15/03/2022

Finnish Companies Looking to Exit Russia – What Role Can Investment Treaties Play?

On 24 February 2022, the whole world was shocked by Russia’s invasion of Ukraine. The military actions taken by Russia have been strongly condemned by Western nations who, as a countermeasure to Russia’s military assault, have imposed heavy sanctions on Russia targeting both the Russian economy and powerful Russian individuals. As part of this movement, several foreign companies have announced their decision to exit Russia in the past few days. Russia has responded to this exodus of Western businesses by threatening to impose counter sanctions of their own and even indicated that they might start nationalising the operations of foreign companies looking to leave the country.

In practice, this would mean that foreign businesses that Russia deems to have shut down for ‘purely political reasons’ would be nationalised. According to the Russian government, the rationale for these actions is to prevent bankruptcies and retain jobs. In its current form, the nationalisation proposal would allow the Russian government to impose an external management on, e.g. factories and shops that are left behind by fleeing companies in which a share of at least 25% is owned by ‘unfriendly nations’. This stage of ‘external management’ would last for three months, after which the government would put such businesses up for auction. For foreign companies, the catch is that the nationalisation process can be cancelled if they resume their activities in Russia within five days from the court order imposing the external management or sell their share in a way that preserves the business activity and jobs.

The law on the nationalisation of foreign companies has not entered into force yet but is set out to do so with a retroactive effect as of 24 February 2022 if passed by the Russian parliament.  

In these changed circumstances, it is paramount for foreign companies with investments in Russia to continuously take stock of the situation and evaluate the available remedies against Russia trying to interfere with their investments. One form of legal protection may stem from investment treaties. These investment treaties, whether bi- or multilateral, can be an important means in combating the potential adverse actions of the Russian government as they offer protection for foreign investors against violations of states.

This blog post gives its readers an overview of the key features of the investment treaty between Finland and Russia and the Energy Charter Treaty.

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Protection for Investments Under the FIN-RUS BIT

Finland and Russia entered into an investment treaty on 8 February 1989 (the ‘FIN-RUS BIT’). The purpose of the FIN-RUS BIT is to promote and protect foreign investments between Finland and Russia. Even though the provisions of the FIN-RUS BIT are not completely aligned with the standard formulations adopted in modern-day investment treaties, it does contain provisions offering safety measures to Finnish investors against actions that might violate their rights.

To this end, Article 3.1 of the FIN-RUS BIT imposes an obligation for Russia to treat the investments of Finnish investors in a fair and equitable manner. In international law, this is referred to as the fair and equitable treatment (FET) standard. The FET standard offers broad protection to Finnish investors as it may be invoked in a variety of situations, e.g. when a host state has treated an investor in a discriminatory or arbitrary manner or when the due process rights of an investor have been violated. There is also extensive case law on breaches of the FET standard that have led to an obligation for the violating host state to pay compensation for damages or losses incurred by the investor.  

Article 3.2 of the FIN-RUS BIT, in turn, sets out that neither Finland nor Russia may subject investments under the FIN-RUS BIT to treatment that is less favourable than the one applied to investments made by investors from third countries. This requirement is known as the most-favoured-nation principle in international law, and it prohibits host states from discriminating investors from one state against investors from third countries. Anyone looking to invoke the most-favoured-nation principle should first examine how broad protection Russia offers to third state investors under the investment treaties it has concluded with other states.

The FIN-RUS BIT also offers protection against Russia’s potential endeavours to nationalise investments made by Finnish investors. Article 4.2 of the FIN-RUS BIT prohibits the parties from adopting compulsory measures of nationalisation, requisition or other measures to expropriate investments, except where such measures are taken in the public interest. Even if expropriation, such as nationalisation, is considered to be required by the public interest, the investor is entitled to compensation for the interference in its investment. The starting point for determining the amount of such compensation is that it should amount to the real value of the investment.

Finally, the FIN-RUS BIT contains a ‘full protection’ clause as Article 4.1 obligates Russia to refrain from actions that might harm Finnish investors. The said article also offers protection to Finnish investors against actions by private parties.

Protection for Investments Under the ECT

The Energy Charter Treaty (the ‘ECT’) governs investments in the field of energy. Russia signed the ECT when it entered into force in 1991 and chose to apply the ECT provisionally, but never ratified it. Finland, in turn, is a contracting party to the ECT.

In practice, Russia’s decision to apply the ECT provisionally has meant that they are bound by the provisions of the ECT only to such extent that the application thereof is not inconsistent with its national legislation.

In August 2009, Russia declared that it would withdraw from the ECT as of 18 October 2009. As a result, Russia’s obligation to provisionally apply the ECT came to an end. However, despite its decision not to ratify the ECT, investments made in Russia prior to 18 October 2009 will continue to be governed by certain parts of the ECT, namely Part III setting forth the investment protection obligations and Part V setting forth the dispute resolution mechanism, until 19 October 2029, provided that the application thereof does not contradict Russia’s constitution, laws or regulations. Consequently, any claims of alleged infringement of the investment protection obligations arising out of the ECT shall be settled in accordance with the dispute resolution mechanism included in the ECT if they concern investments that were made during the period of provisional application.

Similarly to the FIN-RUS BIT, the ECT provides that the contracting parties must treat investors according to the FET standard and offers protection for foreign investors against nationalisation, expropriation, or other equivalent measures in respect of their investments.      

Arbitration as a Mechanism for Resolving Disputes

Claims arising out of or in connection with either the FIN-RUS BIT or the ECT may be settled by arbitration. To this end, Finnish investors whose rights under the above treaties have been violated may initiate arbitral proceedings against the Russian Federation. Through arbitral proceedings, an investor may be awarded compensation for any losses it may have incurred as a result of the violating actions of a host state.

Arbitral awards rendered under the arbitration clauses of either the FIN-RUS BIT or the ECT are enforceable under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the ‘New York Convention’), to which both Finland and Russia are contracting parties. The provisions of the New York Convention enable investors to seek enforcement of arbitral awards in any contracting state where Russia has assets. This might turn out as a feasible option, as enforcing arbitral awards in Russia is known to come with challenges.

Key Take-aways for Foreign Investors in Russia

For the time being, companies looking to exit Russia or occupied territories in Ukraine should assess whether their investments fall within the scope of any investment treaties and to what extent these might offer protection against potential Russian government actions.

In this connection, it is worth noting that Russia has similar BITs in place with other countries that might become applicable in circumstances where an investment is structured in a way that involves numerous countries that fall within the scopes of different BITs. Thus, Finnish or other foreign investors operating through, e.g. the Netherlands might be able to invoke the provisions of the Netherlands–Russian Federation BIT, and so on. In a similar manner, Finnish investors might be able to benefit from the protection offered by other BITs by invoking the most-favoured-nation principle.

Our Experts Can Help

Castrén & Snellman, building upon its experience in acting as counsel in investment treaty arbitration, is available to assist companies in questions pertaining to the protection offered by investment treaties in relation to potential actions by Russia.