Should we be preparing for a Russian-Belarusian investment arbitration offensive?
Putin threatens nationalisation, lawyers recommend investment arbitration lawsuits
After Russia threatened to expropriate foreign investors withdrawing from that country because of the war with Ukraine started by Russia and Belarus, we have seen an avalanche of commentaries encouraging wronged enterprises to prepare lawsuits against Russia in investment arbitration proceedings.
If Russia really wanted to nationalize assets belonging to foreign enterprises just because these had decided to cease conducting activity in that state after the invasion of Ukraine, this would of course be contrary to international law. It could constitute a basis for investors from those states with which Russia has binding bilateral investment treaties (so called “BITs”) to seek compensation from Russia in international arbitration.
The issue of wronged investors enforcing possible favourable awards would remain an open one, as in the present circumstances Russia would doubtless not honour these and they would not be subject to enforcement on Russian territory. Victorious investors could nonetheless seek to direct enforcement against assets belonging to the Russian state and located outside its borders, on condition that these would not be covered by the immunity accorded each state by international law, i.e. assets not being used to perform state functions, but for commercial purposes. Enforcement activities such as this, dispersed across the world, were conducted for years by foreign investors wronged by Russia, for instance in the notorious Yukos case, where the Russian Federation has not recognised the award issued by an investment tribunal (the legal fate of which is now still undecided).
Investment arbitration is a double-edged sword
It is nonetheless good to remember that obligations arising from international law on the protection of investments are bilateral in nature. Russian enterprises will be able to question the legality of western sanctions directed against them before the same international investment arbitration tribunals. The Russian Federation itself will also be able to lodge actions in their name. The same applies with Belarus and Belarusian investors.
The problem also applies to Poland, although in lesser degree. Our country is one of the few EU states which is not linked with Russia through a binding BIT. Like a few other European states, we signed a respective treaty but never ratified it. That is not the case with Belarus. In relations with that state and with Belarusian investors, we are bound by the Agreement between the Republic of Poland and the Republic of Belarus on the mutual promotion and protection of investments of 24 April 1992. On this basis, Belarusian investors whose investments in Poland have suffered because of actions undertaken by our state in reaction to the war in Ukraine, or the Belarusian state itself, may attempt to demand compensation from Poland before an international arbitral tribunal appointed on an ad hoc basis (i.e. not operating within any arbitral institution, but appointed as required to adjudicate a specific case). Moreover, despite the fact that Poland does not have a binding BIT with Russia, Russian investors may have invested in Poland through corporate structures in countries with which Poland does have such treaties, in which case they will be able to benefit from the relevant BIT and its arbitration provisions.
Poland, just like many other EU states, has not yet enacted any regulations of its own imposing economic sanctions on Russia and Belarus, and on Russian and Belarusian entrepreneurs. Within the European Union, these sorts of measures are being adopted above all at by the relevant European authorities, in the form of decisions by the Council of the European Union taken within the framework of the Common Foreign and Security Policy and the implementing European Regulations which directly apply in member states. This nonetheless does not waive the EU member states from liability for the consequences of these measures on the basis of agreements on the mutual protection of investments entered into with third-party states. That is because what is important in bilateral legal relations is solely how states-parties behave towards their investors. It is of no relevance whether these proceedings arise from some obligations undertaken by a given state towards another state or states, e.g. within the EU.
The difference between the sanctions being imposed by the EU and measures threatened by Putin
The key matter is however that European economic sanctions against Russia (so-called restrictive measures), in contrast to the retaliatory measures being threatened by President Putin, are not based on the expropriation of investors caught-out by these steps. Taking of property from the sanctioned entities is only possible, if it can be proven that the property constitutes fruits of crime under general provisions on civil forfeiture or similar doctrines. Whereas European economic sanctions essentially comprise a boycott of the entities subjected to them, as organised by the EU and its member states. In formal terms, they do not in fact impose obligations and burdens on sanctioned entities, but rather on all other entities subject to EU law. These are obligated not to perform any transactions or transactions of specified kinds with sanctioned entities, as identified in person, or for example on the basis of geographic origin, for instance from regions of Ukraine occupied by Russia (e.g. not providing them with loans, not selling or buying specified goods to or from them, or altogether not making available to them any funds or economic resources).
The use of these types of economic sanctions is supported by the fundamental principle of international law pursuant to which each state may freely decide on the states with which it and the entities subject to its jurisdiction will maintain economic relations, and with which they will not. This is also not contrary to the prohibition on expropriation of foreigners without compensation, because as explained above, it is not based on the assets of sanctioned entities being taken away and into ownership by the state imposing the sanctions.
