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Russian Law to Seize Control Over Assets of Hosted Foreign Investors: A Violation of International L

Introduction


The Russian parliament is presently on discourse over a draft bill that, if passed, would empower the government to seize the assets of foreign businesses that have been doing business in the nation since February 24, 2022.


The draft legislation on imposing external administration would allow the federal tax authority to petition the Moscow Arbitration (Commercial) Court to appoint the Russian state development corporation, VEB.RF, or another interdepartmental commission as a 'external administrator' for a firm.


Businesses to potentially face an impact include those where the controlling person or owner of at least 25% of the company is a foreigner from an ‘unfriendly’ country, categorised on the basis of geo-political ties of the Russian Federation, such as the United Kingdom or the United States. To be placed under external management, the enterprise must be critical to maintaining economic stability or safeguarding the rights and legitimate interests of Russian residents in Russia.


It is not the physical invasion of property that characterizes nationalizations or expropriations that has assumed importance, but the erosion of rights associated with ownership by State interferences. So, methods have been developed to address this issue.[1] In addition to the ECT, which has been quoted above, treaties in force that deal with the protection of investments typically address also indirect expropriations or measures having equivalent effect.[2]


This article gives an in-depth insight into potential violations of international law that can arise if the statute comes into legal effect. It does so by covering grounds of the use of force under Article 2(4) of the UN Charter, justifiability as a counter measure, and violation of customary international law on investments, and brings to light an obligation for restitution on the Russian government should such seizures of assets happen.


Violation of Article 2(4) of the UN Charter


Article 2(4) of the Charter requires that states to refrain in their international relations, from the threat or use of force, “All Members shall refrain in their international relations from the threat or use of force against the territorial integrity or political independence of any state or in any manner inconsistent with the Purposes of the United Nations.” It endows the prohibition of force as a general and authoritative principle.[3] The substantial majority of legal scholars attribute the norm contained in Article 2(4) a jus cogens character.[4]The same has also been regarded as jus cogens by the International Court of Justice and the International Law Commission.[5] The principle enshrined under Article 2(4) of the Charter therefore has the character of an international customary law.


The principle of non-intervention, as one of the fundamental norms of international law, is embodied in the Charter of the United Nations and firmly established in state practice and customary international law. Among early treaty formulations of the principle was Article 15(8) of the Covenant of the League of Nations and the Montevideo Convention on Rights and Duties of States of 1933, which prohibited interference with the freedom, the sovereignty or other internal affairs, or the processes of the Governments of other nations, together with the Additional Protocol on Non-Intervention of 1936. The principle enshrines sovereign equality of all nations. The prohibition of use of force covers within its ambit the blocking of investments by Russia which violated the sovereignty and integrity of the countries where the investors are incorporated by infringing its right to trade and other rights associated to its sovereign character.


Justifiability as a countermeasure


Countermeasures that violate fundamental human rights obligations[6] and involve the use or threat of force[7] are unlawful.[8] Countermeasures must be necessary “to safeguard an essential interest against a grave and imminent peril”[9] and proportionate, including quantitatively equivalent,[10] in response to an internationally wrongful act. The actions of the countries where the investors are incorporated does not tantamount to an internationally wrongful act, the ordinance introduced by Russia against these actions involve the use of force and do not satisfy the test of necessity or proportionality and hence is not a justified countermeasure.


According to Article 25(1) ILC Articles, necessity may not be invoked by a state as a ground precluding the wrongfulness of an act not in conformity with an international obligation of that state unless the act is the only way for the state to safeguard an essential interest against a grave and imminent peril; and does not seriously impair an essential interest of the state or states towards which the obligation exists, or of the international community as a whole.


In order to establish an essential interest against a grave and imminent peril, Russia in the first instance has to demonstrate a grave and imminent character of this peril.[11] Afterwards Russia has to establish the essential character of its interest against such a peril.[12] None of that can be effectively done by Russia.


Economic objectives or irrationality in allocation of budget funds can qualify as a "grave peril", required by Article 25(1) ILC Articles. According to the tribunal in LG&E v. Argentina, in order for the peril to qualify as grave and imminent “the threat […] must be extremely grave”.[13] The tribunal in CMS v. Argentina held that even “[a] severe crisis cannot necessarily be equated with a situation of total collapse”,[14] required by Article 25(1) ILC Articles. The economic losses faced by Russia cannot be equated to a completely collapse of its economy. The threat is not grave or eminent and hence an essential interest of Russia cannot be drawn out for it to justify its action as a justified countermeasure.


