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Updated: Oct 21, 2022

-Om Agrawal and Shivendra Narayan*

First Runners Up, 1st RGNUL Arbitration Essay Writing Competition

With an ever-expanding list of businesses declaring their exit from Russia, the world witnesses an attempt at economic decoupling at a scale with no precedent in the age of globalization. Apart from the devastating humanitarian impact of the invasion of Ukraine, it has resulted in a breakdown of Russia’s commercial relations with western nations. A series of international sanctions, followed by countermeasures from Russia, has led businesses from both sides to consider commercial arbitration and investment treaty arbitration to seek redressal for disrupted contracts and plans. This essay focuses specifically on the investment arbitration climate ensuing from the situation.

Sanctions imposed on Russia

The Russian invasion of Ukraine has led to the imposition of a host of international sanctions targeting Russian companies, state-owned enterprises, banks, individuals, and exports, among others. Western nations have frozen assets of the Russian Central Bank to impede it from using its foreign currency reserves of $630 billion. A complete ban has been imposed on all new US investments in every Russian sector. With far-reaching consequences, these sanctions also mean a bar on Russia from paying its debts with the $600 million it has in US banks, hampering it from repaying international loans.

Apart from the US, the EU and the UK have also introduced strong measures and sanctions, including plans to completely phase out Russian energy imports by the end of 2022. Other restrictions imposed by the EU include prohibitions on holding Russian clients’ accounts, Russian banks’ usage of the SWIFT payment system, import of iron and steel products, fertilizers, luxury goods, cement and liquor, and facilitation of public financing or financial support for trade with, or investment in Russia. The UK has also frozen the assets of over a thousand individuals and entities linked with Russia.

Possible investment arbitration claims arising from the suspension of Nord Stream 2

While one can speculate over possible disputes arising from all these measures, perhaps the most significant would be the arising from the Nord Stream 2 pipeline, the $11 billion project, aimed at bringing natural gas directly from Russia to Europe. With its certification halted by Germany, the future of the Russian state company owned pipeline seems uncertain. The German Environment Minister Svenja Schulz has admitted that the suspension of the pipeline certification may lead to investor-state dispute settlement (ISDS) claims under the Energy Charter Treaty (ECT).

The ECT, formed in 1991, is a legally binding multilateral agreement that safeguards foreign investments in nuclear energy, fossil fuels, and electricity without distinguishing between the energy sources used to generate electricity. Articles 26, 27 and 28, laid in Part IV of the treaty, provide for resolving disputes between States Parties (vis-à-vis other States) and between States and foreign investors who have made investments in the former’s territory.[1] The present situation may find parallels in the Vattenfall[2] case. In 2011, in the aftermath of the Fukushima Nuclear Disaster, the ‘Act on the Peaceful Utilization of Atomic Energy and Protection against its Hazards’ (the “Atomic Energy Act”) was amended by the German Parliament to cease the use of nuclear energy in Germany by 2022. This amendment hastened the fixed end dates for nuclear power plant operations without compensation.

As a result of this amendment, the licenses of Vattenfall, a Swedish state-owned power company, to run both its nuclear plants were revoked immediately, and both plants were shut down. Vattenfall filed for an investment arbitration claim of 4.7 billion euros in damages under the ECT against Germany, citing losses allegedly caused by Germany’s decision to expedite the phase-out of nuclear energy. The parties ultimately settled the matter by agreeing to a 1.4-billion-euro pay-out.

Russia’s retaliatory economic measures and their implications

In response to the international sanctions, Russia has adopted a slew of economic measures against the listed “unfriendly states,” including the US, EU, and the UK. Russian economic measures are wide-ranging and aimed at retaliating against international sanctions. Some of these measures that may hamper foreign investors’ protection are elucidated below.

Under the recently introduced transaction approval requirements, Russian residents will have to obtain clearance from a Russian government commission for any financial transaction with persons associated with ‘unfriendly States’.[3] Depositing non-rouble currency into foreign bank accounts, transferring money using non-Russian electronic payment services without opening an account, and transferring non-rouble currency to any non-residents under loan agreements have been forbidden for Russian residents.[4]

The Russian government has also restricted non-rouble currency cash exports above $10,000 from Russia. Moreover, a new debt-payment procedure obligates Russian debtors to pay off substantial debts (i.e., debts exceeding 10 million roubles) to non-Russian creditors situated in “unfriendly states” only in Russian roubles at the official exchange rate set by the Central Bank of the Russian Federation.[5] Measures also include a range of export restrictions on products, including telecommunications, medical supplies, automobiles, agricultural produce, electricals, and forestry products.

