As a result of international sanctions and reputational concerns, many foreign investors with interests in Russia have already exited the country or are contemplating doing so. Whether an investor decides to exit or stay, the decision carries significant risks. This note focuses on the relevant international law considerations. Section 1 summarises recently-announced measures by Russia targeting foreign investors. Section 2 then considers the possible remedies that investors may seek in respect of these measures under international investment law. Section 3 addresses potential international human rights and criminal law risks for companies that continue to operate in Russia. Section 4 concludes with practical advice for those grappling with this situation.
1. Russia’s measures against foreign investors
To date, Russia has proposed or already imposed the following measures affecting foreign investors:
- Nationalisation of foreign companies’ property if they decide to exit permanently from Russia: This legislative proposal affects companies with 25% or more ownership by interests of an “unfriendly country”. Their property may be seized and put under external management, unless the investor agrees to resume operations in Russia or to sell its interest.
- Permission for Russian airlines to register leased foreign aircraft in their name and operate them, without compensation to the foreign leasing companies.
- Limitations on wire and cash transfer of funds outside of Russia: Companies and individuals from certain countries (as yet unspecified) are prohibited from transferring wire funds outside of Russia. No one may transfer cash outside of Russia in a foreign currency worth over USD10,000.
- Restrictions on divestment by foreign investors: Foreigners are not able to sell their positions in any Russian securities, and dividends or other proceeds from Russian securities cannot be transferred to foreigners.
- Requirement of governmental approval for certain transactions involving entities from, or controlled by, sanctioning countries: The transactions include: (i) lending rubles to foreign investors; (ii) transferring title to real estate; and (iii) transferring title to securities.
- Temporary ban by foreign investors on selling Russian assets.
- Authorisation for Russia and its constituent entities, and Russian residents, to repay in rubles debts, which: (i) are denominated in foreign currencies; (ii) are owed to entities from “unfriendly countries”; and (iii) exceed 10 million rubles per calendar month.
- Proposed administrative and criminal liability for foreign companies and their representatives for compliance with sanctions by Western countries.
- Suspension of normal compulsory licensing rules, such that Intellectual Property (IP) owners from sanctioning countries will receive no compensation instead of “reasonable compensation”.
2. Investment treaty protections
To the extent these measures cause foreign investors to suffer losses, remedies may be available through investor-State dispute resolution (ISDS) under Russia’s international investment agreements (IIAs) (which include Russia’s 60+ bilateral investment treaties (BITs) with other countries). The existence and scope of protected rights varies between treaties. However, example claims may include the following:
- Breach of the right to free transfer of funds. Many Russian BITs require Russia to ensure that foreign investors can freely transfer funds relating to their investment out of Russia, without delay and in a freely convertible currency. Those measures listed above which restrict the movement of funds out of Russia may therefore constitute a breach of this provision. Many free transfer provisions also apply “at the rate of exchange applicable on the date of the transfer”. As wild currency fluctuations will affect the value of the outbound transfer, it is advisable to think through the implications of foreign exchange in advance.
- Breach of National Treatment (NT)/Most-Favoured-Nation (MFN) Treatment guarantees. Many Russian BITs require Russia to offer treatment to foreign investors that is not less favourable than the treatment it offers to its own nationals or nationals of other States. Russia’s measures targeting foreign investors of so-called “unfriendly countries” may violate these protection standards as they discriminate based on nationality.
- Expropriation. Measures that (i) directly or indirectly, result in the substantial deprivation of a foreign investor’s enjoyment of its investment, and (ii) which are not accompanied by prompt, adequate and effective compensation, may constitute unlawful expropriation and a breach of Russia’s IIAs. Such measures may include: (i) the nationalisation (without compensation) of foreign investors’ property if they decide to exit Russia; (ii) the registration of leased foreign aircraft in the name of Russian airlines (again without compensation); (iii) measures which prevent foreign investors from disposing of their Russian assets leading to substantial deprivation of value of their investments; (iv) disregarding intellectual property rights; and (v) Russia’s authorisation of the repayment of foreign-currency debts in rubles (to the extent it significantly reduces the value of these receivables).
- Fair and equitable treatment (FET). The FET provision present in many of Russia’s IIAs provides foreign investments with broad protection against measures that are unfair and unreasonable. Investors may argue that the recent abrupt, wide-ranging and disruptive changes to the legal environment for foreign investments in Russia breach this standard since they frustrate their legitimate expectations held when they first invested, that Russia would provide a stable and predictable legal framework. Specific measures may also violate FET to the extent they may be considered arbitrary or discriminatory.
