In this the third essay in this series, we consider how to expel Russia from the international network of bilateral investment treaties that have served as a cover for often corrupt Russian government investments and interference in countries across the world and purport to grant legal protections against confiscation of Russian assets that ought properly to be subject to international seizure to finance the war resulting from Russia’s illegal invasion of Ukraine.
Bilateral investment treaties were an innovation that went back to the late 1950’s to encourage closer economic and investment links between the West and a number of developing world countries, to encourage western companies to invest in emerging markets and thereby to promote economic development in those countries and keep them within the western economic and political orbit amidst the Cold War. The basis of the treaties was to create legal duties in public international law on the part of states to investors who are nationals of other state parties to the treaties and who make investments in the receiving state. Normally public international law governs the obligations of states to one-another; this branch of law, that became known as international investment law, creates obligations in public international law to private parties who are citizens of other states. In due course arbitration clauses became incorporated into these bilateral investment treaties, so that aggrieved investors who complained that their rights under these treaties were being infringed could sue the states hosting their investments.
The arbitration tribunals would not be comprised of national judges but rather of a panel of private lawyers of an international composition. The investing party would typically appoint one of the three arbitrators; the respondent state to the complaint would appoint another; and the two together would appoint the chair of the arbitral tribunal or, in default of agreement, an international appointing authority would appoint the chair. These tribunals, once convened, would then adjudicate complaints against recipient states that they have expropriated an investor’s investments or denied them fair and equitable treatment or due process of law; and if they find that the state has violated international law then they would award compensation, often very substantial amounts based upon so-called “discounted cashflow” models of an investments hypothesised returns had the state not unlawfully interfered with the investment in question. In this way, foreign investors could invest in politically unstable environments with low rule of law with recourse to an international system of adjudication and enforcement of legal disputes, without having to rely upon the domestic courts receiving the investment that might be unreliable, corrupt or biased.
Over the subsequent decades the number of these bilateral investment treaties proliferated, particularly with the end of the Cold War as post-communist states rushed to sign bilateral investment treaties with western countries to encourage investments in their deprived socialist economic systems. The Soviet Union, and then Russia, the successor state under international law to the Soviet Union after the latter’s disintegration, signed several of these treaties with a number of western countries. Hence there is a bilateral investment treaty between the United Kingdom and the Soviet Union, to which Russia is now deemed party as successor state, dated 6 April 1989. Russia or the Soviet Union signed some 85 of these. Some never entered into force and others have been terminated but many or most remain in force to the present day, including that between the United Kingdom and Russia. Moreover these treaties are reciprocal in nature: just as British investments in Russia are protected, so are Russian investments in the United Kingdom. The treaty protects investors against acts of expropriation, so the fear might arise that in British banks through government action confiscating the assets of Russian citizens, companies or government agencies, the treaty is being violated and therefore the United Kingdom is exposed to potentially substantial lawsuits on the part of the Russian government and/or significant Russian citizens or companies.
Hence the UK-Russia Bilateral Investment Treaty, in paragraph 5(1) thereof (and the following language is not untypical of such treaties):
Investments of investors of either Contracting Party [i.e. the UK and Russia] shall not be nationalised, expropriated or subject to measures having equivalent effect to nationalisation or expropriation (hereinafter referred to as “expropriation”) in the territory of the other Contracting Party except for a purpose which is in the public interest and is not discriminatory and against the payment, without delay, of adequate and effective compensation. Such compensation shall amount to the real value of the investment expropriated immediately before the the expropriation or the impending expropriation became public knowledge, whichever is the earlier, shall be made within two months of the date of the expropriation, after which interest at a normal commercial rate shall accrue until the date of payment, and shall be effectively realizable and be freely transferable.
This legal language, no doubt drafted by English government lawyers at the time (1989) to protect British investments in Russia, now has the horrifying consequence of likewise protecting Russian investments in the United Kingdom and acts of seizure pursuant to British foreign policy without the payment of full compensation on a prompt basis together with commercial rates of interest if prompt payment is not made.
Article 9 of the same treaty provides for arbitration between Russian investors (who in all likelihood would be proxies for the Russian government) against the United Kingdom, with the Chair of the three-member arbitration tribunal whose chair, in default of appointment by party-appointed arbitrators, is to be appointed by the President of the International Court of Justice. Now the good news is that the current President of the International Court of Justice is an American; but the Vice-President of the International Court of Justice is a Russian and in those circumstances the International Court of Justice, a court created under the structure of the United Nations Charter, is currently entirely dysfunctional.
