United States: Crisis In Crimea: Is Your Foreign Investment There Protected By A Treaty?

Following Crimea's disputed referendum to join the Russian Federation, held under Russian military occupation, and Russia's annexation of Crimea which has not been recognized by the vast majority of the international community, the burning question for many foreign investors in Crimea is, "how can we protect our investments there?"

While Russia's Federal Constitutional Law No. 6-FKZ dated March 21, 2014 on the admission of the Republic of Crimea into the Russian Federation provides that most existing permits and licenses, which were issued by the Ukrainian authorities, would be deemed effective for the term of their validity, there is no guarantee that such permits and licenses would not be cancelled by a new Russian or Crimean government. Under these circumstances, would Ukraine, Russia or the Crimean government be responsible to a foreign investor under international law for any adverse government action affecting the foreign investment? Unfortunately, there is no easy answer; the difficult political situation leads to some difficult legal realities, particularly under investment treaties. These questions are not apparently limited to Crimea as pro-Russian protesters seized the regional government building in the Ukrainian city of Donetsk and are reported to have declared independence from Ukraine as the "Donetsk Peoples' Republic," and then voted for a referendum to be held before May 11, 2014 on whether to join Russia. If the "dismemberment" of Ukraine continues, the question of how foreign investors can protect their interests there will continue to assume paramount importance.

Both Ukraine and Russia have concluded a web of bilateral investment treaties ("BITs") with other countries. The BITs may provide international law protections to investors which are incorporated in the respective foreign country party to these treaties and which have made a qualifying investment in Crimea. They permit foreign investors to hold a government responsible for any adverse action or inaction affecting the investment under international law such as, for example, uncompensated expropriation, failure to provide full protection and security (including the physical protection of the investment) and fair and equitable treatment, or discrimination. Examples of such actions, in addition to expropriation without compensation, may include: (i) failing to honor contractual and other undertakings made with respect to foreign investments, including licenses or permits; (ii) demanding payment or other obligations from investors while investors' operations are suspended due to the political situation on the ground; (iii) taking steps to protect domestic investments in Crimea, or investments of an investor of a third country in Crimea, but failing to provide similar treatment to other foreign investors; or (iv) failing to act in a manner that would protect foreign investors' investments when such an act was reasonably possible.

Assuming a foreign investor has made a qualifying investment in Crimea and either the Crimean government or the Russian government takes an adverse action against the foreign investment, the investor's recourse would most likely not be against Ukraine under Ukraine's BITs. The international community, including the United Nations, is likely to continue to see Crimea as part of Ukraine under international law, so that it could be argued that Ukraine remains responsible under its BITs for any acts taken on its sovereign territory which may amount to a breach of the international law obligation to provide foreign investments with "full protection and security." However, it would be difficult to attribute the actions of the Crimean government to Ukraine in view of the fact that Ukraine does not consider the Crimean government to be legal or legitimate and to the extent that the Crimean government and the territory of Crimea is effectively controlled by Russia. It would also be impossible to hold Ukraine responsible for the actions of the Russian government in Crimea. Ukraine also may attempt to rely on the international law defence of necessity under the circumstances. Ukraine, of course, may be held liable under its BITs for any actions or omissions by the Ukrainian or the then Crimean government at the time when Crimea was effectively controlled by Ukraine. By the same token, Ukraine also may be held liable for violation of any contractual obligations to the relevant investors in Crimea depending on the terms of the contract at issue.

Another option at the investor's disposal may be to seek damages from the Russian Federation in international arbitration proceedings under an applicable Russian BIT. BITs generally protect investments made in the "territory" of the Contracting States to the BIT. The claims would depend, inter alia, on whether Crimea is a part of the "territory" of the Russian Federation in order to found jurisdiction against the Russian Federation under Russia's BITs. A sample review of Russia's BITs, namely of the France-Russia, U.K.-Russia, Germany-Russia, and Netherlands-Russia BITs, confirms that the term "territory" is not defined in these treaties. The term "territory" is likely to be interpreted by reference to domestic law (Ukrainian and Russian law in this case) and international law and in the event of conflict international law is likely to prevail over domestic law. Although Russia's annexation of Crimea is not considered to be in accordance with international law and has not been recognized by any major country, this would be ordinarily a defense that Russia would have to raise in the arbitration proceeding. Given that both Russia and the Crimean government consider Crimea to be lawfully part of Russia, it is unlikely that Russia would raise the defense, at least not in a non-confidential public arbitral proceeding. In any event, to the extent Russia contends publicly that Crimea is lawfully a part of its territory, Russia may be precluded from raising the defense in the arbitral proceedings or in subsequent award enforcement proceedings.

On the other hand, the tribunal's jurisdiction under BITs is based on consent, and even if Russia consents that its territory includes Crimea, this may be insufficient because it would be important how the other Contracting State to the relevant BIT interprets the term "territory" of the Russian Federation in the BIT. For example, as France, the Netherlands, UK and Germany have not recognized Russia's annexation of Crimea as lawful under international law, there would appear to be no consent for the arbitration of disputes arising out of investments made in Crimea under Russia's BITs with these countries. More fundamentally, a tribunal may be reluctant to exercise jurisdiction over an investment made in an illegally annexed territory on the ground that it would violate the rule of law and hence international public policy. International tribunals have sometimes declined to exercise jurisdiction on public policy grounds over claims based on contracts or rights arising from illegal acts such as corruption, fraud, or misrepresentation. These cases, however, may be distinguishable because it is not the claimants that would have committed the illegal act but rather the respondent – Russia – and if the foreign investor is not granted recourse against Russia under the relevant BIT, it would be left with no protection at all.

