Arbitration: a lifesaver in a sea of actions taken by the Russian Federation

In the past few months, the Russian Federation has increasingly taken action against Western companies. These widely varying actions include seizures, restrictions on the transfer of funds or interests in a business, compulsory administration, supervision or replacement of management, (ordered) sale below value of interests in a company, etc.

However, companies are not without means of protecting themselves.

Breach of investment protection law

Often due to its position as the successor to the Soviet Union, the Russian Federation is a party to more than 60 bilateral investment protection treaties (BITs), including one with the Federal Republic of Germany. The BITs provide the abovementioned companies with legal protection. As is usually the case with BITs, the German-Soviet Investment Protection Agreement protects every kind of investment in every sector. Under the Energy Charter Treaty (ECT), energy-related investments made before 19 October 2009 also have the option of solving disputes via arbitration.

Many of the Russian actions probably constitute breaches of the protection provided by BITs or the ECT, such as the principle of free transfer of investments and investment agreements or the principle of fair and equitable treatment by the state. The latter also is likely to cover unjustified enrichment. In practical application, the rules on expropriation found in every BIT and in the ECT play a major role. Even merely temporary actions can be classified as expropriation.

According to Article 4 of the German-Soviet Investment Protection Agreement, investors’ assets can only be subject to expropriation or a comparable action in return for compensation. This compensation must correspond to the actual value of the asset on the date on which the company becomes aware of the actual or imminent expropriation. This is often not the case in the current actual practice of the Russian Federation.

Enforcing damages claims via arbitration

Claims for damages due to breaches of investment protection law can usually be enforced by means of arbitration. In the past, investors have used the option of arbitration against Russian state-owned companies and/or the Russian Federation itself; by far the majority of such cases were decided in favour of the investors. Even now, several arbitration proceedings against Russian state-owned companies and/or the Russian Federation are pending.

Such arbitration proceedings are still possible even if the Russian Federation has already brought an action before the Russian state courts, in circumvention of an arbitration clause.

Arbitral award enforceable for a long time

Any arbitral award granted against the Russian Federation is in principle binding and enforceable under the New York Convention on the recognition and enforcement of foreign arbitral awards, which is also applicable to the Russian Federation. Because the New York Convention enjoys broad acceptance among states, an arbitral award can be enforced practically everywhere in the world.

Depending on applicable national statutes of limitations, enforcement remains possible even many years after the arbitral award has been issued. How long the creditor of an arbitral award can ask for enforcement in a particular case before it becomes statute-barred varies widely from one jurisdiction to another. German law has a statute of limitations of 30 years.