The 2016 Russian guidelines on future BITs: have your cake and eat it
October 2017 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
October 2017 Issue
A system of bilateral investment treaties (BITs) is expanding every year with more and more getting negotiated. It is becoming very common for investors to structure their investments in such a way as to ensure not only the most efficient tax regime, but also the most effective BITs are covered. In other words, in today’s world a BIT is a one of the key instruments of protection for investors around the globe.
At present there are 80 Russian BITs currently in force. So far Russia has not enforced a single arbitration award issued against it by an international investment tribunal in connection with its breaches of the investment treaties. Needless to say, this does contribute to perceiving Russia as a country risky for foreign investors to invest in. However, the Russian government is looking for ways to improve the investment climate and to protect its own investors, wishing to invest abroad. So far the government has passed two regulations, establishing the models for its BITs. The first such model was established in 1992, which was replaced by another model in 2001. In 2016 the government passed the Regulation on Entering into International Treaties on the Encouragement and Mutual Protection of Investments (Investment Protection Regulation 2016), which replaced the 2001 model and established a new set of guidance for the future BITs.
The key elements of a typical BIT, broadly speaking, include the scope of application, the level of protection granted, as well as the dispute resolution mechanism. We will explore each of these key elements separately.
It seems that that the Investment Protection Regulation 2016 provides for a more stringent definition of an investor. Both the 2001 and 1992 models basically allowed for what is known as ‘treaty shopping’. The definition of an investor in both model treaties was quite broad; it was enough for an entity to be incorporated in a country, with which the Russian Federation negotiated a BIT, in order for its investments to be protected. The Investment Protection Regulation 2016 provides that a corporate entity seeking protection under the BIT must have significant business activities in the country of their incorporation. The Investment Protection Regulation 2016 also expressly provides that the citizens of a host cannot seek protection under the BIT. In other words, if a beneficiary of a company investing in Russia is a Russian citizen, then such a company may not seek protection under the BIT.
It is worth noting that the Investment Protection Regulation 2016 expressly excludes a provisional application of the BITs. In other words, in the future, Russian BITs will only apply once fully ratified. A provisional application of the Energy Charter Treaty was one of the key issues in the Yukos related investment arbitrations. The Investment Protection Regulation 2016 is aimed at avoiding such problems in the future.
Standard of protection
The Investment Protection Regulation 2016 provides quite an extensive definition as to what qualifies as an expropriation. At the same time, the Regulation expressly excludes events such as wars and civil unrest, as well as certain acts of the government, including taxation and IP related licences, from the scope of definition of ‘expropriation’.
The Russian BITs currently in force provide that the amount of compensation shall be determined by reference to the market value of the investment. The question often arises as to at what point the value should be assessed. Some BITs provide that the value will be determined as the value at the date when it became known that the asset was nationalised. Other BITs provide that the date will be an immediate date, which precedes the announcement of nationalisation. The Investment Protection Regulation 2016 provides that value shall be based on the market value of the investment; however, the valuation will take into account any decrease in the value of the investment, due to the fact of expected expropriation becoming known to the public at large. This addition to a classic compensation definition seeks to eliminate the possibility of a discounted sale of an investment to a third-party with the sole purpose of initiating an investment claim against the state.
The Regulations are silent on umbrella clauses. Umbrella clauses are aimed at protecting investments by bringing obligations or commitments that the host state entered into in connection with a foreign investment under the protective ‘umbrella’ of a BIT. By way of example, an umbrella clause can elevate a contract claim to the level of a treaty claim. There are only 12 Russian BITs that contain an umbrella clause: France, China, Germany, Greece, Denmark, Japan, Korea, Kuwait, Netherlands, Switzerland, Turkey and the UK. Whether these types of clauses will be found in the new BITs remains to be seen.
The 2016 Investment Protection Regulations are also silent on the most-favoured-nation (MFN) clauses, on fair and equitable treatment and on the national treatment (NT) clauses. Most of the current Russian BITs allow the host state, such as the Russian Federation, to introduce exemptions from the national treatment with respect to foreign investments. Reservations are often made in connection with the energy and utilities sector. There are 11 BITs that contain no exception regarding the NT: Argentina, Austria, Canada, China, Ethiopia, Finland, France, Italy, Norway, Spain and Turkey. All the Russian BITs, apart from the BITs with Ukraine and Armenia, contain a fair and equitable treatment clause. Most of the Russian BITs contain an MNF clause. Whether BITs will contain MFN, NT or fair and equitable treaty clauses in the future will probably be decided on case by case basis.
It is worth noting that the Investment Protection Regulation 2016 expressly provides that the dispute resolution clauses must be excluded from the scope of an MFN clause. In other words, under future BITs, it will not be possible to rely on an MFN clause in order to utilise a dispute resolution mechanism from a different BIT. There are three Russian BITs – Belgium/Luxembourg BIT; Finland BIT and Spain BIT – in which a dispute resolution clause might be read as allowing only the disputes, the subject of which is limited to the amount of compensation, and not whether a breach of the BIT actually took place or not. There have been several investment arbitrations in which investors tried to bring clearer and wider dispute resolution clauses to said investment treaties.
Generally, in respect of the dispute resolution mechanism, it is important to note that the Investment Protection Regulation 2016 sets clear and detailed provisions related to the notification procedure and negotiation stage. At present, many investors find that the negotiation period is very ineffective. Most Russian BITs currently in force do provide a cooling off period of usually six months. However, at present, no governmental institution is appointed to be responsible for handling negotiations between an investor and the state. As a result, investors often find themselves sending multiple notifications on a commencement of negotiation period to various governmental institutions and simply do not get any meaningful response, which renders any attempts to reach a settlement before actually starting the arbitral proceedings totally inefficient.
It follows that the Investment Protection Regulation 2016 does suggest a more stringent approach to some of the key provisions of the standard BITs. The definition of an ‘investor’ is narrower. An application of the MNF is expressly restricted to the substantial protection only and does not extend to the dispute resolution provisions. The provisional application is also expressly excluded. There is a standard fair and equitable treatment clause; the FT and the umbrella clauses are not mentioned at all. However, it seems that these limitations were introduced following the experience of past investment arbitrations in which Russia was involved. In other words, it seems that the Russian government learned its lessons and in the future will negotiate BITs which are more in line with the level of protection the Russian state is actually willing to provide to its investors. It may well be that, as a result, the Russian state will become more compliant with the arbitral awards issued against it and investors will get, perhaps, more limited but more certain protections in place than they currently have.
Marianna Rybynok is a senior associate at Khrenov & Partners. She can be contacted on +7(495) 927 0707 or by email: firstname.lastname@example.org.
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