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What does the Russian invasion of Ukraine mean for foreign investors?

Posted on 17 March 2022

The brutal Russian invasion of Ukraine engages international law in many different respects. Rightly, the world's focus is on areas such as war crimes, genocide and the crime of aggression.

However, the Russian government's actions may also entail the destruction, or expropriation, of private investments made by foreign investors in Russia and Ukraine. Companies with operations or assets in Russia or Ukraine may be facing the loss of their entire investment. The question for those companies is, can anything be done about it?

International law also has a role to play here, potentially providing investors with avenues for legal redress. For obvious reasons, the current position is very fluid and the ability of foreign investors to make claims will depend on the course that future events take. In light of this uncertainty, in this note, we highlight certain issues that may become significant problems for foreign investors and what investors can do to protect themselves.  

The threats against foreign investments

Over the last month or so, the Russian government has taken, or threatened to take, a number of steps to impair or even wipe out – directly or indirectly – foreign investments in Russia. For example:

  • Expropriation of foreign assets. Last week, Russia outlined proposals to nationalise the assets of any international company that has responded to the war in Ukraine by ceasing, or even just temporarily suspending, operations in Russia. Further, in early February 2022, draft legislation was proposed enabling the government to nationalise companies owned by foreign parent companies from "unfriendly" countries.
  • Difficulties in dealing with or transferring assets, funds and payments:
    • Transfers of funds outside Russia by entities or individuals in jurisdictions that have imposed sanctions on Russia are suspended;
    • Russian residents must now exchange at least 80% of foreign currency received pursuant to foreign trade operations from any non-resident since the start of the year into rubles with the Russian Central Bank, including Russian subsidiaries of foreign companies;
    • Russian nationals, and the State, may pay foreign creditors from "unfriendly" countries in rubles at an exchange rate set by the Central Bank and the funds deposited to a special account; and
    • Transfers of shares in Russian companies by foreign owners have been restricted by the Central Bank, and Russian companies are prevented from paying dividends.
  • Loss of IP rights. A new government decree permits Russian nationals to use foreign patents without consent and without payment to the patent-holder if the patent-holder is from an "unfriendly" country.

In relation to Ukrainian investments, it is too early to tell what may happen. If the war results in the Russian occupation of Ukraine, we can assume the Russian government will take similar actions to those it took in Crimea following the 2014 invasion and expropriate any valuable assets, as well as extending the application of any of the above restrictions (or future restrictions in the same vein) to foreign assets in Ukraine.

The protection of international arbitration

The Russian courts cannot currently be relied upon to uphold the rights of foreign parties. In a decision of 3 March 2022, in a claim between a UK company and a Russian national in a trademark dispute over the Peppa Pig character, the Arbitration Court of the Kirov Region dismissed the UK company's claim on the sole basis that the UK government and other western countries had imposed sanctions on Russia.1

However, Russia has signed a network of over 60 international law treaties that remain in force and which provide specific protections for foreign investments in Russia. If a company is an investor from a country that has signed one of these treaties, it may be able to bring a claim directly against the Russian state. Crucially, such a claim would be made in a neutral arbitration forum, not in the Russian courts. 

The precise protections afforded by the treaties, and the ability to start arbitration, depend on which particular treaty applies to the investment – there are differences among the various instruments. However, if Russia continues on its current path, then it is likely that in many cases a foreign investor may be protected by one of these treaties.

For investments in Ukrainian territory, the position will, as noted above, depend on the course the war takes. For example, in the event of a Russian occupation of Ukraine it may be possible to extend the application of Russia's investment treaties to cover Ukrainian territory, an approach that has already been the subject of cases relating to Ukrainian investments in Crimea.

Careful review and advice is needed early on to establish: (i) what can be done to avoid losses to foreign investments; (ii) whether investments have the benefit of treaty protection; and (iii) how to best protect your position going forward.

If you have any questions or queries on protecting foreign investments, in Russia, Ukraine, or anywhere else, please contact Alexander Slade.

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