Companies with Investments and Activities in Ukraine and Russia: The Importance of Investment Treaties – Company Law/Commercial Law
To print this article, all you need to do is be registered or log in to Mondaq.com.
The situation: Following Russia’s invasion of Ukraine, companies asked how they could protect their employees, investments and assets in Ukraine, Belarus and Russia.
The problem: In terms of recovering losses incurred as a result of the invasion, existing political risk insurance policies can respond. However, often, and without realizing it, companies may already have investment treaty protection, which may offer similar or even more extensive rights than those covered by political risk insurance.
Look forward: Investment treaty protection is an effective way to manage risk and recover damages resulting from state action, including military conflict. Companies must be careful not to act now in a way that hinders their prospects of success in the future.
Why are investment treaties important?
Investment treaties are international legal instruments between two or more states that protect against destruction of property in armed conflict, unlawful expropriation, discrimination and other unjust or inequitable treatment. Investment treaties generally give foreign investors the right to initiate international arbitration directly against the host state of the investment for breaches of the treaty. 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 members from the EU (such as Austria, Belgium, Bulgaria, Czech Republic). , Cyprus, Denmark, Finland, France, Germany, Greece, Hungary, Lithuania, Italy, Luxembourg, Netherlands, Romania, Slovakia, Spain and Sweden). There is no BIT between Russia and the United States, but American companies can still benefit from the protection of the BIT if they hold their investments in Russia (and, potentially, in Ukraine) through a company established in a third country with a Russian BIT. Similarly, Belarus has nearly 60 BITs in force.
Following Russia’s annexation of Crimea in 2014, numerous investment treaty arbitrations have been brought by foreign nationals in relation to their aggrieved investments in Crimea. These arbitrations primarily concerned Russia’s nationalization or seizure of assets in Crimea and involved a range of sectors, including energy, oil and gas, financial services, air transport and real estate.
Foreign investors have won billions of dollars in rewards against Russia. However, Russia has not wanted 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 different this time. Russia will almost certainly not voluntarily comply with sentences handed down against it following the invasion of Ukraine, but while enforcing sentences against a recalcitrant state can take years, more than 160 states allow such execution. These states include all EU member states, the UK, Switzerland, the US and Canada, where Russia is likely to have seizable assets. Historically, when states have failed to pay arbitral awards, investors have succeeded in enforcing them by seizing aircraft, ships, stakes in private or public companies, and income from business assets.
Claims for damaged investments in Ukraine
If an armed conflict results in a change of de facto control over a territory, the state taking control (potentially Russia) must apply its existing treaty obligations to investors in the acquired territory. Investment treaties frequently provide that foreign investors’ losses resulting from requisition or destruction during armed conflict must be compensated promptly, adequately and effectively. Losses may include not only damage resulting from the destruction of physical property, but also loss of profits resulting from disruption of business operations.
Thus, companies or individuals with investments on Ukrainian territory may have treaty claims against Russia (based on de facto control) for damage to those investments resulting from the conflict.
Claims for damaged investments in Russia
In response to Western companies leaving or suspending operations in Russia, the Russian government has issued a number of decrees.
- Foreigners are not able to sell Russian assets or securities, including Russian government bonds.
- We also understand that the Russian government may consider treating the closure of foreign investors’ operations in Russia as premeditated bankruptcy, with implications ranging from administrative liability to criminal liability, including incarceration. Alternatively, the government may require foreign shareholders to divest their operations to Russian partners or companies until they can return to the Russian market.
- Finally, a bill has recently been published which, if passed, will require state administration of companies that have either left Russia or suspended their activities for a specified period, after which the assets of the existing business may be transferred to a new business. . The shares of the new company will then be auctioned and the pre-existing company will be liquidated.
All these emergency measures undoubtedly constitute a violation of an investment treaty and are likely to generate requests for international arbitration.
Companies can generally restructure their investments to take advantage of treaty protections at any time before a dispute arises or is foreseeable. It may be prudent for companies with investments in neighboring countries to restructure their investments now in case hostilities spread.
- Investment treaty protection is highly relevant to companies affected by this conflict and may offer a potential medium-term mechanism to recover losses in Ukraine and Russia.
- It is essential and of immediate concern that the companies act now in a way that supports rather than hinders any future claims against the Russian state.
- Russia will almost certainly not voluntarily comply with awards against it, but there is a mechanism to enforce awards in third states where Russia has assets.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
POPULAR ARTICLES ON: Corporate Law/Commercial Law Around the World