The measures mentioned above are certainly not the end of a rather long list. A new draft legislation effectively allows the Russian government to nationalize/sell the assets of foreign companies linked with ‘unfriendly states’ that have either left Russia or made steps to end their operations there. The proposed law has put foreign investors in Russia in a fix, with several of them having planned divestment due to international sanctions.

Investment arbitration claims by foreign investors in Russia

Evidently, Russian government measures have brought several concerns for foreign investors in Russia. When these investors consider their choices, they may have to route to arbitration claims under investment treaties as a way of recourse. It is crucial to examine this path to redress foreign investors in Russia.

Several international legal instruments may provide for investors to pursue arbitration with Russia. These include the Energy Charter Treaty, FTAs with investment chapters, and numerous Bilateral Investment Treaties (BITs). Russia has BITs with over 60 states, among which are at least 27 states, which Russian economic measures have targeted. Investors from these 27 states will likely be impacted from the measures, which may give rise to arbitration claims against Russia for breach of its obligations to protect and promote foreign investment. Most of Russia’s BITs feature common investment protection standards seen in BITs worldwide. While every relevant BIT cannot be examined in this essay, we can, however, discuss some of these common standards in light of the situation.

Free Transfer of payments

Most investment treaties contain provisions guaranteeing free transfer of payments[6] connected with the investment. This entitles foreign investors to compensation if suddenly affected by acts which hamper repatriation of investments and returns, confining the investors’ money in the host state. It is important to examine possible violations of this standard considering the Russian government’s decisions of restricting foreign currency transfer to accounts outside Russia[7] and imposing approval requirements for transactions between Russian residents and foreign persons connected to ‘unfriendly’ foreign states.[8]

In spite of their importance, there exist a limited number of awards considering free transfer of payments provisions in investment treaties.[9] The situation arising from the presidential decree imposing transaction approval requirements may find parallels in Metalpar v Argentina.[10] Here, the state had subject fund transfer abroad to authorization of the central bank of Argentina through a presidential decree. The tribunal refused to accept the claimant’s contention that Argentina had breached free transfer of funds provisions in the Chile-Argentina BIT, since the claimants had not complied with the established procedure for transferring funds abroad, that is, they had not sought authorization of the central bank. This award establishes the importance of following the established procedure of seeking approval from the Russian government commission, despite any claims of violation of investment treaties.

Foreign currency transfer restrictions by the Russian government may be in breach of free transfer of payments provisions. With restrictions having been imposed on crediting foreign currency to bank accounts outside Russia[11], and on foreign currency export[12], it is pertinent to examine Bernhard von Pezold v Zimbabwe.[13] This dispute arose after the state forced the claimants to exchange some of their US Dollar proceeds to Zimbabwean Dollars and refused to release US Dollars that were earned through Tobacco sale. This resulted in the Claimants being unable to transfer their returns on investment out of Zimbabwe and was adjudged by the tribunal as a violation of Free Transfer provisions of the Zimbabwe-Switzerland BIT.

Protection against unlawful expropriation

Protection against unlawful expropriation is a crucial standard in investment treaties, frequently relied upon in investment arbitration claims. To be lawful, expropriation is generally required to be (a) for a public purpose, (b) non-discriminatory, (c) in accordance with due process, and (d) upon payment of prompt, adequate, and effective compensation.[14] What makes expropriation a broad standard is the fact that tribunals have recognized its indirect occurrence, by state measures resulting in deprivation of the value of the investment – even if the title of the investment remains with the investor.

Quite a few of the measures taken by the Russian government may amount to unlawful expropriation, both direct and indirect. For instance, nationalization of assets of a company from an ‘unfriendly’ country, under the proposed draft legislation may lead to the pursuit of arbitration claims against Russia, claiming compensation for expropriation.

