In light of the Russian invasion of neighbouring country Ukraine, Russia has encountered sweeping condemnation and severe, previously unseen sanctions from the member states of the European Union, the USA, Canada, and other European countries. These sanctions have delivered a blow to the Russian economy. The rouble’s value has nose-dived, and multiple foreign companies have either pulled out of the market, ceased operations or blocked access from Russia to their services and digital content.
To counter the sanctions from the West, Russia has come up with countermeasures of its own. In an attempt to retaliate, bolster its economy and stop – or at least delay – the exodus of foreign capital, Russia has taken various measures that are highly likely to breach Russia’s commitments to foreign investment protection. This article analyses whether these measures could qualify as a breach of the investment protection regime and what recourse is available for foreign investors.
The president of Russia has signed numerous decrees in retaliation to the Western sanctions against a list of what Russia has deemed “unfriendly countries”. These decrees have laid out multiple restrictions on Russian residents, prohibiting or severely limiting transactions in foreign currencies in order to prevent the flow of capital in foreign currencies out of Russia:
- Residents are obligated to sell at least 80% of their capital in foreign currency gained from export of goods and services to non-residents
- Residents are prohibited from issuing loans in foreign currencies to non-residents
- Residents are prohibited from transferring their assets in foreign currency to credit institutions outside of Russia and transferring funds using foreign non-bank financial institutions
- Residents are prohibited from transporting cash in foreign currency totalling more than USD 10,000 outside of Russia
- The Russian central bank is prohibited from selling foreign currencies and cash withdrawals exceeding USD 10,000 to residents
- Restrictions and Government committee approval requirements for loans in roubles and transactions with securities and real estate with foreign nationals and legal entities
Likewise, there have been unconfirmed reports of the Russian government allegedly considering and taking preliminary action on seizing funds and nationalising assets of foreign nationals and companies who are exiting the Russian market.
These restrictions pose a significant risk to investments of foreign investors in Russia and have the potential to breach Russia’s investment protection obligations found in international treaties and Russian investment law.
Russia’s obligations under investment protection agreements
Russia has signed and ratified 62 bilateral investment treaties (BIT), including with most Western and Northern European countries, as well as Lithuania and Ukraine. There is no BIT in force with Latvia and Estonia. The 1992 BIT with the USA is not ratified yet.
Russia is notably not a full member of the Energy Charter Treaty (ECT). Russia has signed the treaty but did not ratify it and only agreed to provisional application of its terms, although even this agreement was terminated on 19 October 2009. Conversely, the ECT provides that investments made in Russia continue to benefit from ECT protection for 20 years following the termination in 2009. This means that for the protection of investments made before 19 October 2009, investors may bring claims against Russia under the ECT until 19 October 2029.
It is worth noting that, unlike its neighbours the Baltic States, Ukraine and Belarus, Russia is only a signatory of the ICSID Convention and has not ratified it. As a result, the ICSID Convention is not in force in Russia, and investors cannot bring claims against Russia at ICSID.
Potential grounds for investment disputes against Russia
The Russian countermeasures might qualify as a breach of the transfer provisions or unlawful expropriation.
1. Breach of transfer provisions
The Lithuania-Russia BIT and the Ukraine-Russia BIT contain a “transfer provision” which guarantees investors “an [unimpeded/free] transfer abroad of payments associated with the investments”. Most of Russia’s BITs with Western and Northern European countries contain a similar provision. This means that Russia must ensure that investors can freely move any funds related to an investment in and out of Russia.
Foreign investment in Russia from Latvia, Estonia and other countries that do not currently have a BIT with Russia is protected by the Russian federal Foreign Investment law (FIL) as the host state’s law. Similarly to the BITs, the FIL also contains a transfer provision providing investors with the right of “unimpeded transfer out of the Russian Federation of earnings, profit and other lawfully gained funds in foreign currency [..]”.
