Protecting the Assets of Foreign Investors in Russia: International and Domestic Remedies | Allen & Overy LLP


Russia’s invasion of Ukraine, in flagrant violation of Article 2 of the United Nations Charter, is above all a humanitarian disaster.

It has caused – and will continue to cause – untold pain and unnecessary suffering. On a lesser note, the Russian invasion has already had an impact on foreign investors, and it looks set to continue. For example, the Central Bank of Russia would limit the ability of businesses and individuals to transfer funds outside of Russia. Russia is also reportedly considering nationalizing the businesses of foreign investors, who are suspending operations or seeking to exit the Russian market. Asset protection may be available to foreign investors through the investor-state arbitration system and domestic remedies.

Protection of Assets in Investor-State Arbitration

The investor-State arbitration system can contribute to:

  • protect foreign investors from losses; Where
  • recover the losses suffered,

following the Russian invasion, subsequent sanctions and Russia’s reaction to these measures.

The investor-state arbitration system provides protections and remedy under public international law to investors (individuals or entities) of one state who make investments in another state. The framework of the system is made up of state-to-state treaties (international investment agreements or “IIAs”) which grant foreign investors (i) a series of legal protections (independent of any contractual protection), and (ii) access to arbitration to settle disputes relating to the violation of these protections by the State in which the foreign investor made his investment. The resulting arbitral award, called an “award”, is binding and enforceable in many countries under various other treaties, the most notable of which is the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. and the New York Convention, the latter applying to Russia.

IIAs to which Russia is a party generally offer a number of protections to eligible foreign investors. In particular, they:

  • demand that Russia ensure that foreign investors can freely transfer their funds. Limiting the ability of foreign companies and individuals to transfer funds outside of Russia could therefore constitute a violation of Russia’s free transfer obligation.
  • generally require Russia to accord to foreign investors treatment no less favorable than the treatment it accords to its own nationals or to nationals of other states. Some of the retaliatory measures imposed by Russia to counter sanctions are specific to foreign investors from sanctioning countries. To the extent that there is a difference in treatment based on the state of incorporation or the nationality of a foreign investor, Russia could violate relevant obligations under its IIAs.
  • protect against illegal expropriation. Broadly, an expropriation occurs when a state implements measures that directly or indirectly result in the substantial deprivation of a foreign investor’s enjoyment of its investment. The Russian invasion of Ukraine is a sui generis event as far as investor-state arbitration is concerned. Russia invaded Ukraine illegally and knowing full well that many states would impose crippling sanctions as a result. It is possible that, in this context, the Russian invasion of Ukraine is itself the relevant measure of expropriation. Alternatively, if Russia adopts more traditional expropriation measures, as recent media reports suggest, it could also breach its obligation not to illegally expropriate investments from foreign investors.
  • often include a clause that protects foreign investors against losses incurred during war, civil unrest, states of emergency or other exceptional circumstances. Sometimes these clauses do not provide for an affirmative right to compensation. Instead, they simply require Russia to compensate a foreign investor for relevant losses in the same way it compensates domestic investors or investors from another state. Some IIAs may, however, provide for an affirmative right to compensation. If a foreign investor is protected by an IIA that contains such a clause, Russia could fail in its obligation to provide adequate compensation for losses resulting from the crippling of the Russian economy by foreign sanctions.
  • -sometimes require Russia to treat foreign investors and their investments fairly and equitably. This obligation protects foreign investors against arbitrary, discriminatory, obscure and unreasonable measures and against denials of justice by the judiciary or other organs of the State. Due to the breadth of the fair and equitable treatment obligation, many actions that would violate other obligations may also be considered unjust and inequitable. The fair and equitable treatment obligation also encompasses actions that fall outside the scope of other IIA obligations.

Russia has IIAs in force with various states. Where an investor’s home state does not have an IIA in force with Russia, the investor may still be protected if a subsidiary is incorporated in a state that is party to a Russian IIA. So, although there is no US-Russia IIA, if a US investor has, for example, Italian or Dutch intermediary companies, they may be able to rely on their nationality to claim protection and sue in investor-state arbitration.

Investors concerned about protecting their assets in Russia should (i) verify their corporate structure and the availability of IIA protection, (ii) carefully document their internal decisions (including as to possible exit), (iii) keep mind that any documents produced now (including local business assessments) may be subject to disclosure in any arbitration proceedings, and (iv) retain contemporaneous written records of all discussions with the Russian government or Russian state entities, and ensure that relevant records are available outside of Russia.

Depending on the scope of the dispute settlement provision of the relevant Russian IIA, foreign investors may be able to bring arbitral claims against Russia for breach of any or all of the above obligations. Under the New York Convention, the resulting award can be enforced in the domestic courts of more than 160 other countries. It is always difficult to locate assets that are not protected from execution by sovereign immunity and are owned by the state in question, rather than its wholly owned companies. At the same time, the current sanctions regime means that significant state-owned assets have been frozen around the world, and some jurisdictions may be willing to pierce the corporate veil when it comes to wholly owned entities. owned by the state.

Protection of Assets in Internal Remedies

Foreign investors whose home state does not have an IIA in force with Russia, and whose business structure does not allow them to rely on other IIAs with Russia, may have access to internal remedies. As mentioned, the United States does not have an IIA in force with Russia. In the event of expropriation or other action by Russia, one possible remedy for US investors would be to file an expropriation claim either in a US court or ultimately in a broader settlement, with a claims program administered by the Foreign Claims Settlement Commission (“FCSC”). The FCSC provides a forum for US persons (including US corporations) to resolve claims against foreign governments, once it is authorized to adjudicate categories of claims against a particular state.

The most likely assignments of power will be (i) Congressional legislation that authorizes the FCSC to adjudicate classes of claims against Russia, and (ii) a referral by the Secretary of State to the FCSC of classes of claims against Russia. If the FCSC were allowed to adjudicate claims against Russia, US nationals could have standing to file claims. The Treasury Department provides funds to claimants who receive favorable compensation from the FCSC. Funds for the payment of claims may come from claims settlement agreements between the United States and the affected state (in this case, Russia). Often, foreign countries execute such agreements as part of a broader normalization of relations. Alternatively, payments may be funded by congressional appropriations or the liquidation of foreign assets held in the United States.

In deciding claims submitted to it, the FCSC generally applies the principles of international law, justice and fairness. As such, the FCSC may require the submission of similar relevant facts and laws to an investor-state arbitration tribunal.

In determining the value of a claim under international law, the FCSC assigns the fair market value of the property at the time of expropriation by the relevant foreign government, except that the value of the claim shall not reflect any decrease in value attributable to acts or threats of acts committed by the foreign government with respect to the property prior to the expropriation. Fair market value is determined by the method most appropriate to the asset taken and fair to the plaintiff, including: (i) the market value of the outstanding equity securities, (ii) the replacement value, (iii) the value utility (which includes consideration of a company’s profitability) and (iv) book value.

Investors from other countries should consider whether their home state has similar foreign debt settlement mechanisms.


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