President Putin Signs Decree Further Threatening Foreign-Owned Property in Russia: Investment Treaties May Provide a Remedy for Foreign Investors

On May 23, 2024, Russian President Vladimir Putin signed a decree allowing Russia to seize the assets of U.S. companies and nationals as compensation for Russian assets confiscated in application of U.S. sanctions.[1]

The new decree permits the Russian Federation or the Russian Central Bank to apply to Russia’s courts in order to determine if Russian assets have been subjected to “unjustified deprivation” by the United States.[2] The courts then can award compensation in the form of U.S. assets or property held in Russia. Such assets are to be identified from a list that will be created by Russia’s Governmental Commission for the Control of Foreign Investments.[3] The decree is broad in that it allows Russia’s courts to order the seizure of assets held both by U.S. entities and by any foreign person or company associated with or controlled by U.S. entities.[4]

The new decree, which still must be implemented via legislation to be adopted by the Russian government, appears to be a response to U.S. and EU measures that threaten to transfer previously frozen Russian assets, and profits derived from certain of those assets, to Ukraine.[5]

President Putin’s decree demonstrates the significant risks for foreign companies that continue to operate or hold property in Russia, including the possible transfer of their property to regime-friendly owners. Russia’s measures may constitute uncompensated expropriations, for which investors could seek redress under Russia’s network of bilateral investment treaties (BITs).[6]

In a prior Covington alert, we discussed Russia’s use of an earlier decree to seize investments of companies from "unfriendly countries" in Russia. We have also 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, and have highlighted certain key protections available under BITs that may provide recourse to foreign investors affected by other Russian measures.

In this alert, we focus on those protections under Russian BITs of most direct relevance to foreign investors whose assets may be at risk as a result of President Putin’s decree.

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 as threatened in President Putin’s decree 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 only on their connection to the U.S. 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.