International Arbitration under International Treaties: A Potential Remedy to Putin’s Threats of Expropriation

Russia recently announced its Economic Development Ministry has drafted legislation to prevent the exodus of international businesses from Russia by nationalizing them.¹ The Putin-backed proposed bill would allow the state-owned bank and export-guarantee agency to seize the property of foreign companies that have decided to leave Russia.² The United Russia party claimed this “is the first step toward the nationalization of foreign organizations leaving Russia.”³ The new companies’ shares would be offered for trading, the old companies would be liquidated, and if no one bought the new shares the company would be nationalized.⁴ According to media reports, prosecutors in Russia have contacted Western companies, warning that their assets may be at risk of government seizure if they choose to stop doing business in Russia.⁵

Any Russian expropriation or asset seizures may be a breach of Russia’s treaty obligations. If Russia chooses to take such action, investors in those expropriated or nationalized companies may be able to seek redress through bilateral (or multilateral) investment treaties Russia has with over 60 countries.⁶ These bilateral investment treaties (BITs) typically contain protectionist provisions for investors of the treaty-signing states against actions like expropriation. Therefore, Russia’s proclaimed expropriation of assets of a foreign investor from a country that has a BIT with Russia would open Russia to a lawsuit by that investor. In that instance, depending on the language of the particular treaty, investors may bring a demand for arbitration to the United Nations Commission on International Trade (UNCITRAL) or the World Bank Group’s International Centre for Settlement of Investment Disputes (ICSID), depending on the treaty.

Clients should review the structure of their investments in Russia to determine whether this legal remedy is a possibility for them if faced with expropriation. Because of the nuanced nature of international law and the varied language of the BITs themselves, it is important to assess this issue with counsel that has knowledge and expertise in this area of law. For example, international law typically defines the investor as the direct entity bringing the claim and not the ultimate owner of the investment. Still, some treaties alter this definition and attribute nationality of the investor to incorporation of control. By way of example, in some instances it is possible a U.S. entity that does not have a BIT with Russia could still bring a claim if their investment in Russia flows through an entity incorporated in a BIT state. However, if the BIT references control for purposes of defining an investor’s nationality, then the BIT itself may foreclose relief.

If you have any questions on the material discussed above or would like to conduct an analysis of your investment and discuss potential claims and protection of your investment, please contact the authors of this post.

As the Russia-Ukraine war continues, so too do new business and legal implications for companies around the world. For more information on how to mitigate risk and protect your business, contact a Foley lawyer today.