Violation of Customary International Law relating to investments


Under customary international law, foreign investors are entitled to a certain level of treatment, and any treatment which falls short of this level, gives rise to responsibility on the part of the State. The international minimum standard includes fair and equitable treatment, full protection and security and compensation against expropriation.


Violation of fair and equitable treatment obligation


Russia owed a duty to accord fair and equitable treatment to the countries where the investors are incorporated, an element of this duty is the prohibition of arbitrary behaviour towards the investor state. As provided in the ELSI v. Italy, arbitrariness is “a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of judicial propriety”.[15] To meet the obligation to accord fair and equitable treatment, a host state shall ensure that “all relevant legal requirements for the purpose of initiating, completing and successfully operating investments made, or intended to be made,…should be capable of being readily known to all affected investors…There should be no doubt or uncertainty in such matters.”[16]


The ordinance issued by Russia expropriating assets and suspending pending contractual payments came as a shock to the affected investors and the same was not made readily known to the investors beforehand. Such uncertainties in the legislations regarding the successful operation of investments in Russia state indicates arbitrary behaviour on part of Russia and hence a violation of the fair and equitable principle.


The right to due process being one of the core rights of an investor, to grant the same, the host state should ensure that there is an operative mechanism of challenging governmental decisions which affect the investor.


While the countries where the investors are incorporated had a possibility to resort to the state courts of Ruth, it would be futile. Given that the requirements for granting a license are confidential, the countries where the investors are incorporated would be unable to make a case before the national courts of Ruth, challenging the denial to grant a license to its investment. Hence, under the circumstances, the countries where the investors are incorporated in fact had no access to due process.


The key element of the fair and equitable treatment standard is the requirement to protect the legitimate expectations of investors.[17] This requirement includes the obligation of the host state to maintain a stable legal framework for the investors,[18] which means that it should act consistently, without ambiguity, and transparently.[19] Moreover, the host state is under an obligation to meet the expectations of the investors, which arose out of direct or indirect representations or promises made by the host state.[20]


The countries where the investors are incorporated established its investment in Russia state upon availing the requisite permits and licenses. The legitimate expectations can be based on the legal orders of the host state and/or explicit and implicit assurances,[21] which among other things includes licenses.[22] Hence, the countries where the investors are incorporated was entitled to expect the host state to act without arbitrarily revoking any pre-existing decisions or permits issued by the state that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities.[23] Russia however failed to provide a transparent, stable legal framework and hence failed to protect the legitimate expectations of the countries where the investors are incorporated.


In CME v. Czech Republic the host state had reversed its previous position on the legal situation of the holder of the license, which caused damage to the investor. The tribunal came to a conclusion that “the [Government] breached its obligation of fair and equitable treatment by evisceration of the arrangements in reliance upon with the foreign investor was induced to invest.”[24] In this instance, investors relied on the legal situation in Russia state at the time of its establishment in the state. This legal situation would completely reversed by way of the law introduced by Russia and hence cause severe damage.


Impairment of conduct

To make a plea of necessity the conduct in question must not seriously impair an essential interest of the state towards which the obligation exists.[25] Investors derive benefits from the investment made in the countries where the investors are incorporated state, this in turn was the basis on which the countries where the investors are incorporated state was operating. Hence, it formed a regular conduct wherein the parties were acting in accordance with the international investment law. However, the illegal ordinance promulgated by Russia state impaired the usual course of practice which had been recognised as legitimate, hence seriously impairing the conduct of the countries where the investors are incorporated.


Arousal of the restitution obligation under Customary International Law


A case of judicial restitution


This being said, according to James Crawford, “[c]ustomary law or treaty may create obligations to which is annexed a power to demand specific restitution”.[26] As it is established by the International Court of Justice in the Chorzów Factory case, not only restitution may be claimed, but it is a primary remedy for a breach of an international obligation.[27] The ITLOS in M/V Saiga (No 2) cited the Chorzów Factory as an authority and confirmed the primacy of restitution as a remedy for a breach of an international obligation.33 Russia violated international treaty obligations as well as customary international law on investment thereby the COUNTRIES WHERE THE INVESTORS ARE INCORPORATED is entitled to restitution as a primary remedy against the breach of international obligations on part of Russia.


Article 12 ILC Draft Articles frames customary international law on detecting a breach of an international obligation. As it follows from Article 12 ILC Draft Articles, certain obligations may be breached by the mere passage of incompatible legislation. As it further follows from Article 35 ILC Draft Articles, in this case the aggrieved party is entitled to claim restitution, which shall take the form of "the reversal of some juridical act".34 Such a juridical restitution is not alien to practice of international tribunals and was granted, for instance, in the Case of Radio East35, where the tribunal ordered Egypt to revoke a decree violating the 1932 Madrid International Telecommunications Convention. The illegal ordinance promulgated by Russia is conflicting with the international obligations it owed to the countries where the investors are incorporated. Hence, the claim for restitution is available to the countries where the investors are incorporated under customary international law, it being a reversal of the illegal action on part of the countries where the investors are incorporated by a passage of an inconsistent legislation.


