Russia has participated in several major investment arbitration cases, including the largest arbitration award ever, the so-called Yukos arbitration. However, when it realized that bilateral investment treaties (BIT’s) may have serious ramifications, most traditional investment treaty work was suspended. The newest Russian BIT, signed with Palestine, dates back to 2016. Most existing Russian BITs date from the 1990’s and early 2000’s.
Despite the suspension of new BIT activity, recent Federal Law No. 69-FZ on the Protection and Promotion of Capital Investments in the Russian Federation (the “Law”) of 1 April 2020, may provide foreign investors with an additional layer of protection. The Law is applicable to investments made on the basis of agreements on protection and promotion of the investments executed between private entities and the State.
Before considering the features of the Law, it should be noted that investment arbitration in Russia under the Law will be different from traditional investment arbitration.
Protection Under the New Russian Investment Law
Investor and Investment
Protection under the Law is granted to investors. Article 2.1.4 of the Law defines an investor as a Russian individual(s) or legal entity(ies), making investments or conducting economic activities, or a foreign investor. The notion of a foreign investor is defined in accordance with Federal Law No. 160-FZ “On foreign investments in the Russian Federation”. Only investors may submit a claim against Russia to arbitration.
The Law protects investment projects and investments made in the project. An “investment project” under the law is a complex of measures limited in time and resources aimed at creation (construction) and further exploitation of immovable or movable property, or intellectual property, for the purpose of gaining profit or obtaining other benefits, such as protecting the environment.
Among protected investment projects are only those, the budget for which was established after 7 May 2018. Under Article 6, the Law does not protect investments in the following spheres:
- Tobacco, alcohol, and liquid fuel production (except for liquid fuels derived from coal);
- Oil and gas extraction (except for liquefied natural gas);
- Trade (both wholesale and retail, securities for financing the investment project may be protected);
- Financial services controlled by the Central Bank of Russia; and the
- Construction of shopping centers and residential buildings.
An investment project will be protected by the Law only if the investor has entered into an “Agreement on protection and encouraging investment” with the Russian Federation, a subject of the Federation or a municipality. Thus, a claim under the Law may be submitted only with regard to an agreed investment project.
Protections Afforded to Investments
The Law provides for several protection mechanisms, which include a stabilization clause, governmental support and an obligation not to devalue the investment. All these mechanisms may be subject to arbitration between an investor and the State.
The stabilization clause is aimed to protect the investor from adverse legislation arising after the investment was made. It preserves the same legal regime throughout a period of time. Protection by the stabilization clause in the Law varies depending on the region, where the investments are made, the sector of the economy in which the investment was made and the amount invested. The stabilization clause also protects from changes to the taxation regime for the period of the agreement.
For instance, under Article 9, the term of application of the stabilization clause cannot exceed 6 years for investment projects with a value of less than 5 billion rubles and 20 years for investment projects with a value of over 10 billion rubles.
An investor may, of course, come across a difficulty with observance of the stabilization clause on behalf of Russia, which could lead to investment arbitration. Such claims occur frequently in traditional investment arbitration.
Governmental support mainly concerns reimbursement of expenses spent on the infrastructure of the project. The State reimburses up to 50% for infrastructure used only for the purpose of the project and up to 100% for infrastructure which may be used for other purposes. A potential dispute over the obligation to compensate expenses and the amount of compensation may arise with regard to this provision.
The obligation not to devalue the investment means that the State will not promote two competing projects, each of which may diminish the return of the investment, for example, there will be no competing toll roads or airports at the same location. If a State promotes another competing project, this may crystallize in a claim by the investor.
Investment Arbitration in Russia under the New Investment Law
Under Article 13, the State and an investor may include an arbitration clause in the investment agreement between them. Arbitration is not an exclusive mechanism of dispute resolution under the Law, however, and the parties are obliged to execute an optional arbitration clause, allowing the claimant to choose between Russian State courts and arbitration.
Under Article 13, the arbitration clause may only refer the parties to arbitration with its seat in Russia, thereby ensuring the potential intervention of Russian courts, for instance with respect to the annulment of an arbitration award:
6. The arbitration agreement is concluded in the form of an arbitration clause in the investment protection and promotion agreement.
7. The place of arbitration shall be the Russian Federation.
Arbitration must be carried out in accordance with the rules of the Permanent Arbitral Institution, including a foreign arbitral institution authorized to perform functions permanently acting arbitral institution, in accordance with the Federal Law of December 29, 2015 No. 3 82-FZ “On Arbitration (Arbitration proceedings) in the Russian Federation ”.
Arbitration can thus only be administered by a so-called Permanent Arbitration Institution (an institution which has received special accreditation from the Russian Ministry of Justice). Arbitration should be conducted in accordance with the rules of such Permanent Arbitration Institution. That means that no ad hoc investment arbitration is possible in Russia under the new Law.
As of today, parties may opt for one of four arbitration centers, two of which are truly international in nature (the HKIAC and the VIAC):
- International Commercial Arbitration Court of the Russian Chamber of Commerce and Industry (ICAC);
- Hong-Kong International Arbitration Centre (HKIAC);
- Vienna International Arbitration Centre (VIAC); and
- Russian Arbitration Centre (RAC).
The dispute resolution section of the Law is reminiscent of BIT’s. It has a cooling-off (negotiations) period of three months with an obligation to amicably attempt to resolve the dispute. First, the claimant has to submit a notice of dispute to the respondent, which triggers the cooling-off period. The Law provides for a detailed notice of dispute, including the submission of relevant facts and legal positions that a party deems necessary, together with the evidence and proposals on settlement.
If the parties do not settle the dispute within the cooling-off period, it will then be resolved either by arbitration or by court litigation.
While the new investment Law may provide some protection for foreign investors, and should help Russia to avoid similar Yukos-style claims in the future (which would presumably be annulled by Russian courts), it remains to be seen whether it will actually encourage additional foreign investment in Russia.