Protecting Foreign Investors in Crimea: Is Investment Arbitration an Option?

Screen Shot 2014-07-29 at 10.03.49Following the annexation of Crimea by Russia multiple reports suggest that there is underway a redistribution of property, which belongs not only to Ukraine but also to Ukrainian and foreign private owners.

This raises the question of whether interests of foreign investors can be protected by means of international arbitration.

A preliminary analysis of international public law and international investment law issues related to possible investors’ claims suggests that international arbitration may not offer any effective remedy.

Brief History and the Status of Crimea

In March 2014 Russia took advantage of political instability in Ukraine, which followed the ousting of president Viktor Yanukovich.

Arguing that the interests of the Russian-speaking population of Crimea was under threat Russia facilitated seizure of key administrative buildings in Crimea and deployed its troops, which had no official insignia. Subsequently Crimean authorities organised a referendum on the independence of Crimea.

Although only few countries recognised the referendum because of multiple irregularities, Russia accepted its results. As soon as Crimea proclaimed itself independent, Russia signed an agreement according to which Crimea became a part of the Russian Federation.

The question of whether Crimea now constitutes a part of Russia as a matter of international law depends on the legality of its annexation.

According to the 1970 UN Declaration on Principles of International Law Concerning Friendly Relations and Co-operation Among States (Friendly Relations Declaration) all peoples have a right “freely to determine, without external interference, their political status and to pursue their economic, social and cultural development.

Generally, self-determination is closely related to the protection of the rights of the minority and if such rights are protected in practice there is no reason and justification for external self-determination in the form of secession.

Most observers and international organisations agree that there were no serious violations of the rights of minorities in the autonomous republic of Crimea when it was a part of Ukraine. Therefore it is highly controversial whether the independence of Crimea was a result of expression of its population’s right of self-determination.

Secondly, even though Russia denied any accusations of unlawful use of force with regard to events in Crimea, there is plenty of evidence that actually supports this statement, including admissions of Russia’s president.

The Russian Ministry of Defence even established a special medal in 2014 “For Return of Crimea” which was awarded to its military personnel and those who serve in the special services.

As the International Court of Justice established in the Kosovo Advisory Opinion in 2010, unilateral declarations of independence can be illegal if “connected with the unlawful use of force or other egregious violations of norms of general international law”.

On 23 March 2014 the General Assembly of the United Nations adopted the Resolution on “Ukraine’s Territorial Integrity” calling not to recognise any change in the status of Crimea.

Therefore, it is unlikely that the international community at large will recognise the independence of Crimea any time soon.

That also means that in the eyes of international law Crimea remains a part of Ukraine.

Consequences of Unlawful Occupation

Although under international law Crimea is still a part of Ukraine, the only effective power in control on the peninsula is Russia.  That would suggest that Crimea might be considered an occupied territory.

There are two important UN General Assembly enactments dealing with the status of occupied territories.

First, the 1987 Declaration on the Enhancement of the Effectiveness of the Principle of Refraining from the Threat or Use of Force in International Relations states that neither acquisition of territory resulting from use of force nor any occupation of territory resulting from use of force in contravention of international law will be recognised as legal acquisition or occupation.

Second, the 1969 Declaration on Social Progress and Development calls for compensation for damage, be it social or economic in nature caused as a result of aggression and of illegal occupation of territory by the aggressor.

The UN Security Council has applied these principles in practice. For instance, according to UN Security Council Resolution 674 (1990) concerning the situation of the occupation of Kuwait by Iraq, Iraq was declared liable for  “…any loss, damage or injury arising in regard to Kuwait and third States, and their nationals and corporations, as a result of the invasion and illegal occupation…”.

In addition, the UN Compensation Commission stipulated that among the acts entitling claimants to compensation shall be “…actions by officials, employees or agents of the Government of Iraq or its controlled entities during that period in connection with the occupation”.

In other words, since the territory of Crimea is an occupied territory any damages caused to foreign investors may also be compensated provided that there is a causal link.

As a result, Russia as an occupying force in Crimea could be held liable for any violations of the investors’ rights under the rules of state responsibility for unlawful occupation.

However, as discussed in more detail below the lack of Russia’s consent to arbitration with foreign investors is likely to prevent any successful claim against Russia.