The purpose of these provisions in the BITs and the FIL is to protect investors’ legitimate expectations of free and unimpeded transfer of funds and assets, which in the absence of these provisions, could be restricted at will by sovereign states.
Arbitral tribunals in similar circumstances have supported this view and found that refusing to release foreign currency and forcing the use of national currency is a breach of transfer provisions. Equally, preventing the sale of assets has also been held to be a breach of transfer provisions.
Even though the restrictions imposed by Russia are aimed at residents, they also affect subsidiaries registered in Russia owned and controlled by foreign investors. Consequently, local laws or executive orders targeting residents or sanctions on non-residents limiting the transfer of funds could violate Russia’s investment protection obligations under its BITs and the FIL.
Under these circumstances, if a foreign investor is prohibited or severely limited in selling its assets or transferring its funds out of Russia, this may be considered a breach of investment protection obligations.
2. Unlawful expropriation
The FIL and the Russian BITs provide that investments shall not be subject to expropriation, appropriation, requisition or nationalisation, or other measures equivalent to expropriation or nationalisation.
For the actions of the state to be considered expropriation and therefore a breach of the BIT or FIL, they must rise to the level of “taking”, where the investor is totally or nearly totally deprived of its investment permanently or seemingly permanently. The only exceptions to prohibition of expropriation are in cases where it is done: (1) in the public interest; (2) without discrimination against the investor; (3) under due process of law; (4) and in exchange for effective compensation.
It is equally essential to be aware that expropriation can occur directly and indirectly. Thus, even if nationalisation through a formal transfer of title or outright seizure does not happen, future restrictions and sanctions on residents and non-residents could potentially amount to what is known as “creeping expropriation”. This is when expropriation occurs gradually in stages that individually do not rise to the level of taking, but collectively, over time, amount to a total or near-total deprivation of the investment.
As the situation in Russia develops, the critical points for investors when considering their rights of claim are that expropriation can also occur indirectly through increasingly stringent restrictions. To bring investment treaty or host state law claims, the expropriation must result in total or near-total de facto deprivation of the investment permanently or for a seemingly permanent period.
Recourse against Russia available to foreign investors
The Lithuania–Russia BIT and the Ukraine–Russia BIT state that disputes between the investor and the host state are to be resolved in arbitration proceedings. The investor must notify Russia six months in advance of the proceedings and, at this time, attempt to negotiate the dispute in good faith. Investors may bring a claim against Russia either in a Russian state court or a local court of arbitration, or at an international arbitration institution such as the Stockholm Chamber of Commerce (SCC) or the International Chamber of Commerce (ICC), or in ad hoc arbitration proceedings.
Under the ECT, the time frame for prior notification and attempts at amicable investor-state dispute resolution is shorter – three months. After this, the investor may submit a claim against Russia in the SCC or ad hoc arbitration proceedings.
A similar system exists for Latvian, Estonian, American and other investors under the Russian FIL. In contrast to the BITs and the ECT, there are no previous notification or negotiation requirements. Investors can immediately resort to bringing a claim to a court or arbitration court. The FIL does not specify a permanent arbitration institution. Instead, the law provides that disputes will be resolved either in a “court or arbitration court or an international arbitration court”. According to Russian federal law, disputes under the FIL will be referred to ad hoc arbitration.
For investors from countries with no BIT or other investment protection regime with Russia, other than the Russian FIL, investment protection comes with a caveat. Investment protection in the national legislation of Russia and the corresponding dispute resolution mechanism is a unilateral commitment by the state. This means that a standing consent to arbitrate included in national legislation may be unilaterally withdrawn by amending the law or repealing it.
Moreover, the investor’s corporate structure and nationality under Russian law may cause a dispute over whether domestic or international arbitration law rules apply to the proceedings. Applying domestic arbitration rules would impose additional requirements on potential arbitrators and most likely limit the available selection to local arbitrators. This, in turn, could raise impartiality concerns.
