Allen & Overy | 21 March 2022
International Law considerations for foreign investors with business interests in Russia
As a result of international sanctions and reputational concerns, many foreign investors with interests in Russia have already exited the country or are contemplating doing so. Whether an investor decides to exit or stay, the decision carries significant risks. This note focuses on the relevant international law considerations. Section 1 summarises recently-announced measures by Russia targeting foreign investors. Section 2 then considers the possible remedies that investors may seek in respect of these measures under international investment law. Section 3 addresses potential international human rights and criminal law risks for companies that continue to operate in Russia. Section 4 concludes with practical advice for those grappling with this situation.
1. Russia’s measures against foreign investors
To date, Russia has proposed or already imposed the following measures affecting foreign investors:
2. Investment treaty protections
To the extent these measures cause foreign investors to suffer losses, remedies may be available through investor-State dispute resolution (ISDS) under Russia’s international investment agreements (IIAs) (which include Russia’s 60+ bilateral investment treaties (BITs) with other countries). The existence and scope of protected rights varies between treaties. However, example claims may include the following:
Additionally, we note that Russia may default on its international bonds if no payment is made after the expiry of the applicable grace period. If it has to restructure its debts as a result, that may give rise to investment treaty claims. Argentina is a cautionary example, where its attempts to restructure its debts following its default of sovereign debt in 2001 exposed it to international investment treaty claims for expropriation and violation of FET.
Russia is likely to defend any claims against it vigorously. In doing so, it may seek to rely on the customary international law defences of necessity, self-defence and countermeasures. Of these principles, the most relevant is necessity, but this requires showing that the action taken is the only available course of action to safeguard an essential interest against a grave and imminent peril, and that it does not seriously impair any other essential interest. The defence is rarely upheld, and is especially unlikely to be successful where Russia has contributed to the situation of necessity by invading Ukraine.
Investors who prevail in investment treaty arbitration claims against Russia will likely need to enforce their awards through national courts in jurisdictions outside of Russia where the State has assets (since Russia is unlikely to pay an award voluntarily and enforcement through Russian courts is unlikely to be successful). In principle, such jurisdictions could be any of the over 160 signatory States to Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), to which Russia is also a party. Under the New York Convention, enforcing courts are generally not permitted to reconsider the merits of the case, and the grounds for refusing to enforce are narrow. While this is unlikely to put Russia off from seeking to resist enforcement, most such attempts are likely to fail.
Key to successful enforcement is identifying assets which belong to Russia and which are not protected by sovereign immunity. While substantial assets have been frozen following Russia’s invasion of Ukraine, many belong to State-owned entities rather than Russia itself or are likely to be covered by sovereign immunity (e.g. Central Bank assets). However, given the severity of crimes committed by Russia, enforcing courts in at least some countries may be more willing to pierce the corporate veil of State-owned entities. Those not willing to engage in enforcement proceedings may consider exploring a sale of the award (at a discount) to a third party.
Beyond the investment treaty context, the recent decision by the Committee of Ministers to exclude Russia from the Council of Europe means that remedies against Russia under the European Convention of Human Rights are no longer available.
3. Other international law implications of continuing to conduct business in Russia
Even companies that decide to keep their operations in the Russian market face a completely different economic reality in light of restricted funds transfers and divestment opportunities, among other restrictions. Investors should also be aware of the potential implications under international human rights and criminal law for continuing to do business in the country (at the very least, from a reputational perspective).
Corporations have a responsibility under the United Nations Guiding Principles on Business and Human Rights 2011 (UNGP) to respect human rights. The UNGP requires corporations to respect human rights by: (i) avoiding causing or contributing to adverse human rights impacts through their own activities, and addressing impacts when they occur; and (ii) seeking to prevent or mitigate adverse human rights impacts that are directly linked to their operations or even their business relationships. Moreover, the UNGP suggests that in instances where corporations do not have leverage to prevent or mitigate adverse impacts, they should consider ending the commercial relationship. The UNGP is technically non-binding, but a breach of its principles entails a significant reputational risk. Corporations dealing in Russia or with any Russian State-owned entities should therefore conduct due diligence of their operations and assess any actual and potential risks of contributing to human rights violations occurring in Ukraine.
Companies should also be aware of potential criminal liability for being complicit in international criminal acts, which domestic courts outside Russia may prosecute under the doctrine of “universal jurisdiction” (if permitted by national legislation). There is precedent where corporate representatives have been prosecuted for the supply of dual-use substances to an aggressor State, with the knowledge of its intended illegal use, as well as knowingly contributing (for instance, by way of financial support) to war crimes. There is also an important, albeit remote, possibility of the prosecution of individuals acting on behalf of a corporation complicit in international crimes at the International Criminal Court (ICC).
4. Practical advice for foreign companies
Considering the above, investors who are concerned about protecting their assets in Russia should:
If any of these international law issues affect your investments in Russia, our market-leading international law team can advise and assist you.