Bracing for Russian Actions Against Foreign Investments

March 16, 2022 – The Russian Federation recently implemented measures in retaliation to US and EU sanctions that may violate its obligations under international treaties that protect foreign investment in Russia.¹ These measures include:

• Authorizing Russian companies to use patents without paying compensation to patent holders from specific countries designated as “unfriendly”² 
• Imposing restrictions on transfers of foreign currency³  
• Requiring Russian companies, including subsidiaries of foreign companies, to sell foreign currency proceeds from export activities to the Russian Central Bank and exchange them into rubles.⁴  
• Authorizing Russian nationals to pay foreign currency-denominated debt to foreign debtors from “unfriendly” countries in rubles.⁵  
• Restricting foreign holders from selling stocks and bonds in Russian companies.⁶  
• Effectively confiscating aircraft owned by foreign lessors by placing leased aircraft on Russia’s aircraft register.⁷  

In addition, the Russian government introduced a draft law that contemplates the takeover of assets owned by foreign companies that pull out of the Russian market.⁸ 

Russia has bilateral investment treaties in force with over 60 countries, including 20 of the 27 member states of the European Union,⁹  Canada, Japan, Korea, Switzerland, the UK, Ukraine, and several Latin American countries.¹⁰   Bilateral investment treaties protect investments in the Russian Federation made by investors from those countries against specific forms of state action.  For example, bilateral investment treaties typically protect foreign investors against unlawful expropriation, interference with the free transfer of funds, and unfair and inequitable treatment.  In addition, many of the Russian Federation’s bilateral investment treaties contain provisions that allow investors who suffer injury as a result of the Russian Federation’s breaches of the investment treaty’s protections to obtain compensation through international arbitration outside of Russia.  

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The investment treaty arbitration team at Hughes Hubbard & Reed LLP has brought more treaty claims against the Russian Federation than any other law firm.  We were the first to use arbitration under a bilateral investment treaty successfully to obtain an award of compensation against the Russian Federation for its unlawful expropriation of Yukos Oil Company on behalf of a U.K.-based shareholder in Yukos.  In 2014, immediately following the Russian Federation’s unlawful annexation of Crimea, we established the applicability of the Ukraine-Russia BIT to Russian actions in the Crimean Peninsula in a series of five groundbreaking arbitrations that have held the Russian Federation’s expropriation of property following its annexation of Crimea to have breached the BIT.  The aggrieved investors in those cases have collectively obtained hundreds of millions of dollars in awards of compensation against the Russian Federation that are enforceable in any of the 169 countries that are party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

If your business in Russia has been or may be impacted by these new measures being considered by the Russian Federation, the members of our international arbitration practice would be happy to advise about what remedies may be available.