Additionally, we note that Russia may default on its international bonds if no payment is made after the expiry of the applicable grace period. If it has to restructure its debts as a result, that may give rise to investment treaty claims. Argentina is a cautionary example, where its attempts to restructure its debts following its default of sovereign debt in 2001 exposed it to international investment treaty claims for expropriation and violation of FET.
Russia is likely to defend any claims against it vigorously. In doing so, it may seek to rely on the customary international law defences of necessity, self-defence and countermeasures. Of these principles, the most relevant is necessity, but this requires showing that the action taken is the only available course of action to safeguard an essential interest against a grave and imminent peril, and that it does not seriously impair any other essential interest. The defence is rarely upheld, and is especially unlikely to be successful where Russia has contributed to the situation of necessity by invading Ukraine.
Investors who prevail in investment treaty arbitration claims against Russia will likely need to enforce their awards through national courts in jurisdictions outside of Russia where the State has assets (since Russia is unlikely to pay an award voluntarily and enforcement through Russian courts is unlikely to be successful). In principle, such jurisdictions could be any of the over 160 signatory States to Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), to which Russia is also a party. Under the New York Convention, enforcing courts are generally not permitted to reconsider the merits of the case, and the grounds for refusing to enforce are narrow. While this is unlikely to put Russia off from seeking to resist enforcement, most such attempts are likely to fail.
Key to successful enforcement is identifying assets which belong to Russia and which are not protected by sovereign immunity. While substantial assets have been frozen following Russia’s invasion of Ukraine, many belong to State-owned entities rather than Russia itself or are likely to be covered by sovereign immunity (e.g. Central Bank assets). However, given the severity of crimes committed by Russia, enforcing courts in at least some countries may be more willing to pierce the corporate veil of State-owned entities. Those not willing to engage in enforcement proceedings may consider exploring a sale of the award (at a discount) to a third party.
Beyond the investment treaty context, the recent decision by the Committee of Ministers to exclude Russia from the Council of Europe means that remedies against Russia under the European Convention of Human Rights are no longer available.
3. Other international law implications of continuing to conduct business in Russia
Even companies that decide to keep their operations in the Russian market face a completely different economic reality in light of restricted funds transfers and divestment opportunities, among other restrictions. Investors should also be aware of the potential implications under international human rights and criminal law for continuing to do business in the country (at the very least, from a reputational perspective).
Corporations have a responsibility under the United Nations Guiding Principles on Business and Human Rights 2011 (UNGP) to respect human rights. The UNGP requires corporations to respect human rights by: (i) avoiding causing or contributing to adverse human rights impacts through their own activities, and addressing impacts when they occur; and (ii) seeking to prevent or mitigate adverse human rights impacts that are directly linked to their operations or even their business relationships. Moreover, the UNGP suggests that in instances where corporations do not have leverage to prevent or mitigate adverse impacts, they should consider ending the commercial relationship. The UNGP is technically non-binding, but a breach of its principles entails a significant reputational risk. Corporations dealing in Russia or with any Russian State-owned entities should therefore conduct due diligence of their operations and assess any actual and potential risks of contributing to human rights violations occurring in Ukraine.
Companies should also be aware of potential criminal liability for being complicit in international criminal acts, which domestic courts outside Russia may prosecute under the doctrine of “universal jurisdiction” (if permitted by national legislation). There is precedent where corporate representatives have been prosecuted for the supply of dual-use substances to an aggressor State, with the knowledge of its intended illegal use, as well as knowingly contributing (for instance, by way of financial support) to war crimes. There is also an important, albeit remote, possibility of the prosecution of individuals acting on behalf of a corporation complicit in international crimes at the International Criminal Court (ICC).
4. Practical advice for foreign companies
Considering the above, investors who are concerned about protecting their assets in Russia should:
- Check the structure (in particular the nationality) of their foreign investments in Russia to see if they are eligible for protection under any of Russia’s IIAs.
- In anticipation of potential disputes, formally document any important internal decisions, including as to a potential exit from Russia. Maintain contemporaneous written records of all discussions with the Russian government. Preserve and safeguard all paper and electronic documentation, including making sure that they are available outside of Russia. Be aware that any documents produced now may be subject to disclosure in any arbitration proceedings. Avoid the temptation to undervalue your local business on exit – it should be a true and accurate reflection of the business’s value so as not to prejudice any potential claims in an investment arbitration.
- If you are considering commencing investment treaty arbitration proceedings, consider all available enforcement jurisdictions (i.e. in a New York Convention signatory State where there is clear evidence of available Russian State-owned assets).
- Undertake human rights due diligence of your business operations in Russia, especially if the business concerns sensitive industries playing a role in the military invasion in Ukraine or where the relevant entities are subject to sanctions. Advise your employees on what to do to ensure compliance with applicable sanctions.
If any of these international law issues affect your investments in Russia, our market-leading international law team can advise and assist you.