In Short
The Situation: Following Russia's invasion of Ukraine, companies have been asking how they can protect their employees, investments, and assets in Ukraine, Belarus, and Russia.
The Issue: In terms of recovering losses suffered as a result of the invasion, existing political risk insurance policies may respond. However, often, and without realizing it, companies may already have investment treaty protection, which can offer similar, if not more expansive, rights than those covered by political risk insurance.
Looking Ahead: Investment treaty protection is an effective way of managing risk and recouping damages arising out of measures taken by a State, including military conflict. Companies should be careful not to act in a manner now that hinders their prospects of a successful claim later.
Why Are Investment Treaties Important?
Investment treaties are international legal instruments between two or more States that protect against property destruction in armed conflict, illegal expropriation, discrimination, and other unfair or inequitable treatment. Investment treaties typically give foreign investors the right to commence international arbitration directly against the host State of the investment in the event of a treaty breach. International arbitration allows investors to claim damages in a neutral forum before a panel of independent arbitrators.
Russia has bilateral investment treaties ("BITs") in force with more than 60 countries, including the UK, Switzerland, Norway, Canada, Japan, Korea, and Ukraine and many EU members (such as Austria, Belgium, Bulgaria, the Czech Republic, Cyprus, Denmark, Finland, France, Germany, Greece, Hungary, Lithuania, Italy, Luxembourg, the Netherlands, Romania, Slovakia, Spain, and Sweden). There is no BIT between Russia and the United States, but U.S. companies may nonetheless benefit from BIT protection if they hold their investments in Russia (and, potentially, Ukraine) through a company established in a third country that does have a Russian BIT. Belarus similarly has nearly 60 BITs in force.
Following Russia's annexation of Crimea in 2014, many investment treaty arbitrations were brought by foreign nationals in relation to their harmed investments in Crimea. These arbitrations related primarily to Russia's nationalization or seizure of assets in Crimea and involved an array of sectors, including energy, oil and gas, financial services, air transportation, and real estate.
Foreign investors have won billions of dollars in awards against Russia. However, Russia has been unwilling to voluntarily comply with these awards, which means that the awards will be enforced in a third State where Russia has assets. No one expects the situation to be any different this time. Russia is almost certainly not going to voluntarily comply with any awards against it arising out of the Ukraine invasion but, while enforcing awards against a recalcitrant state may take several years, more than 160 states permit such enforcement. Among these states are all EU Member States, the UK, Switzerland, the United States, and Canada, where Russia is likely to have attachable assets. Historically, when states have failed to pay arbitral awards, investors have successfully enforced by seizing aircraft, ships, stakes in private or state-owned companies, and income from commercial assets.
Claims for Damaged Investments in Ukraine
If an armed conflict leads to a change of de facto control over a territory, the control-taking State (potentially Russia) must apply its existing treaty obligations to investors in the acquired territory. Investment treaties frequently provide that losses of foreign investors resulting from requisitioning or destruction during armed conflict shall be compensated promptly, adequately and effectively. The losses may include not only damages arising from the destruction of physical property but also lost profits from disrupted business operations.
Thus, companies or individuals with investments in Ukrainian territory may have treaty claims against Russia (on the basis of de facto control) for harm to those investments arising from the conflict.
Claims for Damaged Investments in Russia
In response to Western corporations exiting or suspending operations in Russia, the Russian government has issued a number of executive orders.
- Foreigners are unable to sell Russian assets or securities, including Russian state bonds.
- We also understand that the Russian government may plan to treat the closure of foreign investors' operations in Russia as a premeditated bankruptcy, with implications ranging from administrative to criminal liability, including incarceration. Alternatively, the government may require foreign shareholders to hand over their operations to Russian partners or businesses until they can return to the Russian market.
- Finally, a draft law has recently been released that, if passed, will require state administration of companies that have either exited Russia or suspended their operations for a set time period, after which the assets of the existing company can be transferred to a new company. The shares in the new company will then be sold at auction and the pre-existing company will be liquidated.
All of these emergency measures arguably constitute a breach of an investment treaty and are likely to generate international arbitration claims.
Companies can ordinarily restructure their investments so as to take advantage of treaty protections at any point before a dispute arises or is foreseeable. It may be prudent for companies with investments in neighboring countries to restructure their investments now in the event that the hostilities spread.
Three Key Takeaways
- Investment treaty protection is highly relevant to companies affected by this conflict and can offer a potential medium-term mechanism for recouping losses in Ukraine and Russia.
- It is critical and of immediate concern that companies act now in a manner that supports rather than hinders any future claim against the Russian State.
- Russia is almost certainly not going to voluntarily comply with any awards against it but there is a mechanism available for enforcing awards in third States where Russia has assets.