However, the measures under discussion might in practice still prevent entities subject to sanctions from using their assets and thus lead to a de facto expropriation. These measures clearly also do not support the state applying the sanctions in determining its own economic order, but rather serve to put pressure on another state. That is why the legality of international economic sanctions seen in these terms often arouses doubts from the point of view of another fundamental principle of international law, namely non-interference in the internal affairs of another state. The so-called principle of reciprocity is nonetheless binding in international law. Pursuant to this principle, a breach of international obligations towards a given state might be justified as a retaliation, if it constitutes a proportional reaction to an earlier breach of the international legal order by that state.
In the case of the war in Ukraine, the sanctions against Russia imposed by the European Union fulfil the test of legality. Firstly, they are not so much intended to influence Russia’s internal affairs as constitute an attempt to force the Russian Federation to cease activities undertaken externally with respect to a sovereign neighbour (although it seems that this might take place through weakening the internal position of the present Russian government). Secondly, despite the unprecedented scale of sanctions, they still seem to be a proportional reaction to illegal actions by the Russian Federation in the international arena (or even according to many people, a reaction that is altogether too mild).
Will the dispute about legality of the war be conducted through investment arbitration?
Russian investors, especially those controlled by the state, might nonetheless wish to prove something else. They might attempt to bring lawsuits before investment tribunals and argue there in accordance with Russian propaganda that the sanctions aimed at them are illegal. This is on account of Russia’s actions against Ukraine being in accordance with international law, because they constituted a defence against allegedly imminent aggression or were a reaction to the breaching of the Russian nationals’ rights which was purportedly taking place in Ukraine. Or on account of the sanctions or the implementing acts of states being disproportionate. Bringing such claims might serve not only the Kremlin’s economic, but also political interests. Investment awards which would confirm Russian propaganda arguments about the reasons for war in Ukraine would be of some weight in terms of international law and could (with all due proportion) constitute a certain counterweight to the recent judgment by the International Court of Justice in The Hague, much publicised and shattering for Russia, recognising the recent Russian aggression against Ukraine to be illegal. And Russian and Belarusian entities would have much more sway on the composition and balance of power in investment arbitral tribunals.
These types of cases would be an enormous challenge to the investment arbitration system, which has been subject to criticism for many years now. This concentrates on the fact that within this system private persons adjudicate on matters of public importance in a procedure behind closed doors (the arbiters in investment arbitration cases are chosen in the same way as with commercial arbitration, and the procedure in both types of arbitration proceedings is all but identical). This arouses fears about the susceptibility of the system to abuse and about its legitimacy. It is difficult to find cases in which these problems would be starker than the possible future cases in which the issue of the legality of western sanctions against Russia, and thus indirectly the legality of the Russian aggression against Ukraine, would be adjudicated on the occasion of decisions about the protection of investments.
The need for a coordinated defence
Western states may wish to take actions to defend themselves against such a possible “legal offensive” and coordinate defensive actions as best as possible. This is because in formal terms, an award in a dispute between Belarus or a Belarusian investor and Poland will have the same weight as an award in a case where Russia or a Russian investor sues Germany or France. If these types of cases were to come about, the occasion would take discussions about the usefulness and legality of investment arbitration in today’s world to a completely new level. They would impart new significance to objections formulated by the European Court of Justice against the investment arbitration system in the much publicised Achmea case, pursuant to which this system threatens to erode the very foundations of European law.
It is worth noting in this context that apart from the possible cases in which investment arbitration would be instrumentally exploited by Belarusian or Russian entities for the political purposes described above, there will certainly be situations where the granting of effective legal protection to a Russian or Belarusian investor against the economic sanctions being directed against it or the particular state measures taken to implement them will be desirable. That is because contrary to the Roman maxim, in the contemporary world in times of war the law does not at all fall silent, and a state of war or threat of war is no cause for not looking carefully at what governments are doing and not preventing the injustices to which they might sometimes lead. At this particular moment in time, it is also necessary to cultivate the rule of law - if only because values such as democracy and the rule of law are a weapon for the western world in this continuing war, they are among what distinguishes us from autocrats trampling all over the international legal order and what might allow us to win against them. Not only in the international arena but in their own countries as well. An efficient, just and socially trusted system for the resolution of investment disputes called forth by economic sanctions might be an important contribution to this arsenal. The question is whether investment arbitration in its hitherto form is capable of fulfilling that function, or whether the war in Ukraine should be a catalyst for work that has been in progress for many years now on a new, better generation of the system for resolving investment disputes.
Stanisław Drozd, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners
