Investment Treaties May Provide a Remedy to Foreign Investors in Russia Facing Challenges to Repatriate Their Profits

Since the start of the full-scale invasion of Ukraine, many foreign companies have curtailed or divested their entire operations in Russia, while others have not been successful in exiting the Russian market due to various restrictions imposed by Russia.[1] As we flagged in a prior Covington alert, a few companies—France’s Danone, Denmark’s Carlsberg, Finland’s Fortum, and Germany’s Uniper—have been subjected to outright government seizures in retaliation for their attempts to divest local assets and leave the country.

For companies that continued doing business in Russia, repatriating their profits has become increasingly challenging. The Kremlin has adopted a number of retaliatory measures affecting investors from countries labeled by Russia as “unfriendly.” As a result, the affected companies have accumulated billions of dollars in profits that remain trapped in Russia along with their invested capital.[2]

Among other retaliatory measures, Russia blocked investors of “unfriendly” origin from accessing their local earnings by restricting dividend distributions in Russian companies, suspending transfers of funds outside of Russia, imposing a pre-authorization requirement on foreign currency transfers abroad, and restricting sales of the shares of Russian companies held by foreign investors. 

In August 2023, Russia ostensibly eased restrictions on dividend payments, allowing non-resident investors to repatriate profits not exceeding the amount of their investment in Russia. But a company seeking to benefit from the new rules must promise to commit capital to the Russian economy or must have otherwise invested in Russia after April 1, 2023.[3]

On September 4, 2023, a new Russian law came into effect allowing the exclusion, or removal, of foreign holding companies associated with “unfriendly” jurisdictions from the shareholding structure of “economically significant” Russian companies.[4] More specifically, if a foreign holding company owns more than 50 percent of voting rights in such a “significant” company and is deemed to undermine its operations (e.g., by suspending operations or complying with foreign sanctions), the new legislation allows Russian shareholders to gain control of such “significant” companies through the Russian courts and have the relevant foreign shareholdings suspended.[5]

These developments demonstrate the risks for foreign companies that continue to operate in Russia. Foreign investors from the relevant countries could seek redress by bringing investment claims under Russia’s network of bilateral investment treaties (“BITs”), most of which include a provision obligating Russia to allow foreign investors to repatriate their capital and profits freely. Russia’s restrictions on divestment and its refusal to allow foreign companies to repatriate their profits appear to constitute a breach of such free transfer provisions in Russia’s BITs.

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 measures. In this alert, we focus on those protections under Russian BITs of most relevance to foreign investors facing obstacles to repatriate their profits and invested capital.

Key Protections in Russian BITs

Russia has BITs in force with over 60 countries, including many EU members 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, to guarantee their right to freely transfer payments related to their investments out of Russia, and not to expropriate their investments except under certain conditions and upon payment of adequate compensation. All of these protections are relevant in the present context.

The guarantee of unimpeded transfer of payments abroad is a fundamental protection granted to foreign investors in all Russian BITs currently in force. Free transfer provisions typically contain a non-exhaustive list of payments covered and extend to all payments related to the investment, including dividends and proceeds resulting from a sale or liquidation of an investment:

• the amount of the initial investment and subsequent investments over time;
• income from the investment, including profits, dividends, and interest;
• funds required for loan repayments;
• royalties;
• proceeds of the partial or complete liquidation or sale of an investment;
• compensation for expropriation, nationalization, or equivalent measures; and
• wages or other remuneration of expatriate personnel.

Most Russian BITs also require that transfers be permitted in a convertible currency and at the exchange rate applicable on the date of the transfer.[6] Free transfer provisions in a number of BITs also require that transfers be made promptly or without delay, or within pre-set timeframes.[7]

Restrictions on Repatriation of Invested Capital and Profits in Breach of BIT Protections

Russia’s retaliatory measures affecting investors from “unfriendly” jurisdictions may constitute breaches of core protections accorded to foreign investors under Russia’s BITs. In particular:

• Measures restricting the ability to freely pay dividends to foreign shareholders or to transfer other funds outside of Russia in a timely manner may violate the guarantee that protected foreign investors shall be able to remit the funds associated with their investment, including any profits and proceeds from divesting assets.
• Requirements to make certain payments in Russian rubles at a below-market exchange rate and unreasonable delays in granting authorizations to conduct foreign currency transactions by Russian subsidiaries of foreign companies, may also constitute a breach of Russia’s free transfer obligations.
• Measures affecting companies in Russia based on their shareholders’ “unfriendly” nationality appear to be at odds with Russia’s obligation of non-discrimination, as well as the obligation to refrain from arbitrary, unfair, and inequitable treatment.
• Asset seizures and/or forced transfers of foreign shareholdings in Russian companies to Russian entities may constitute an unlawful expropriation in breach of Russia’s treaty obligations.

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 Russia. 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.