Following Russia’s invasion of Ukraine on Feb. 24, businesses from around the world have suspended operations in Russia. In retaliation, the Kremlin has threatened to seize assets belonging to foreign investors in Russia. And while Russia may be able to quickly pass legislation that provides legal cover for such a move, international law will make any seizure, permanent or temporary, far more expensive and complicated than Putin and his advisers may imagine.
International law has protected foreign investors for decades, but with the advent of international investment treaties, beginning in the 1990s and continuing through the 21st century, the seizure of an investment made by a foreign investor can give rise to a claim for damages, often at amounts that reflect either the fair market value of the investment or compensation that equals full reparation for the breach of the treaty.
Claims increasingly have risen in amount, with Russia on the receiving end of the largest known claim, totaling some $50 billion in damages for the tax measures that led to the downfall of an oil company called Yukos.
Other awards include over $12 billion in one case against Venezuela over control of an oil and gas field and $4 billion in relation to the denial of the right to mine a copper and gold deposit in far-western Pakistan. All these awards are facing legal challenges, but their size shows that investment treaties can provide access to substantial claims.
Bilateral Investment Treaties
In the case of Russia, it has investment treaties with countries around the world, including the U.S., Canada, the U.K., Japan, and Switzerland, among others. These treaties give foreign investors access to international arbitration for a violation of the treaty, although the scope of Russia’s consent to arbitration may vary from treaty to treaty.
Normally, the foreign investor can be either an individual or a business. The only requirement is foreign nationality, which the company can establish independent of its owners.
Any arbitration award that comes from a nationalization process, either by the Russian Federation taking ownership of the asset or auctioning the asset off to Russian bidders, will be enforceable in almost every country in the world. For foreign investors, this provides access to a claim, even if the ultimate beneficial owner is not from a country with a bilateral investment treaty.
Bilateral investment treaties, known as BITs, are international agreements establishing the terms and conditions for private investment by nationals and companies of one state in another state. By one estimate, almost 9% of all foreign direct investment in Russia is from the U.S. The U.S. does not have a ratified BIT with Russia, but if that investment went through a British or Dutch entity, to name two countries among others, then there could be a claim.
This is especially important in cases where the Kremlin auctions off a company’s assets, as Putin has threatened. If the price is less than market value, then there could be claim for the difference.
Collecting on a Claim
If it prevails, any award holder will face the challenging prospect of collecting from Russia, who has proven relentless in protecting its assets. But there are success stories, such as Franz Sedelmayer, who was able to collect on an award in his favor after years of trying.
There is also the benefit of reducing the claim to a liquidated sum. Following the Iraqi invasion of Kuwait in 1990, the U.N. Security Council established a compensation commission, funded by proceeds of the sale of Iraqi oil. Over the course of 30 years, the commission paid over $52 billion to claimants.
There is no indication that the United Nations could achieve a similar result with Russia, but the notion of a compensation commission has a long history. As part of a resolution of the hostage crisis in 1979, Iran and the U.S. created a claims commission that allowed certain claims paid out of seized Iranian assets.
Should Russia ever seek to re-engage with Europe, the U.S., and other countries that have placed sanctions, there could be similar initiatives to help pay for the damage caused by Russia’s invasion. There is also the possibility of collection against companies owned or controlled by Russia.
While Russia may not be interested in paying now, if it continues to exert further control over foreign companies, perhaps transferring foreign assets at below-market prices to state-owned companies or government insiders, creditors may have success at piercing the corporate veil and collecting on these debts in the future.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Quinn Smith is co-founder and managing partner of GST LLP, an international dispute resolution firm with offices in Washington, D.C., Miami, and London. He has led teams representing global companies, governments, and private client parties in Latin America, Europe, Africa, Asia, and the Caribbean.