Protecting Against Russia’s Asset Seizures: Investment Treaties May Provide a Remedy for Foreign Investors

Protecting Against Russia’s Asset Seizures: Investment Treaties May Provide a Remedy for Foreign Investors

July 19, 2023, Covington Alert

On Sunday, July 16, Russian President Vladimir Putin signed a decree putting shares of Danone Russia JSC, owned by French yogurt maker Danone, and of Baltika Brewing Company, owned by Danish brewer Carlsberg A/S, under “temporary management.”

The Kremlin has since reportedly appointed Yakub Zakriev, deputy prime minister and agriculture minister of Chechnya, as head of the Danone business.[1] Mr. Zakriev has been described as a close ally of Ramzan Kadyrov, the notorious leader of the Chechen Republic, and himself a close ally of President Putin.[2] Meanwhile, Taimuraz Bolloev, a longtime friend of Putin, has been installed as director of Carlsberg’s Baltika business.[3]

These recent seizures follow a decree Putin signed in April, laying the groundwork to expropriate, damage, or otherwise impair the investments of companies from “unfriendly” countries—including the U.S., UK, Canada, all EU member states, Japan, Singapore, and South Korea.[4] This is the second time Russia has used the decree to seize assets. Previously, Russia took control of utilities owned by Finland’s Fortum Oyj and Germany’s Uniper SE.[5]

These Russian actions demonstrate the significant risks for foreign companies that continue to operate in Russia and signal further potential asset seizures, including the possible transfer of foreign assets to regime-friendly owners. Russia’s measures appear to constitute uncompensated expropriations, for which investors could seek redress under Russia’s network of bilateral investment treaties (BITs).[6]

In prior Covington alerts, we have discussed how foreign investors in Russia can protect their investments from Russian retaliatory measures by ensuring that they have access to international arbitration, including through BITs. We also have highlighted certain key protections available under BITs that may provide recourse to foreign investors affected by Russia’s recent measures. In this alert, we focus on those protections under Russian BITs of most direct relevance to foreign investors whose assets have been expropriated or that have had the management of that investment obstructed by Russia’s actions, present and future.

Key Protections in Russian BITs

Russia has BITs in force with over 60 countries, including many EU members (such as Austria, Belgium, Bulgaria, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Lithuania, Italy, Luxembourg, the Netherlands, Romania, Slovakia, Spain, and Sweden) and countries such as Canada, Japan, Korea, Switzerland, the UK, and Ukraine. There is no BIT between Russia and the United States, but U.S. companies may nonetheless benefit from BIT protection if they hold their investments in Russia through a third country that does have a Russian BIT.

In its BITs, Russia has committed to, among other things, treat investors from the relevant countries in a fair and equitable manner, not to discriminate against such investors on the basis of nationality, not to expropriate their investments except under certain conditions and upon payment of adequate compensation, and to guarantee their right to freely transfer payments related to their investments out of Russia. All of these protections are relevant in the present context.

Russia’s Retaliatory Measures in Breach of BIT Protections

Russian retaliatory measures may constitute breaches of core protections accorded to foreign investors under Russia’s BITs. For example:

• Russia’s seizure and/or transfer of the assets of foreign firms to regime-friendly owners may constitute an expropriation in breach of Russia’s treaty obligations.
• All of Russia’s retaliatory measures affecting companies or their investments in Russia based on their shareholders’ “unfriendly” nationality would appear to be in breach of Russia’s obligation of non-discrimination, as well as Russia’s obligation to refrain from arbitrary, unfair, and inequitable treatment.
• Russia’s measures may also violate the guarantee that protected foreign investors shall be able to remit the proceeds of their investment, including any proceeds resulting from a sale or liquidation.

Access to International Arbitration under Russia’s BITs

Russia’s BITs with many of the countries it considers “unfriendly” allow investors from such countries to pursue investment arbitration claims against the Russian government. As discussed in our prior alert, the scope of Russia’s consent to arbitration varies from treaty to treaty, with some treaties providing for access to international arbitration over a greater variety of disputes than others.

International arbitration under investment treaties may be the only effective remedy for many foreign investors with investments in Russia to recover the losses caused by Russia’s retaliatory measures. Arbitral awards may be enforced against certain types of Russian government assets overseas, and firms may also be able to work with their home governments to explore opportunities to enforce awards.

As Russia’s retaliatory measures continue to intensify, investors should actively analyze available protections and consider acting to preserve their rights under Russia’s BITs.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Arbitration practice.