The UK-Russia Bilateral Investment Treaty makes no provision for exceptions to the rules against expropriation or other infringements of treaty rights on the grounds of national security or foreign or defence policy. The treaty was designed not to have such protections, lest the Russian authorities relied upon such things to evade their own treaty obligations towards British investments in Russia. By contrast some bilateral investment treaties, such as the US 1992 standard model, makes an explicit exception whereby the state “reserves the right … to take measures it regards as necessary … for the protection of its own essential security interests”, and the absence of language of this kind from the UK-Russia Bilateral Investment Treaty as well as a number of other such treaties between western parties and Russia suddenly appears regrettable.
Now we are waking up to the fact that this sword cuts both ways. Moreover the Treaty provides that it can be denounced by either state contracting party; but that in such an event the Treaty protections remain in place for existing investments for a period of 15 years. In other words the straightjacket of the investment treaty regime - and this is not unusual amongst the many thousands of bilateral investment treaties that exist in a tightly criss-crossed mesh between various states throughout the world - is a straightjacket protecting foreign investments without an escape clause in the event of war or other hostilities and this is precisely what was intended. Now these treaties threaten to inhibit the foreign and defence policy of both the United Kingdom and many of her principal allies in resisting Russian aggression in Ukraine.
The solution to all this is difficult to stomach for the international law purist but ultimately necessary. The United Kingdom and other affected western parties that have signed investment treaties with the Russian Federation under such onerous terms must denounce those treaties under Articles 60 et seq Vienna Convention on the Law of Treaties (1969), which provide for withdrawal from Treaty obligations in the event of material breach, supervening impossibility of performance or a fundamental change of circumstances. The argument must be swallowed that Russian military aggression in invading a de jure independent European member state is so offensive to the international legal order that the international network of legal obligations arising under international investment law is no longer appropriate to protect Russian investments. This should surely be achieved by consensus of the affected western parties, who themselves enter into a common treaty denouncing all their investment treaties with Russia on these mutually agreed grounds.
Further, all western state parties should refuse to participate in arbitrations that investors from the Russian Federation might attempt to initiate. Domestic laws of western member states may prohibit arbitrators from those countries from accepting appointments under pain of professional conduct or even criminal sanctions, and should prohibit them from accepting any appointments on the part of the Russian Federation. Ultimately we will also have to consider the prospect of professional conduct or even criminal sanctions against lawyers based in western member states who accept certain sorts of instructions or mandates from the Russian government, its emanations, or from investors purporting to be from the Russian Federation and bringing claims of this kind. Further agreement might be made in international treaties between western powers suspending the operation of the limited number of international treaties to which Russia is a party providing for cross-border enforcement of arbitration awards.
In other words, Russia and her foreign investors, the greater majority of whom are tainted with the corruption and misconduct of the Russian government and have enriched themselves under the Russian government’s umbrella and be deploying Russian state assets, must be excluded entirely from the West’s legal system and must not be allowed to take advantage of it to protect their interests.
These steps may sound radical and dramatic. But should the West not understand the nature of the litigation risks inherent in bilateral investment treaty arbitration, Russia may abuse the West’s legal systems and inundate western states engaged in confiscation actions in manifold legal procedures with a view to advancing the interests of the Russian Federation. Regrettably we are not just in a second Cold War but in a third World War, and this entails that legal protection and security under the umbrella of international law can no longer be afforded to the Russian government or to Russian investors acting under her shadow. There is substantial and intricate legal work to be done by western governments in unravelling the regime of investment treaty protections that have afforded rights to Russian investors across the West; emanations of the Russian state have taken advantage of the rights and protections existing within the western legal system for too long.
Now we are in an existential war for the future of European values, we must, admittedly with reluctance but likewise with grim determination, withdraw legal rights from the Russian state and from Russian investments. This is but another inevitable corollary of the conflict in Ukraine and the ever-increasing gulf of separation arising between Russia and the West. This gulf may persist for decades; we might regard ourselves as naive in ever having permitted ourselves to become so financially and legally intertwined with the Russian state and the Russian Oligarchs; now the errors of the past must be undone.
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