International dispute resolution options for investors in Russia

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Through Ian Laird, Eduardo Mathison and Leslie Castello


April 4, 2022 at 5:14 p.m. EDT

Law360 (April 4, 2022 5:14 p.m. EDT) —

Ian Laird
Edward Mathison
Edward Mathison
Leslie Castello
Leslie Castello

As the geopolitical and economic crisis in Russia and Ukraine is rapidly increasing due to recent events, international trade operations in both regions will be severely affected in some way, and many of these effects will lead to disputes with Russia.

Western companies that have been operating in Russia for years are finding that their businesses and assets may be expropriated. For these companies, one thing is certain: Russia will be exposed to the many international disputes that will follow. And if it ever wants to re-enter the global economy as an active and trusted participant, it must resolve these issues.

The events surrounding the peso crisis in Argentina in the early 2000s, as well as events in Venezuela due to the actions of former President Hugo Chavez and others that resulted from the Arab Spring, all led to dozens of complex international trade disputes.

We can see the same consequences of current events. Investors and companies doing business in Russia – affected by serious business disruptions, loss of profits or destruction of property – have access to dispute resolution options, which may include investor-state arbitration, domestic litigation or arbitration to recover claims.

From an immediate and practical point of view, developing the situation, companies should begin to collect and keep all materials related to communication with Russian government officials, documents related to the ownership and corporate structure of their foreign investments, to operation and profitability, to insurance forwarders and others covers.

Businesses should also create and keep registers of all assets currently located in Russia and record and keep simultaneous records of all developments. As far as possible, this information should be stored, or at least accessible, in a location outside the Russian territory.

Perhaps most importantly, since Russia has over 60 operating contracts that provide some protection to foreign investors, investor-state dispute settlement mechanisms may be available to parties entitled to make claims under those contracts.

In particular, the treaties provide a procedure for claiming compensation for expropriation and nationalization, such as may occur if the draft law currently before the Russian Parliament is adopted and implemented.[1]

Affected parties in Russia may also consider recovering their commercial damages through other avenues, including domestic litigation in the United States or elsewhere, international commercial arbitration, or potential future class action courts that may be formed after the conflict has ended. Each path of recovery will present unique challenges.

And if none of these options provide a viable avenue for recovery against states or government entities, affected parties should consider whether their agreements or applicable contracts allow for third-party claims.

Investor-state arbitration

Foreign investors in Russia may consider investor-state arbitration if:

  • The investor is a national of a country that is a party to an international investment treaty or IIA in force, as defined in a bilateral investment agreement, free trade agreement or other similar international instrument; or
  • The investor is itself a signatory to a contract or any type of investment agreement with the state, its local authorities or agencies or bodies that contains an international dispute settlement clause.

More than 60 investment treaties signed by Russia are currently in force, and they all provide procedures for foreign investors to seek compensation for direct and indirect expropriation. Signatories to these treaties include the main members of the European Union, Canada, Japan and others.

Although no U.S.-Russia bilateral investment treaty or other investment treaty is currently in force, American investors may consider whether their investment structure would permit an investor-state claim to be brought against an affiliate or subsidiary under the auspices of another bilateral investment to make a treaty or IIA, such as those signed by the UK, Italy, Germany, France or the Netherlands.

Such treaties may also include protections against arbitrary and discriminatory treatment, fair and equitable treatment, full security and safety, pledges of out-of-country transfers of funds, and obligations of universal indemnity for losses caused by war and armed conflict on a most-favoured-nation nation basis. An example of the latter protection, referred to as the “protection from dispute” clause, can be found in Article 4 of the UK-Russia bilateral investment treaty:

Investors of a Contracting Party whose investments in the territory of the other Contracting Party suffer losses as a result of an armed conflict, national emergency or civil disturbance in the territory of the latter Contracting Party shall be accorded treatment by the latter Contracting Party as to refund, indemnity, compensation or other settlement no less is more favorable than that granted by the latter Contracting Party to third-country investors. The resulting payments are to be made immediately and are freely transferable.

Businesses should carefully review the applicable IIAs to fully understand what claims may be made and what damages they may be entitled to. In the event that a company has signed an investment contract with Russia, its local authorities or the state or local authorities or bodies, the party should also carefully examine their contract to determine which dispute resolution mechanism, if any, is identified, and which ones Claims may be available outside or outside the scope of the IIA, to the extent applicable.

A State Party to an IIA may also consider participating directly in a State-to-State investment arbitration against Russia on behalf of its investors, likely depending on the breadth of claims, the investors involved in that particular State, and the will of the home State to engage in such diplomatic protection to stand up for the international rights of its nationals.

litigation

Depending on the individual circumstances and factors at hand, companies may consider initiating legal proceedings under the relevant and applicable national law. Companies should pay particular attention to questions of jurisdiction and against which parties they can or should bring claims.

Businesses should also review their underlying contracts and applicable national law to answer these questions. In the US, for example, the Foreign Sovereign Immunities Act provides broad judicial immunities for states, subject to a few important exceptions that may be applicable in a particular context.

Claims courts, commissions and funds

Although most arbitration tribunals and class action commissions organized after acts of war, invasions, and occupations are largely designed to deal with critical issues related to humanitarian needs, such arbitration tribunals have also been set up to compensate individuals and corporations whose Business activity was interrupted as a direct result of the war.

One of the best-known examples of an international arbitral tribunal is the Iran-US Claims Tribunal, which emerged after the 1979 Iranian revolution and widespread expropriation of US investments. Approximately 4,700 private US lawsuits were filed against the Iranian government at the tribunal, resulting in more than $2.5 billion from US citizens and businesses.

Such tribunals and commissions have been created in a variety of ways, including by United Nations resolutions and national laws. However, setting up an arbitration tribunal for trade claims following Russia’s war with Ukraine is likely to face significant obstacles in this case.

For example, the UN Security Council was previously responsible for passing the resolution that created the United Nations Compensation Commission, which would compensate individuals and companies for claims arising from the 1990 Iraqi invasion and occupation of Kuwait.

Around 6,600 commercial claims were filed under the commission from around 70 governments, seeking compensation of US$79 billion. The US made 95 claims on behalf of its investors, resulting in more than $633 million in compensation. However, Russia’s position in the UN Security Council makes a similar process unlikely, as Russia could be expected to veto any attempt. Likewise, the international community rightly has little optimism that Russia would pass national legislation to create its own commission.

Realistically, the parties could only expect a court to deal with these allegations if the states concerned included a framework as a condition of any future diplomatic settlement with Russia.

Alternatively, states could – independently or in cooperation with the wider international community – set up their own tribunal, commission or victim fund to compensate their investors and pursue their own redress independently of any action they take on the impact of going to war against Ukraine.

However, the parties should not rely solely on this path, as overall control and determination will rest with individual governments and any recovery – if any – is likely to be relatively distant.


Ian A Laird is a Partner and Co-Chairman of the International Dispute Resolution Group at Crowell & Moring LLP. He is an Associate Professor at Georgetown University’s Law Center and Co-Director of the International Investment Law Center.

Edward Mathison is Counsel at Crowell & Moring.

Leslie Castello is an employee of the office.

John L. Murino, a partner at Crowell & Moring, contributed to this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the company, its customers, or Portfolio Media Inc. or any of its or their respective affiliates. This article is for general informational purposes and should not be construed as legal advice.

[1] https://www.crowell.com/files/Russia-New-Draft-Law-re-Ext-Management-March-9-Engl-Translation.pdf.

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