Since Russia is not a signatory of the ICSID Convention, an arbitral award issued by a reputable international arbitration court, such as the SCC or the ICC, would have to be recognised and enforced under the 1958 New York Convention. The involvement of the state courts in this procedure for the investors means that recovery in Russia might not be effective or possible. Instead, the arbitral awards would have to be recognised and enforced outside Russia in other countries where Russia has assets.
Conclusions and recommendations
Restrictions on foreign investments and capital flow in Russia are increasing rapidly. Investors from states that have concluded BITs with Russia or have investments still covered by the ECT appear to be better positioned to resolve disputes with Russia and protect their investments than investors from other states forced to rely on Russian national legislation. Investors are advised to monitor their investments closely and consider gathering relevant evidence of government restrictions on using, transferring or selling their assets or investments. Because of the variety of investment structures, the investor’s nationality might be subject to debate. Therefore, all investors are recommended to contact trusted legal advisors in order to reach an understanding of the applicable framework for protecting their investments in Russia.
Investors from countries that do not have a BIT or another investment protection regime with Russia should be mindful to notify Russia of the existence of a dispute and to accept the standing offer to arbitrate disputes found in the national legislation as early as possible.
To increase the likelihood of compliance with a favourable award, investors are advised to request arbitral tribunals and state courts, particularly in the European Union, to grant provisional measures, including security for costs. This would significantly increase the investor’s chances of successfully enforcing the arbitral award.
In anticipation of possible disputes and claims against Russia, investors must consider and thoroughly evaluate potential difficulties with recognition and enforcement of arbitral awards in Russia against Russian state-owned assets. We strongly recommend considering the possibilities to seek enforcement of the award against Russia in other countries, such as EU member states or the USA, where Russian assets are located.
 28 February 2022 Decree on the Application of Special Economic Measures in Connection with the Unfriendly Actions of the United States and Foreign States and International Organizations that Have Joined Them. Available: http://www.kremlin.ru/events/president/news/67881; 1 March 2022 Decree on Additional Temporary Economic Measures to Ensure the Financial Stability of Russia. Available: http://www.kremlin.ru/events/president/news/67886
 These unfriendly nations consist of Albania, Andorra, Australia, Great Britain, Anguilla, the British Virgin Islands, Gibraltar, the member states of the European Union, Iceland, Canada, Liechtenstein, Micronesia, Monaco, New Zealand, Norway, South Korea, San Marino, North Macedonia, Singapore, the United States, Taiwan, Ukraine, Montenegro, Switzerland and Japan. 5 March 2022, Russian Government order No. 430-r. Available: http://government.ru/news/44745/
 These restrictions concern converting funds into foreign currencies, transferring funds to foreign bank accounts and credit institutions, issuing loans in foreign currencies, and transporting cash in foreign currency outside of Russia, as well as the requirement of special approval from a government established committee for transactions with non-residents related to lending, securities and real estate.
 Mauro Orru. “Russian Commission Backs Nationalization of Exited Western Businesses”. The Wall Street Journal. Available: https://www.wsj.com/livecoverage/russia-ukraine-latest-news-2022-03-09/card/russian-commission-backs-nationalization-of-exited-western-businesses-YmEMuTCPezVe08xDRqAB
 Russian Federation Law on Foreign Investments. Available at: https://investmentpolicy.unctad.org/investment-laws/laws/87/russian-federation-foreign-investment-law.
 Border Timbers v. Zimbabwe (Award) (ICSID, 28 July 2015). paragraphs 607–608; von Pezold and others v. Zimbabwe (Award) (ICSID, 28 July 2015). paragraphs 608–609.
 Karkey Karadeniz v. Pakistan (Award) (ICSID, 22 August 2017). paragraphs 655–656.
 Generation Ukraine v. Ukraine (Award) (ICSID, 16 September 2003). paragraph 20.22.
 Santa Elena v. Costa Rica (Award) (ICSID, 17 February 2000). paragraphs 69–71.