Date of publication: 29 July 2024
Marina Riashchenko, Attorney at Law, Counsel
Mykhailo Churakov, Lawyer
Source: Ukrainian Law Firms 2023-2024
Following the outbreak of the full-scale invasion by the Russian Federation of Ukraine on 24.02.2022, Ukraine initiated its exit from a number of bilateral treaties and agreements concluded with the Russian Federation. One of the most sensitive issues was the termination of the Agreement between the Cabinet of Ministers of Ukraine and the Government of the Russian Federation on the Promotion and Mutual Protection of Investments (“BIT”).
The BIT was signed on 27 November 1998 and remained in force for more than 20 years. It established an effective legal framework, required for mutual protection of investments on the territory of Ukraine and the Russian Federation. However, given Russian military aggression, Russian investments can, in no event whatsoever, benefit from any protection guarantees offered by Ukraine to foreign investment.
On 10 August 2023, Ukraine adopted the Law of Ukraine On Termination of the Agreement between the Cabinet of Ministers of Ukraine and the Government of the Russian Federation on the Promotion and Mutual Protection of Investments No. 3329-IX. Accordingly, the BIT will be terminated on 27 January 2025.
Will this termination become a double-edged sword that can cut the owner?
Sunset of the BIT
Most of the talks surrounding the termination of the BIT concerned the possibility of Ukrainian investors protecting their rights, in the event of violation, after the BIT will be terminated. Given the fact that the ICSID Convention never came into force for Russia, and since 2018 the Russian Federation officially confirmed its intention not to be considered as a Signatory to the Energy Charter Treaty and the Protocol on Energy Efficiency and Related Environmental Aspects, the BIT remained the last international treaty providing for legal forums where State-Investor disputes can be resolved. And now this last resort is lost.
However, the termination is not “immediate”: Article 12 of the BIT contains a so-called “sunset clause”, governing the effects of any possible termination of the BIT. The sunset clause of the BIT provides that all the investments that were made before the termination date of the BIT remain protected for a period of 10 years from the termination date of the BIT. Naturally, all articles of the BIT also remain valid to the investments made prior to the termination date of the BIT (i.e. 27 January 2025). Therefore, the claims under the BIT may be brought until 27 January 2035.
The termination of the BIT does not influence the recognition and enforcement of investment arbitral awards rendered so far, though the process of compensation recovery from Russia is both lengthy and financially exhausting.
Practical consequences
After the full-scale military aggression and occupation of Ukrainian territories most (if not all) Ukrainian investors have ceased their investments in Russia. The assets of Russian investors either fell under the sanctions, were frozen or seized. Thus, it’s difficult to talk about any investment protection on both sides.
From the current perspective there are three potential dimensions where, in the near future, a number of investment arbitration proceedings may arise under a terminated BIT.
The first issue relates to Ukrainian investments left on the occupied territories that are currently under the effective control of the Russian Federation. At the end of September/beginning of October 2022, the Russian Federation illegally annexed territories belonging to the Donetsk, Luhansk, Kherson and Zaporizhzhia Regions of Ukraine. Based on the practice, as established by a number of investment arbitration proceedings related to Crimean assets, for the sake of future arbitration proceedings, Ukrainian investments will be considered to be made on the date of the annexation of the above-named Ukrainian regions, i.e., before the termination of the BIT. Therefore, those investors who suffered significant losses from the military aggression by the Russian Federation and occupation of Ukrainian territories may pursue their claims for direct losses and lost profit under the terminated BIT.
The situation is similar with Ukrainian investments made on the territory of the Russian Federation. Even though Ukrainian investors terminated their investment and commercial activity in Russia, they may still have some assets that they were not able to alienate. Such assets are currently being expropriated by Russia due to their affiliation to, as Russia calls them “foreign agents” and transferred under control of the Russian state entities or entities with close ties to the state. It goes without saying that such “foreign agents” practice is a brutal breach of BIT conditions and falls within the scope of protection granted by the BIT. However, in this case investors may face the need of recourse to Russian state courts first before initiating any investment arbitration.
Another potential cause of action related to Russian investments, expropriated on the basis of the Law of Ukraine On Sanctions providing for the possibility of nationalization of Russian assets that are used to sponsor Russia’s war (including payment of taxes in the Russian Federation). For example, at the beginning of 2024 the ex-owner of the Sense Bank (nationalized in 2023) initiated ICSID proceedings against Ukraine by claiming compensation for nationalization of the bank.
In other words, the potential investment arbitration landscape under a BIT is more than rich. The main point here is that all investments were made way prior to 2025 and, therefore are eligible for application of the BIT. Even though the BIT will be officially terminated in 2025, there will be a period of 10 years to adjudicate plenty of investment claims that are yet to be filed by foreign investors, both Ukrainian and Russian.
Taking into consideration the continuing military aggression of the Russian Federation little to no serious investments are expected to be made in coming years. Given that, we do not expect the termination of the BIT to affect the ability of Ukrainian and Russian investors to protect their infringed rights.