Apart from this, attention must be drawn to the possibility of a Russian sovereign default. With international sanctions preventing it from accessing foreign exchange reserves, Russia has made international bond repayments in Rubles, even though the payments were due in Dollars. Subsequently, credit rating agency S&P Global has lowered Russia’s foreign currency ratings to “selective default”, with a full default increasingly likely.

Derivatives contracts have been found to fulfil the definition of investment in investment treaties.[15] With over 15 bonds outstanding for Russia, it is probable that investor-state arbitration claims could be filed for expropriation of investment – over a Russian sovereign default. A leading case in this regard is Deutsche Bank v Sri Lanka[16], where the tribunal found that the state had breached its duties under the BIT not to expropriate Deutsche Bank’s investments. The central bank’s stop-payment order, ensuing suspension of payments and the termination of an oil hedging agreement were adjudged to be indirect expropriation.

Furthermore, there appears to be a possibility of expropriation claims arising from Russia’s suspension of certain intellectual property rights (IPRs) for investors of ‘unfriendly’ states.[17] While most IPR related cases are addressed before forums such as the World Trade Organisation, scholars have hypothesized indirect expropriation claims from state actions that effectively rescind IPRs.[18]

Fair and equitable treatment

Fair and equitable treatment (FET) is a common protection standard in investment treaties. It is also the one which is most frequently invoked and the one most frequently adjudged as breached.[19] The award in MTD v. Chile[20] stated that fair and equitable treatment includes essential notions such as good faith, due process, non-discrimination, and proportionality.

Giving considerable discretion to tribunals, the FET standard has a very broad scope of application in investment arbitration,[21] particularly in the context of the series of economic measures taken by Russia. The broadness of the standard means that it may offer redressal even where the tribunal finds no breach of other protection standards. Measures selectively aimed at investors from ‘unfriendly countries’, such as currency transfer restrictions, prohibition on exports and imports of certain materials[22] and non-enforcement of intellectual property rights, can be said to be in breach of essential elements of the standard, such as “the stability of the legal and business framework in the state party”[23] and the investors’ legitimate expectations.

National Treatment and MFN

National Treatment and Most-Favored Nation Treatment (“MFN”) clauses may be said to be as flip sides of the same coin. National treatment clauses compel the host state to give foreign investors no less favorable treatment than nationals.[24] Similarly, MFN clauses mean that the host state cannot treat investors from the country in question any less advantageously than investors from any other country.

As discussed above, most Russian measures selectively target investors from designated ‘unfriendly’ countries, making a very strong case for claims under these clauses. Since these standards are relative ones, their scope of protection will vary according to the circumstances of the case and cannot be defined in the abstract.[25] Importantly, being relative means an MFN clause in a treaty may allow for importation of standards from treaties with other countries.[26] Importation of standards stems from the essence of the MFN clause, i.e., ‘treatment that is no less favourable’, extending the meaning of the word ‘treatment’ to encompass investment treaty obligations with other countries as well.[27]

Russia’s BITs with different countries have differing standards of protection. For example, the UK-Russia BIT[28] has narrower standards compared to the Denmark-Russia BIT.[29] In RosInvestCo UK v. Russia[30], clauses in the UK-Russia BIT limited jurisdiction of the tribunal with regard to expropriation. The tribunal invoked the MFN clause contained in the treaty to import broader clauses from the Denmark-Russia BIT. Regarding the several prospective violations of standards discussed above, investors may make use of the MFN clause to import standards from more favourable treaties.

