The Russia-Ukraine war – international investment law as protection against asset losses in Russia?

Since the Russian invasion of Ukraine, numerous German and international companies have been withdrawn from or significantly reduced their activities in Russia. Those companies that have not taken an explicit decision to withdraw are faced with their subsidiaries' ailing operations. In response to all this, Russia has enacted and is threatening to enact several counter-measures that either target those companies specifically that are withdrawing or that provide for the takeover of struggling companies. For example, a draft law is currently under consideration in Russia which would provide for the establishment of external administration for and subsequent liquidation of subsidiaries of German and international parent companies that withdraw from Russia without them receiving any compensation.

So, what are the risks?

The risks to assets held by German and international companies in Russia are manifold. New laws and governmental decrees are passed on a weekly basis affecting every aspect of commercial enterprise – from corporate ownership to capital transfer to IP. For instance, Russian authorities are reportedly confiscating the property of local subsidiaries of multinationals. Often, companies are faced with only three alternatives: dispose of their assets in emergency sales, relinquish them or declare insolvency of their Russian subsidiaries. It is uncertain whether reliable legal recourse can be taken in Russia's national court system. Companies should therefore take the existing legal protections under international law into account when deciding on the future of their subsidiaries.

Bilateral investment treaties, or BITs, provide the legal basis on which international investors can derive direct legal protection against a foreign state's unlawful measures. There are currently 63 BITs in force between Russia and other nations, which include major industrial nations like Germany, France, the United Kingdom and the Netherlands. Russia – together with the European Union – is also a party to the Energy Charta Treaty ("ECT"), an international treaty dealing with the energy sector.

These BITs and the ECT provide investors from contracting party states substantive safeguards against measures taken by Russia that are detrimental to their assets. In particular, investors may seek prompt, adequate and effective compensation for any expropriation of their investments.

Investor claims may be brought before international arbitration tribunals. These tribunals are independent from national court systems and are at the heart of the international law regime of investor-state dispute settlement.

Russia is known to be reluctant to participate in international arbitral proceedings or to pay any amount ordered by an arbitration tribunal. Enforcing claims under an international investment treaty before an arbitral tribunal will therefore be a challenging task. However, these challenges should not automatically discourage investors from demanding the protections and safeguards afforded to their investments under international law. Even if an arbitral award may not currently be effectively enforced, it will be a bargaining chip when negotiating a potential return to the Russian market at some point in the future. In addition, enforcing investor rights is a means of holding Russia accountable for its unlawful invasion of Ukraine.

As the situation is evolving rapidly, our assessment of this issue might change. If you have any specific asset-related questions please reach out to one of our experts.