Editor's note: Co-authored by James Maton, Rachel Thorn and Juan Nascimbene, this article was originally published by Law360.
In light of recent events in Ukraine and the possibility that Russia may seize assets of foreign entities, companies with investments in Russia may have a direct right of action against Russia if it seizes their investments, including their local operating companies.
That action is governed by international law and would be heard by an independent arbitration tribunal and awards are enforceable throughout the world against nonimmune Russian assets.
Measures Adopted by Russia
Russia has adopted a series of countermeasures against Western companies as a result of the various sanctions imposed by Western countries due to the Russian invasion of Ukraine.
For example, Russia is preparing a new law that will allow it to seize the local businesses of Western companies that have left or suspended operations in Russia due to the invasion of Ukraine.
Russia has also announced several other measures including:
- Mandating Russian residents to sell foreign currencies to the Russian Central Bank;
- Suspending the transfer of funds outside of Russia;
- Prohibiting Russian residents, including subsidiaries of Western countries, from providing loans, transferring ownership of securities or transferring ownership in real estate;
- Limiting the sale of Russian companies' shares and bonds owned by foreign individuals or companies; and
- Eliminating the obligation of Russian users from paying compensation to Western companies that hold patent rights for the unauthorized use of their patents.
Companies that may see their investments in Russia affected by these measures could have a remedy under international law through investment treaties. These treaties allow eligible foreign investors to bring claims for compensation against Russia directly in arbitrations before impartial and independent tribunals.
For many investors, international arbitration may offer a better, or the only, avenue to recover losses because of the hurdles in suing foreign sovereigns in courts, including sovereign immunity laws, service of process challenges and abstention doctrines.
Could International Investment Law Protect Foreign Investors in Russia?
International investment law is a public international law treaty-based regime that is independent of national legal systems.
It protects foreign investors and their investments from unfair interference by a host government through regulation or other governmental measures that are arbitrary or unfair, discriminate in favor of local players, or take the investment without full compensation.
Bilateral or multilateral investment treaties signed between a host state, the country where the investment is made, which in this case is Russia, and a home state, the country of the investor's nationality, also grant foreign investors the right to bring claims against host states before international arbitration tribunals.
This means that investors may have a direct right of action against Russia for its unlawful measures, in a neutral forum, heard by independent arbitrators appointed by the disputing parties.
Generally, the resulting awards are enforceable against states as local court judgments. This means awards could be enforced against Russian state assets outside of Russia, subject to questions of whether those assets are protected by sovereign immunity.
However, access to these legal protections and remedies depends on whether the foreign investor is from a home state that has concluded an investment treaty with Russia.
Protection also may be available for companies within a corporate holding structure that includes a company from a home state that has concluded an investment treaty with Russia.
What Investment Treaties Are Available to Foreign Investors in Russia?
Russia has 62 bilateral investment treaties, or BITs, in force, including with EU member states Denmark, Finland, France, Germany, Lithuania, Italy, Luxembourg, the Netherlands, Norway, Spain and Sweden.
Russia also has BITs with Canada, Japan, South Korea, Switzerland, the U.K. and Ukraine.
The U.S. has signed a BIT with Russia, but the BIT has not entered into force. Despite this, U.S.-based companies might still avail themselves of investment treaty protections if their investments in Russia are structured via one of the countries with a BIT with Russia.
Some of these treaties have limited protections — such as restricting international arbitration to ascertaining the amount of compensation arising out of expropriatory measures.
However, the most recent treaties are more comprehensive and give investors a wider set of rights.
How Do Investment Treaties Protect Foreign Investors?
The protections vary, depending on the treaty, but generally, most Russian BITs prohibit expropriation without compensation, and require Russia to accord investments fair and equitable treatment.
International investment law requires host states to pay prompt and adequate compensation if they seize or nationalize investors' assets.
Critically, the protection also covers indirect expropriation, which occurs when the state does not take the property directly, but rather takes measures that largely deprive the investor of the benefits or value of its investment.
This means that if Russia directly seizes a foreign investment or adopts measures that destroy its value, Russia could be liable for breaching the prohibition against expropriation in BITs.
Some of the measures taken by Russia could also indirectly expropriate an investor's rights, for example by permitting or requiring patents' users to stop paying royalties to patent holders.
Additionally, Russia is required to treat investors fairly and equitably. Under this standard, Russia must not treat investors arbitrarily or unreasonably, frustrate their legitimate expectations, or abruptly change its regulatory framework.
Consequently, Russia's proposed law of seizing the assets of Western investors could constitute an arbitrary measure breaching the fair and equitable treatment protection. So could the other measures that are specifically aimed at retaliating against Western investors.
Finally, most investment treaties incorporate a free transfer of funds clause that allows foreign investors to send and receive funds from abroad without restrictions. Some Russian measures that limit foreign currencies' transfers could breach this provision.
How Can Investors Claim Compensation for Violation of Rights in Russia?
In order to be covered by the investment treaties' protections, a foreign company must have made an investment in Russia in accordance with the treaty.
Typically, the term investment is defined broadly under these investment treaties and extends to intangible rights and intellectual property, locally incorporated enterprises, commitments of capital to the host state, claims to money, and other assets.
Many of these investments represent the kind of assets that companies already possess in foreign investments in Russia.
Eligible investors with investments in Russia can bring an action directly against Russia before an international arbitration tribunal and claim damages for Russia's unlawful measures.
However, each treaty will have certain conditions that need to be complied with before bringing a claim — for example, notifying Russia of a dispute and a cooling-off period before commencing arbitration.