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-à-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.