Possible claims against Ukraine

Can investors assert a claim against Ukraine? Although Ukrainian authorities will not be responsible for any expropriation or other “active” violations of investors’ rights committed in Crimea following its annexation, they may argue that Ukraine is under an obligation to provide full protection and security of foreign investments in its territory.

This standard of protection generally means that the host State is under an obligation to take measures to protect such investments from any violent actions.

Generally, arbitral tribunals have assumed that the standard of full protection and security applies exclusively to physical security and to the host State’s duty to protect the investor against violence stemming from State organs or private parties (see cases BG Group v. Argentina; Sempra v. Argentina; Eastern Sugar v. Czech Republic).

But the obligation to provide protection and security does not create absolute liability. For instance, the tribunal in Wena v. Egypt stated that:

a host state’s promise to accord foreign investment such protection is not an absolute obligation which guarantees that no damages will be suffered, in the sense that any violation thereof creates automatically a ‘strict liability’ on behalf of the host State

Therefore, to claim for full protection and security of investments one must prove that the actions are attributable to the State in question. It would be difficult to attribute the actions of the Crimean government to Ukraine given that Ukraine regards the Crimean government as illegitimate and has no effective control over it.

Moreover, Ukraine could rely upon a force majeure defence. According to the International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts:

the wrongfulness of an act of a State not in conformity with an international obligation of that State is precluded if the act is due to force majeure, that is the occurrence of an irresistible force or of an unforeseen event, beyond the control of the State, making it materially impossible in the circumstances to perform the obligation.

Ukraine could argue that Russia’s annexation amounted to force majeure which made it impossible to perform Ukraine’s obligations. It could argue that it was an irresistible force, which they could neither foresee nor control.

Possible Claims against Russia

The investor may also argue that after annexation of Crimea the conduct of the Crimean government can be attributable to Russia. Given the high degree of centralisation in the Russian Federation, the argument that now the Russian government runs Crimea seems plausible.

Although unlike Ukraine Russia is not a party to the ICSID convention, it has signed a number of bilateral treaties protecting rights of foreign investors.

The tribunal’s jurisdiction under any investment treaty is based on consent of the state and the investor. The question is whether Russia consented to protect investors in Crimea.

Apparently when Russia entered into investment treaties Crimea was not controlled by it.  Therefore Russia can argue that its consent did not cover the territory of Crimea.

Moreover, definition of the territory of each Contracting State is usually done by reference not only to domestic law but also to international law.

There is a strong argument that non-recognition by nearly all states in the world of Crimea’s annexation means that under international law Crimea is not a part of Russia which will put the tribunal in a difficult position.

The lack of consent can be cured by a subsequent agreement of Russia to investors’ claims. But consenting to such claims may open the floodgates to numerous investor claims, including claims of Ukrainian nationals. Therefore Russia is unlikely to consent.

As a result, the arbitral tribunal would not proceed to the merits of the dispute because of lack of jurisdiction.

Where does this leave the investor?

It appears that foreign investors are left without any effective remedies at least when it comes to international arbitration.

They may pressure their respective governments to seek compensation from Russia at the International Court of Justice or other bodies dealing with disputes between states. Under this approach they would follow the pre-BIT era pattern when governments acted on behalf of their nationals.

However, this would require a long-term commitment and overcoming various jurisdictional hurdles. Finally, there is the risk that any award or decision against Russia would be extremely difficult to enforce.

Yaraslau Kryvoi, Maria Tsarova

Dr Yaraslau Kryvoi is the founder and general editor of CIS Arbitration Forum. He holds law degrees from Harvard, Moscow and St Petersburg. He has been teaching and practicing international arbitration in Russia, the United States and England for over ten years. Most recently Dr Kryvoi was appointed a Co-Chair of the International Courts Committee of the American Bar Association’s Section of International Law.

Maria Tsarova is a PhD candidate at the Legislative Institute of the Verkhovna Rada of Ukraine. She holds degrees from Leiden University and Kiev National Taras Shevchenko University and studied international arbitration at the Arbitration Academy in Paris.

1 Comment on "Protecting Foreign Investors in Crimea: Is Investment Arbitration an Option?"

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  1. Joseph Key says:

    I wonder whether the Yukos case makes any difference to the analysis above.

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