Foreign investors also should be mindful of the definitions of investment in Russia's BITs. Although these definitions are relatively broad, the Netherlands-Russia BIT, for example, defines investment as, inter alia, "rights to conduct commercial activity, including rights to prospect, explore, extract and exploit natural resources, granted under contract or under the legislation of the Contracting Party in the territory of which such activity is undertaken." A similar definition is present in the Germany-Russia BIT. Assuming an investor's production sharing agreement is with the State of Ukraine and its rights to develop hydrocarbons arose in part under Ukraine's legislation, a question arises as to whether the investor's rights constitute an investment under Russia's BITs. The Russian Federal Constitutional Law No. 6-FKZ dated March 21, 2014 on the admission of Crimea into the Russian Federation preserves the validity of "ownership" rights, "rights to use", "benefits", and "permits", issued by the government and other official bodies of Ukraine and the Autonomous Republic of Crimea (as it was then a part of Ukraine). It may be contended that on the basis of this law, the Russian Federation has made a representation and an undertaking to foreign investors to continue to honor contract rights to develop hydrocarbons in Crimea granted by Ukraine and the then Ukrainian Crimean Government and that Russia's failure to abide by this undertaking can be actionable under an applicable Russian BIT. It is a more complicated question whether Russia has agreed to honor hydrocarbon rights arising from Ukrainian legislation and not specific contracts.

Even if the adverse action was taken by the Crimean government and not by the Russian government, the actions of the Crimean government are likely to be attributable to the Russian State. As Crimea has now been incorporated as a territorial unit of Russia (a matter governed by domestic law), the Crimean government may be considered an organ of the territorial unit of Crimea and its conduct is thus attributable to the Russian Federation for purposes of attribution of responsibility to Russia under international law. If the action was not taken by an organ of the Crimean Government such as, for example, one of the new Crimean ministries or government agencies but rather by a Crimean or a Russian state-owned entity, the actions of such a state-owned entity could be attributable to Russia if the entity was exercising elements of governmental authority or through a demonstration of a factual relationship between the entity in question and the Crimean government or the Russian government, i.e., demonstrating that the entity was acting on the instructions of, or under the direction or control of, the Crimean government or the Russian Federation in carrying out the allegedly unlawful acts in question (e.g., discrimination or uncompensated expropriation). The analysis would be more complicated if the state-owned entity is owned by the Ukrainian State.

Foreign investors also should be aware of the issue of jurisdiction ratione temporis over their claims against Russia. A review of the same Russia BITs noted above confirms that the timing of any claim made against Russia by foreign investors is important. For those of Russia's BITs, such as the U.K.-Russia BIT, that limit their applicability to disputes which arose after the BIT's entry into force, the date when, for example, Russia's BITs would enter into force for Crimea is significant and accordingly the dispute must arise after that date. A foreign investor may be able to argue that as soon as Crimea became de facto and de jure (at least domestically) a part of Russia's territory, as it has become by now, Russia's obligations under its BITs arose vis-ŕ-vis foreign investors in Crimea. For this reason, any disputes arising after this date should be within the scope of the BIT.

There is a further dimension to all of this. Both Russia and Ukraine are parties to the European Convention on Human Rights and, in particular, to Protocol No. I, article 1 of which protects the right of peaceful enjoyment of property. This would be breached by any unlawful taking of property of a natural or legal person falling with the jurisdiction of the system as per article 1 of the Convention itself. The concept of jurisdiction here includes territory falling within the overall effective control of another state party, so that in principle Russia could be liable for a breach of the Convention articles (including relevant Protocols) with regard to Crimea. While Ukraine has indeed commenced an inter-state action in Strasbourg against Russia, it is possible that a company falling within the jurisdiction of Russia could make an application to the European Court of Human Rights for a violation of the property rights enshrined in Protocol No. I. This is, in addition, quite apart from Russia's general liability under the international law rules of state responsibility for breaches of international law with regard to events in Crimea, including maltreatment of aliens. This could well raise the prospect of cases brought in foreign jurisdictions with regard to any property wrongly taken in Crimea and being sold or otherwise dealt with outside of Russia and Crimea.

Without a doubt, the situation is fluid, uncertain, and few of the foregoing analyses are tested in international bilateral investment treaty jurisprudence. In fact, if anything, they demonstrate situations in which bilateral investment treaties, for all their benefits for investors, may not be effective in protecting foreign investment. But, at least, investors may have colorable arguments, and are certainly not left without any potential remedy at all other than local courts. That said, in light of the fact that bilateral or multilateral investment treaties may not provide the most robust cover for foreign investors in these difficult situations, investors are advised to use several avenues of protection and redress now and in the future including political stratagem, diplomacy, commercial negotiations, potential insurance options, and the like.

Jones Day would like to thank Professor Malcolm Shaw QC of Essex Court Chambers for his assistance in the preparation of this client alert.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Sergei Volfson
James Egerton-Vernon
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions