Protecting Russian Investments Abroad Opportunities and constraints

1. Protecting Russian Investments AbroadOpportunities and constraints Anatole Boute

2. Structure of the presentation Protecting Russian investments abroad: relevance Introduction to Russian investment treaty-making Reciprocity in international investment law Principle of Most-Favored Nation Procedural protection Substantive protection The way forward

3. Protecting Russian investments abroad: relevance Commercial v. investment arbitration Ex ante – ex post Investor-state arbitration: independence of procedural protection Substantive standards that go beyond states’ obligation under customary international law

4. Russian investments in unstable and unpredictable climates Developing and transition economies: Mongolia (Paushok, Golden East, Vostokneftegaz, April 28, 2011) Moldova (Bogdanov, March 30, 2010) The EU internal energy market?

5. Introduction to Russian investment treaty-making • Russian Bilateral Investment Treaties (BITs) “First-generation” BITs “Second-generation” BITs “Third-generation” BITs? BUT Dangerous classification

6. Russian multilateral investment treaties Energy Charter Treaty (and Draft Convention on Energy Security) Partnership and Cooperation Agreement with the EU? WTO?

7. The European Convention for Human Rights Article 1, First Additional Protocol

8. Reciprocity in international investment law BITs as “bilateral” treaties: reciprocity of rights / obligations Obligations apply to both Contracting Parties Rights for investors from both Contracting Parties

9. Reciprocity and the economic power of the parties: bilateral in practice? Primarily aimed at countries with weak institutional framework and weak “rule of law” to export capital to developing or transition economies. But, the trend is changing: ex. claims against the US.

10. Example: the Energy Charter Treaty Objective: to reduce non-commercial risks associated with energy investments to facilitate “Western” investments in the CIS countries. More recently stress on the reciprocity of the ECT.

11. André Mernier, Secretary General of the Energy Charter: “it is extremely important to recall that the provisions of the Treaty are not only applicable to upstream markets. Political risk is not confined only to one part of the energy value chain, and companies from producer countries are increasingly active on downstream markets. Through the Treaty, these companies receive the same binding protection against non-commercial risk.” Reciprocity of arbitration (although commercial) highlighted in recent BP-Rosneft deal.

12. Reciprocity also means that Russian investors abroad face the same arbitration obstacles as foreign investors in Russia

13. Principle of Most-Favored Nation Requirement not to treat investors from the other Contracting Party less favorably than other investors Application of non-discrimination principle to the relation of a host state with investors that come from all the states with which the host state has concluded investment treaties.

14. “Neither Contracting Party shall in its territory subject investors of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favorable than that which it accords to investors of any third State.” (Art. 3, para. 2 UK-Soviet BIT)

15. Relevance: Harmonization of investment protection. Obligations go beyond a particular investment treaty. Application to substantive protection? Application to procedural protection?

16. Procedural protection Access to independent investor-state arbitration Key: scope of the dispute resolution clause “First-generation” BITs “Second-generation” BITs ECT Prospects?

17. “First generation Russian BITs” : - Dispute resolution clauses apply to any dispute: “relating to the amount or method of payment of the compensation due under article 6 of this Agreement [on nationalization and expropriation].” Art. 10 Spain-Soviet BIT. See also Soviet BITs with UK, Belgium/Lux, Germany, Austria, Finland, Netherlands

18. Interpretation of dispute resolution clauses: ● Strict: The clauses exclude from the scope of arbitration: (i) other disputes than related to expropriation, and (ii) disputes concerning “whether or not an act of expropriation actually occurred”.

19. On the expropriation itself: RU courts or contract Berschader v Russia, Award, 21 April 2006 (SCC 080/2004. See also RosInvest v Russia, Award on Jurisdiction, October 2007 (SCC V079/2005)

20. ● Broad: “It is impermissible to read Article 10 of the BIT as a vanishingly narrow internationalization of Russia’s commitment. Yet that would be the consequence if Russia could determine unilaterally and conclusively whether the very predicate of the Tribunal’s jurisdiction were operative or not”. Renta v Russia, Award on Preliminary Objections, 20 March 2009 (SCC 24/2007).

21. Interpretation of MFN clause: ● Strict: MFN does not allow to “import” broader dispute resolution clauses from other BITs. (Berschader, Renta)

22. ● Broad: “if [MFN] applies to substantive protection, then it should apply even more to “only” procedural protection.” (RosInvest)

23. Restricted dispute resolution clause in all “first-generation” BITs? Exception: Soviet BITs with France and Canada

24. “Second-” and “third-generation” Russian BITs: Investor-state dispute resolution open to: “Any dispute which may arise between an investor of one Contracting Party and the other Contracting Party in connection with an investment on the territory of that other Contracting Party”. (Art. 8 Denmark-Russia BIT. See also BITs with Italy, Cyprus, Norway, Sweden, Hungary)

25. The Energy Charter Treaty dispute resolution clause: Article 26 applies to “disputes which concern an alleged breach of an obligation under Part III [investment promotion and protection]”.

26. Interpretation: “Article 26 ECT provides to a covered investor an almost unprecedented remedy for its claims against a host state.” Plama v Bulgaria Decision on Jurisdiction of 8 February 2005 (ICSID ARB/03/24)

27. The Y…. case: 30 November 2009 (PCA) The central issue: Is Russia bound by the investment regime of the ECT on the basis of the provisional application clause?

28. No protection under the ECT after 18 October 2009 The investment chapter of the ECT, as well as the dispute resolution clause, remains in force for existing investors until 18 October 2029 Cavaet: No doctrine of precedent in international arbitration But:IoannisKardassopoulos v Georgia, Decision on Jurisdiction of 6 July 2007 (ICSID ARB/05/18)

29. Relevance for Russian investments abroad: Art. 45, para 2, (b) of the ECT: Neither a signatory which makes a declaration in accordance with subparagraph (a) nor Investors of that signatory may claim the benefits of provisional application under paragraph (1). What about investments incorporated in other countries?

30. The dispute resolution clause of the Draft Convention on Energy Security: recognizes investor-state arbitration

31. Substantive protection - Expropriation; - National treatment and non-discrimination; - Fair and equitable treatment; - Full protection and security; - Umbrella clause.

32. Expropriation Expropriation clauses in most Russian BITs include measures “tantamount” to expropriation ex. Italy-Russia BIT: de jure and de facto compensation (Hull formula)

33. Interpretation in arbitral practice debate on “regulatory taking”: the sovereign right of states to regulate v. the protection of property degree of interference with an investment

34. National treatment and non-discrimination Relative and not absolute standard No treatment less favorable than national investors that are in a comparable situation

35. Most Russian BITs contain a NT clause, except with Finland and Austria BUT MFN and fair and equitable treatment standard

36. Some Russian BITs limit protection “to the extent possible” and “in accordance with their laws and regulations” 2002 Model Russian BIT: retains the right to introduce exceptions to NT ex post?

37. Additional safeguards: Germany-Soviet BIT: discriminatory measures include “unjustified restrictions on the acquisition of raw materials and auxiliary materials, energy and fuel”.

38. Interpretation: “comparable situation”: the likeness test. exactly the same business? the same economic sector? over cross-sectoral analysis? justification based on public policy objectives

39. Fair and equitable treatment “Currently the most promising standard of investment protection” (Schreuer) Absolute standard that “fills the gaps” left by other standards (Dolzer)

40. Respect for investors’ legitimate and reasonable expectations • Stability and predictability of the legal framework • Protection against arbitrariness and discrimination • Procedural propriety and due process

41. Discussion in arbitral practice: Does it go further than the minimum standard of protection under customary international law? Russian BITs do generally not refer to the “principles of international law” in the formulation of the Fair and Equitable Treatment standard

42. NL and Sweden BITs refer to “fair and equitable treatment” in preamble: fair and equitable treatment will stimulate the flow of capital and technology and the economic development of the contracting parties.

43. Specific formulation in Russian BITs: link with non-discrimination (with Cyprus) only “fully equitable” (Germany) or just “fair” (2002 Model BIT)

44. Full protection and security Physical security Legal security?

45. Full protection and security clauses in Russian BITs: “full protection” (Germany) “full and unconditional legal protection” (Cyprus)

46. Umbrella clauses Sanctity of contract Add the compliance with (investment) contracts and other commitments to the BIT substantive standards

47. In Russian BITs: only few UK and NL-Soviet: shall observe any obligation it may have entered into with regards to investors the other Party BUT limited dispute resolution clause Japan-Russia

48. Substantive protection standards and MFN Differences in the investment disciplines included in the respective BITs and their formulation, BUT MFN clause applies to substantive protection: “import” of more favorable protection standards from other (third-party) BITs.

49. Conclusion Reciprocity: Reciprocity of investment obligations and rights Increasing use by Russian investors can be expected, following the general trend

50. Access to arbitration: Crucial importance of access to arbitration: a considerable limit for Russian investments abroad, just as for certain foreign investments in Russia In EU: Germany, Finland, UK, Austria, NL, BEL/LUX