Conclusion and the Way Forward

In the present geopolitical context created by Russia’s invasion of Ukraine, the world is witnessing a historic wave of sanctions and countermeasures, which has a grave impact on investors. Foreign investors with investments in Russia may find themselves trapped in a dilemma as a result of such measures, forcing them to choose between divestment from the Russian market as a result of international sanctions, and retention of their investments due to the risk of expropriation under the proposed legislation.. When foreign investors consider their choices, they may discover that investment treaty arbitration is the most promising way to recover losses or depreciated investments. As demonstrated in this essay, there is a broad scope for investment arbitration claims, against Russia for breaches of these BITs, such as forced asset sales, liquidation, or bankruptcy. Historically, the Russian Federation has refrained from participating in treaty arbitration claims arising out of the annexation of Crimea and Georgia. Moreover, Russia habitually challenges the awards of the arbitral tribunal in the local courts of the seat to restrict their enforcement. Therefore, at the commencement of any claim, the companies should consider effective enforcement strategies including preservation of information and documentation related to their claims. It is conceivable to enforce the award against Russian government commercial property, for instance, if Russia rents out a portion of an embassy to serve as a restaurant. Some states have already taken action to ensure that the concept of state immunity does not protect Russian assets in light of the unprecedented conflict against Ukraine. For example, the US administration has recently announced plans to sell confiscated Russian assets and Canada has also recently approved bill allowing the government to seize frozen Russian assets and utilise them to recover losses.[31] In the coming days, one can expect investor-state arbitration claims to be brought by both, Russian businesses against foreign states and foreign businesses against Russia.


*Om Agrawal and Shivendra Narayan are students from Dr. Ram Manohar Lohiya National Law University, Lucknow. They can be emailed at and respectively, and on LinkedIn here and here respectively.

[1] Energy Charter Treaty, Articles 26, 27 & 28.

[2] Vattenfall AB & others v. Federal Republic of Germany, ICSID Case No. ARB/12/12.

[3] Russian President’s Decree No. 81 of March 1, 2022, titled, “On Additional temporary economic measures to ensure financial stability in Russia” (“Decree No. 81”).

[4] Russian President’s Decree No. 79 of February 28, 2022 titled, “On the Application of Special Economic Measures in relation to Unfriendly Actions of the United States of America and Allied Foreign States and International Organizations” (“Decree No. 79”).

[5] Russian President’s Decree No. 95 of March 05, 2022 titled, “On the temporary procedure for fulfilling obligations to certain foreign creditors”, para 1-3.


[7] supra note 10, at para 3.

[8] supra note 9, at para 1.

[9] supra note 19, NIGEL, 167.

[10] ICSID Case No. ARB/03/5.

[11] supra note 10.

[12] supra note 9.

[13] ICSID Case No. ARB/10/15.

[14] supra note 19, NIGEL, at 471.

[15] David Rivkin & Mark Friedman, Financial Products as Investments in International Financial Disputes Arbitration and Mediation, (Jeffrey Golden & Carolyn Lamm eds., 2015)], 134-37.

[16] ICSID Case No. ARB/09/02.

[17]Decree No. 299 of the Government of the Russian Federation dated 6 March 2022 titled, “On Amendments to Clause 2 of the Methodology for Determining the Amount of Compensation Paid to a Patent Owner When Deciding to Use an Invention, Utility Model or Industrial Design without His Consent, and the Procedure for Its Payment”, available at

[18] Dany Khayat and William Ahern, ‘Reliance on Investment Treaty Standards to Claim for Failures to Recognize or Protect Intellectual Property Rights’, in Nassib G. Ziadé (ed), BCDR International Arbitration Review, (© Kluwer Law International; Kluwer Law International 2016, Volume 3 Issue 2), pp. 399 – 422.

[19] supra note 19, NIGEL, at 476.

[20] ICSID Case No. ARB/01/7.

[22] Decree No. 100 of 8 March 2022 titled, “On the application of special economic measures in the field of foreign economic activity in order to ensure the security of the Russian Federation” (“Decree No. 100”), para 1.

[23] LG&E Energy Corp. and others v. Argentine Republic, ICSID Case No. ARB/02/1.

[24] supra note 19, NIGEL, at 485.

[25] Id.

[26] Patrick Dumberry, ‘The Importation of the FET Standard through MFN Clauses: An Empirical Study of BIT’s’, in Meg Kinnear and Campbell McLachlan (eds), ICSID Review – Foreign Investment Law Journal, (The Author(s); Oxford University Press 2017, Vol. 32 Issue 1), 116 – 137.

[27] Id.

[28] Russian Federation-United Kingdom BIT (1989).

[29] Denmark-Russian Federation BIT (1993).

[30] SCC Case No V079/2005, Decision on Jurisdiction of October 2007.

[31] Budget Implementation Act, Notice of Ways and Means Motion to introduce an Act to implement certain provisions of the budget tabled in Parliament on April 7, 2022 and other measures, Division 31, available at online:

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