Russia threatens to nationalize foreign businesses in response to Western sanctions and boycotts

Following Western sanctions and voluntary boycotts of Russia, Russia has threatened to pass legislation allowing for the expropriation and nationalization of assets belonging to foreign companies shutting down their operations in Russia. Danish companies having ceased their activities in Russia should prepare themselves for this risk and may be able to seek compensation through international - and neutral - arbitration under international treaties on investment protection.

The bill

In a recent statement, the ruling party, United Russia, announced that it was preparing a bill which, if passed, will allow the Russian government to nationalize the assets (shops, offices, production plants, shares etc.) of foreign businesses having recently shut down their activities in Russia. On 10 March 2022, President Putin confirmed that the government was investigating "legal solutions" to nationalize foreign assets. If passed, the bill will also affect Danish companies present on the Russian market which either cannot or do not wish to continue operations while the war in Ukraine is ongoing.  

Investment protection in Russia

Like most other nations in the world, Russia is bound by several multilateral and bilateral investments treaties ("MITs" and "BITs"). These are international legal instruments whereby each of the state-parties to the treaty undertake to respect and actively protect the investments made by nationals of the other state-party in its territory. MITs and BITs confer specific material and procedural rights to investors that they can invoke directly against the state-party "hosting" their investment(s).

Russia and Denmark concluded a BIT which entered into force in 1996 (see here). Danish investors may also rely on the investment treaty between Russia and the EU, which entered into force in 1997 (see here). Both of these treaties are still in force. 

Like most other modern BITs, the Denmark-Russia BIT contains a broad range of protection standards, i.e., obligations which Russia, as host-State, must observe towards Danish investors operating on its territory.

Notably, Article 4 of the BIT protects against illegitimate expropriation without adequate compensation. This means that foreign investors whose assets are seized by the Russian state have a right to receive compensation - normally corresponding to the "fair market value" of the investment. 

In order to benefit from the treaty protection, the investment must materially and territorially fall within the scope of the BIT (i.e., qualify as an investment under the terms of the BIT and be made within the territory of Russia). It is also a general prerequisite for the treaty-protection, that the investment has been made in accordance with the laws and regulations of the host-State (this follows expressly from Article 1(1) of the Denmark-Russia BIT). 

The material scope of the treaty is otherwise broadly framed: Under Article 1(1)(a), "movable and immovable property" (real estate, other fixed assets, IP rights, etc.) as well as related rights (hereunder leases) are protected as an investment. Under Article 1(1)(b) of the treaty, the shares in an enterprise are also covered by the treaty-protection. These two provisions may be relevant, e.g., in case of potential state interference (as currently contemplated by Russia) with the ownership and control with real-estate assets or by unlawful expropriation of shares. 

International arbitration and recovery of damages

Pursuant to Article 8 of the Denmark-Russia BIT, a Danish investor whose assets are illegitimately expropriated would have a right to pursue its claims against Russia before an international arbitral tribunal, i.e., at a neutral venue and before a panel of independent, international arbitrators (rather than going before the Russian state courts). 

Russia has been involved as the respondent party in a relatively high number of investment arbitrations under different BIT's. According to the United Nations Conference on Trade and Development (UNCTAD) listing, there are no less than 26 recorded cases with Russia as the respondent since 1996. The majority of these cases have concerned claims about expropriation without due compensation and, in most of the cases concluded by a final arbitral award, the investor has prevailed (sometimes obtaining damages in the multi-billion dollars range).

In the current geo-political environment, it is of course likely that Russia will refuse to even participate in arbitration proceedings legally instigated against it - and will not voluntarily comply with an arbitral award ordering it to pay compensation for an unlawful expropriation. 

However, one of the benefits of international arbitration as opposed to litigating before the state courts, is that an arbitral award - unlike a court judgement - will be almost globally enforceable under the 1958 New York Convention. 

Under the New York Convention, an award may be enforced in Russia or in any other country where Russia has assets that qualify for attachment (or similar enforcement remedy). An arbitral award, even if rendered "in absentia" against a non-participating state-party, will thus provide good prospects for recovery of any damages awarded to an injured investor. 

The current sanctions will likely play a role in relation to enforcement against Russian foreign assets. It is reasonable to assume that, even if relevant sanctions would still apply at the time of enforcement, Western countries would likely be amendable to letting Western companies seek enforcement in them based on investment treaty awards.

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