization.9 Such actions could diminish or destroy the value of the assets of these companies in Russia.

Moreover, in an important movement concerning intellectual propertyon March 6, 2022, the government adopted Decree No. 299, providing that patent holders registered in “hostile” countries can no longer be protected in Russia, as this would allow the use of patents without having to first obtain the consent of the holder and without having to pay compensation.ten In addition, the Ministry of Economic Development is also reportedly considering removing intellectual property restrictions on goods with restricted supply in Russia; it could affect inventions, computer programs and trademarks.11

2 REMEDIES FOR FOREIGN INVESTORS

2.1 Russia’s international investment agreements

Foreign investors who suffer loss or impairment of their investments in Russia due to actions of the Russian state may be able to seek redress through arbitration under an international investment agreement (“IIA“), usually a bilateral investment treaty (“BIT”) or a multilateral treaty.

Russia has entered into BITs with countries around the world. It has 62 BITs currently in force12, including 27 BITs with so-called “unfriendly” states.13 Nearly 200 companies that have suspended part of their activity in Russia are based in a country that has a BIT with Russia.14 Foreign investors may also benefit from treaty protection if they have subsidiaries in countries with BITs with Russia.

Energy companies can also consider their options under the Energy Charter Treaty (“ECT”), to which there are 53 signatories and contracting parties, including 35 “hostile” states.15 The ECT’s applicability to Russia is somewhat controversial, as Russia signed the ECT in 1994 but did not ratify it; however, the ECT applied provisionally in accordance with its Article 45. In 2009, Russia notified its intention not to become a contracting party to the treaty, triggering a 20-year sunset clause. Russia denies having consented to arbitration under the ECT, but, notoriously in the Yukos cases, an arbitral tribunal (as well as the Dutch Supreme Court) overruled Russia’s objection on this point.16

2.2 Protection of investments in Russia

Russia’s BITs protect eligible investors/investments against state acts such as expropriation and unjust or discriminatory treatment, including by imposing an obligation to provide fair and equitable treatment. Another frequent provision is the protection of the repatriation of investments and returns (i.e. the transfer of funds) from Russia to the state of the investor (see, for example, Article 6 of the BIT Russia-UK). Some BITs, such as the Russia-Ukraine BIT, also provide “full and unconditional legal protection.”17 In the event of a violation, the State is required “to wipe out all the consequences of the wrongful act”, which will most often be done by paying just compensation to “restore the situation which would, in all probability , existed if this act had been committed”. not been committed”.18

So, for example, a foreign company whose assets in Russia are nationalized under the proposed “external administration” law could have (among other potential causes of action) a claim for compensation for expropriation. In the meantime, a foreign investor who has not been allowed to repatriate assets under the new measures prohibiting the transfer by Russian residents of foreign currency to foreign bank accounts could have a claim under a provision on the funds transfer.

2.3 Arbitration procedure

BITs generally provide that investors can submit their claims to an international arbitral tribunal. Injured investors generally must first notify Russia of their claim, and this notification marks the start of a three to six month “cooling-off” period, after which a request for arbitration can be filed. The parties then have the option of appointing a three-member tribunal; importantly, even if Russia refused to participate, the tribunal could nevertheless be constituted (with the support of a court or an arbitral institution) in such a way that the procedure could move forward.

2.4 Enforcement of Arbitral Awards

Any arbitration award made against the Russian state (or public entities) would be binding and enforceable under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which Russia ratified on August 24, 1960. that, under the principle of sovereign immunity, many State assets cannot be seized to enforce a sentence, there are many exceptions to this principle; in Switzerland, for example, assets can be seized if they are used for business purposes and if the underlying transaction giving rise to the claim against the Russian state (or public entities) has a sufficient connection with Switzerland. Additionally, there is a secondary market for arbitral awards, and a successful claimant may be able to sell their interest in an award to a funder or other entity who will then assume the effort. of execution.

2.5 Conclusion

International arbitration can offer a way forward for foreign investors who suffer losses at the hands of the Russian state and wish to claim compensation.

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