Asset protection for foreign investors in Russia: international and domestic remedies
14 March 2022
Russia’s invasion of Ukraine, in clear violation of Article 2 of the Charter of the United Nations, is first and foremost a humanitarian catastrophe.
It has resulted - and will continue to result - in untold pain and unnecessary suffering. On a lower plane of importance, Russia’s invasion has already had repercussions on foreign investors, and these seem likely to continue. For example, the Central Bank of Russia is reportedly limiting the ability of companies and individuals to transfer funds outside of Russia. Russia is also reportedly considering nationalizing businesses of foreign investors, which suspend their operations or seek to withdraw from the Russian market. Asset protection may be available to foreign investors under the investor-State arbitration system and domestic remedies.
Asset protection under investor-State arbitration
The investor-State arbitration system may help to:
- insulate foreign investors from losses; or
- recover losses incurred,
as a result of the Russian invasion, the ensuing sanctions, and Russia’s reaction to such measures.
The investor-State arbitration system provides protections and a remedy under public international law for investors (whether natural or legal persons) of one State who make investments in another State. The system’s framework is comprised of treaties between States (international investment agreements or “IIAs”) that grant foreign investors (i) a series of legal protections (independent of any contractual protections), and (ii) access to arbitration to adjudicate disputes relating to breaches of those protections by the State in which the foreign investor has made its investment. The resulting arbitral decision, called an “award,” is binding and enforceable in numerous countries under various other treaties—the most notable of which are the Convention on the Settlement of Investment Disputes between States and Nationals of Other States and the New York Convention, with the latter applying to Russia.
IIAs to which Russia is a party generally provide a number of protections to qualifying foreign investors. In particular, they:
- require Russia to ensure that foreign investors can freely transfer their funds. Limiting the ability of foreign companies and individuals to transfer funds outside of Russia could thus constitute a breach of Russia’s free transfer obligation.
- generally require Russia to offer treatment to foreign investors that is not less favorable than the treatment it offers to its own nationals or nationals of other States. Some of the retaliatory measures imposed by Russia to counteract sanctions are specific to foreign investors of sanctioning countries. Insofar as there is differential treatment based on the State of incorporation or nationality of a foreign investor, Russia may be violating the relevant obligations under its IIAs.
- protect against unlawful expropriation. Broadly, an expropriation occurs when a State implements measures that—directly or indirectly—result in the substantial deprivation of a foreign investor’s enjoyment of its investment. The Russian invasion of Ukraine is a sui generis event as it relates to investor-State arbitration. Russia invaded Ukraine illegally and with full knowledge that many States would impose crippling sanctions as a consequence. It is possible that, in that context, the Russian invasion of Ukraine would itself constitute the relevant expropriatory measure. Alternatively, if Russia adopts more traditional expropriatory measures, as recent media reports suggest, it could also breach its obligation to not unlawfully expropriate foreign investors’ investments.
- often include a clause that protects foreign investors against losses incurred during war, civil disturbances, states of emergency, or other exceptional circumstances. Sometimes, those clauses do not provide an affirmative right to compensation. Instead, they merely require Russia to compensate a foreign investor for relevant losses no less than it compensates domestic investors or investors from another State. Some IIAs may provide an affirmative right to compensation, however. If a foreign investor is protected by an IIA that contains such a clause, Russia might breach its obligation to provide adequate compensation for losses resulting from the crippling of the Russian economy by foreign sanctions.
- -sometimes require Russia to treat foreign investors and their investments fairly and equitably. This obligation protects foreign investors from arbitrary, discriminatory, obscure, and unreasonable measures, and from denials of justice by the judiciary or other State organs. Due to the breadth of the fair and equitable treatment obligation, many actions that would breach other obligations may also amount be unfair and inequitable. The fair and equitable treatment obligation also encompasses actions not falling within the scope of other IIA obligations.
Russia has IIAs in force with various States. Where an investor’s home State does not have an IIA in force with Russia, the investor may still be protected if a subsidiary is incorporated in a State that is party to a Russian IIA. So, while there is no United States-Russia IIA, if a U.S. investor has, for example, Italian or Dutch intermediary companies, it may be able to rely on their nationality to claim protection and bring an investor-State arbitration claim.
Investors who are concerned about protecting their assets in Russia should (i) check their corporate structure and the availability of IIA protection, (ii) carefully document their internal decisions (including as to a potential exit), (iii) be mindful that any documents produced now (including valuations of the local business) may be subject to disclosure in any arbitration proceedings, and (iv) maintain contemporaneous written records of all discussions with the Russian government or Russian state entities, and ensure that the relevant records are available outside of Russia.
Depending on the breadth of the dispute resolution provision of the relevant Russian IIA, foreign investors may be able to bring arbitral claims against Russia for breaches of some or all of the aforementioned obligations. Under the New York Convention, the resulting award can be enforced in the domestic courts of over 160 other countries. It is always a challenge to locate assets that are not protected from enforcement by sovereign immunity and belong to the State in question, rather than its wholly-owned enterprises. At the same time, the current sanctions regime means that significant State-owned assets have been frozen around the world, and some jurisdictions may be willing to pierce the corporate veil when it comes to wholly-State-owned entities.
Asset protection under domestic remedies
Foreign investors whose home State does not have an IIA in force with Russia, and whose corporate structure does not allow them to rely on other IIAs with Russia, may be able to access domestic remedies. As mentioned, the United States does not have an IIA in force with Russia. In the event of an expropriation or other measure by Russia, a possible remedy for U.S. investors would be the filing of a claim for expropriation either in U.S. court, or ultimately, within a broader settlement context, to a claims program administered by the Foreign Claims Settlement Commission (“FCSC”). The FCSC provides a forum for U.S. nationals (including U.S. corporations) to resolve claims against foreign governments, once it is granted authority to adjudicate categories of claims against a particular State.
The most likely grants of authority will be (i) Congressional legislation that authorizes the FCSC to adjudicate categories of claims against Russia, and (ii) a referral by the Secretary of State to the FCSC of categories of claims against Russia. If the FCSC were authorized to adjudicate claims against Russia, U.S. nationals could have standing to file claims. The Department of the Treasury disburses funds to claimants that receive favorable awards by the FCSC. The funds for the payment of awards can come from claims settlement agreements between the United States and the relevant State (in this case, Russia). Often times, foreign countries execute such agreements as part of broader normalization of relations. Alternatively, payments can be funded by congressional appropriations or liquidation of foreign assets held in the United States.
In making a decision on claims brought before it, the FCSC generally applies principles of international law, justice, and equity. As such, the FCSC may require presentation of relevant facts and law similar to an investor-State arbitral tribunal.
In determining the value of a claim under international law, the FCSC awards the fair market value of the property as of the time of the expropriation by the foreign government involved—except that the value of the claim is not to reflect any diminution in value attributable to actions that are carried out, or threats of action which are made, by the foreign government with respect to the property before the expropriation. Fair market value is ascertained in accordance with the method most appropriate to the property taken and equitable to the claimant, including: (i) market value of outstanding equity securities, (ii) replacement value, (iii) going-concern value (which includes consideration of an enterprise’s profitability), and (iv) book value.
Investors from other countries should consider whether their home State has similar foreign claims resolution mechanisms.