Non-exclusion of Judicial restitution under customary international law


In customary international law restitution can be excluded only in two cases, namely, when restitution is materially impossible and when it is disproportionate (Article 35 (a) and (b) ILC Articles). Nevertheless, Russia cannot effectively invoke these defences.

The typical cases when restitution is materially impossible are destruction of the object in question[28] or serious effect of restitution on the position of third parties.[29] Restitution may not be found impossible merely due to legal or practical difficulties.[30] The object in question, being the investment made by investors in Russia state would neither be destroyed nor would there be a serious effect of restitution on any third party. Further, the restitution claimed by the countries where the investors are incorporated is proportionate to the adverse effects of the illegal expropriation of assets on the countries where the investors are incorporated. Hence, restitution cannot be excluded in this regard.




[1]UNCTAD Series on issues in international investment agreements, Taking of Property 20 (2000).

[2]UNCTAD Series on issues in international investment agreements, Taking of Property 41 (2000).

[3]Louis Henkin, ‘Use of Force: Law and US Policy’ in Right v. Might, International Law and the Use of Force (Council on Foreign Relations Press 1991) 38.

[4]Malcolm N Shaw, International Law (Grotius, 1991) 686; Antonio Cassese, International Law in a Divided World (OUP 1994)141; Edip Celik, Milletlerarasti Hukuk (International Law) (Filiz Kitabevi 1982) 410.

[5]Nicaragua v. United States, para. 183; Democratic Republic of the Congo v. Uganda, para. 148; Legal Consequences of the Construction of a Wall in the Occupied Palestinian Territory, Advisory Opinion, I.C.J. Reports 2004 (Sep. op. Elaraby), p. 254; Oil Platforms (Islamic Republic of Iran v. United States of America) (Dis. op. Elaraby), p. 291; Oil Platforms (Islamic Republic of Iran v. United States of America) (Sep. op. Kooijmans), para. 46; Yearbook of ILC (1996-II), p. 247.

[6]Article 17, The International Covenant on Civil and Political Rights (1966).

[7] Article 2(4), The Charter of The United Nations (1945).

[8]Article 50(1)(a-b), The Articles on the Responsibility of States for Internationally Wrongful Acts (2001).

[9]Id., Article 25(1)(a); Thomas Franck, On Proportionality of Countermeasures in International Law, 102 AJIL 715, 741 (2008).

[10]Enzo Cannizzaro, The Role of Proportionality in the Law of International Countermeasures, 2001 EJIL 889, 906-07.

[11]Supra Note 8, Article 25(1).

[12]Id.

[13]LG&E International Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, ¶253.

[14]CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, ¶354

[15]Elettronica Sicula S.p.A. (ELSI) (U.S. v. Italy), 1989 I.C.J. 15, ¶128.

[16]Metalclad Corporation v. The United Mexican States, ICSID Case No. ARB(AF)/97/1, ¶76.

[17]Supra Note 14; Total S.A. v. The Argentine Republic, ICSID Case No. ARB/04/01, ¶114.

[18]Supra Note 13, ¶124; Supra Note 14, ¶¶160-161.

[19]Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, ¶154.

[20]Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8, ¶333.

[21]Id.

[22]Metalpar S.A. and Buen Aire S.A. v. The Argentine Republic, ICSID Case No. ARB/03/5, ¶185.

[23]Supra Note 19.

[24]CME Czech Republic BV v. Czech Republic, Final award and separate opinion, (2006) 9 ICSID Rep 264, ¶611.

[25]Supra Note 18

[26]James Crawford, Brownlie’s Principles of Public International Law, Oxford University Press (2019), p.569.

[27]Factory at Chorzów, Germany v. Poland, Jurisdiction, Judgment, PCIJ Series A No 9, ICGJ 247 (PCIJ 1927), ¶48; New Zealand v. France, (1990) 82 ILR 500, ¶114; LaGrand, Germany v. United States, ICJ GL No 104, ¶128(7); Congo, The Democratic Republic of the v. Belgium, [2002] ICJ Rep 3, ¶¶72-77, 78(3); Avena and Other Mexican Nationals, Mexico v. United States, [2004] ICJ Rep 12, a ¶¶128-143.

[28]Supra Note 8, Article 35

[29]Id.

[30]Id.

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