[This article is authored by Shuban Sheth, a second-year law student from JGLS, Sonipat.]
Keywords: Investor-State Dispute Settlement (“ISDS”) Mechanism; Investment Treaty Arbitration (“ITA”); Ukraine-Russia Bilateral Investment Treaty; Territorial and Temporal Scope of a Bilateral Investment Treaty.
In the wake of recent Russian aggression in Ukraine, several questions have been raised regarding the legal impact of the Russian occupation of Eastern Ukraine, particularly on Ukrainian investments in the region. Moreover, as the war draws to a standstill, the questions of State responsibility for the allegedly illegal expropriation of Ukrainian investments have begun to resurface. To address these questions, it would be worthwhile to look at the strategy employed by Ukrainian investors after the annexation of Crimea in 2014 and Russia’s subsequent response. This article will explore the unique interpretation of the Ukraine-Russia Bilateral Investment Treaty (“the BIT”) employed by Ukrainian investors to initiate Investor-State Treaty Arbitration proceedings against Russia at the Permanent Court of Arbitration (“PCA”) for the expropriation of their investments in Crimea. It will demonstrate the jurisdictional challenges faced by investment tribunals while considering claims from investors and the precedents set for investment disputes potentially arising due to the annexation of the regions of Donetsk and Luhansk. Furthermore, it will also trace the gradual change in Russia’s strategy to provide an insight into the approach Russia is likely to take in such disputes.
On 18th March 2014, President Putin signed the Treaty of Accession of Crimea, intended to provide the legal sanction to occupy the Crimean Peninsula. This resulted in several Ukrainian investors losing control over their substantial investments in Crimea due to the Russian occupation. Multiple factories and buildings were expropriated without compensating their Ukrainian owners. In the following years, Ukraine filed cases in multiple international courts, including the International Court of Justice and the International Criminal Court. However, Ukrainian investors were encouraged to utilise the BIT and file Investor-State Treaty Arbitration proceedings against Russia. Consequently, considering that effective control over their investments had transitioned from Ukraine to Russia, the investors argued that their domestic investments in Crimea had now become foreign investments, thereby allowing them to seek protection under the BIT. If the investors could establish that their investments fall within the definition of “investments” given under Article 1(1) of the BIT, they could seek compensation for the allegedly illegal expropriation of their investments and breach of the fair and equitable treatment standard under the BIT. While this approach prima facie seems opposed to Ukraine’s long-standing stance that Crimea is a part of Ukraine, a deeper analysis reveals the different approaches taken by Ukraine at different international tribunals.
The Jurisdictional Challenge
Evidently, the strategy employed by Ukrainian investors was an unprecedented application of the BIT, which was not anticipated when the treaty was drafted. Article 1(1) of the BIT defines investments as:
“Investments” shall denote all kinds of property and intellectual values, which are being invested by the investor of one Contracting Party on the territory of the other Contracting Party in conformity with the latter’s legislation.”
The definition of “investments” provided by the BIT is silent on whether it applied to investments made in a newly occupied territory even before its annexation. Therefore, the tribunals in these cases had to go beyond the plain text of the BIT and interpret whether it was intended to cover claims of this nature. To explicate this jurisdictional conundrum, we must dichotomise the issue into two sub-issues: the territorial scope and the temporal scope of the BIT.
I. The Territorial Scope of the BIT
The first question that needed to be determined by the tribunal was whether Crimea should be considered a part of Russian “territory” under the BIT and if de facto control of the region was sufficient to constitute it as a part of Russian territory. It is important to note that, consistent with Ukraine’s stance, the Claimants in these cases did not argue that Russia had de jure control over Crimea, but instead they argued that Russia had effective or de facto control over Crimea which provided sufficient grounds to recognise it as a part of Russian “territory” for the purposes of the BIT.
In Oschadbank v. Russia, it was argued by Russia that the tribunal lacks jurisdiction to hear the matter as it, being an investment tribunal, does not have the mandate to rule on disputes regarding de jure sovereignty. However, the court asserted that they don’t need to decide on who has sovereignty over Crimea, deeming that the question of sovereignty and that of protecting the investments under the BIT are independent of each other. Furthermore, it relied on Article 29 of the Vienna Convention on the Law of Treaties (“VCLT”) to stipulate that treaties apply to the “entire territory” of a country, which would include disputed territories as well. Any change in the territory of the country does not necessitate an additional agreement to be drawn as the initial treaty will continue to apply to all parts of the State’s territory. Although the factual matrix in Ukrnafta v. Russia and Stabil and others v. Russia were different, the tribunals found that under international law, ‘territory’ can have an independent meaning from ‘sovereignty,’ and the definition of the former does not depend on the latter.
The investment tribunals found that effective control and “the ability to legislate and to enforce its laws” was essential to fulfil the territorial scope of the BIT. The arbitrators in Oschadbank v. Russia pointed out that because Russia alone has the ability to legislate in Crimea and enforce the laws therein, Crimea must be considered to be a part of Russian territory for the purposes of the BIT. Furthermore, the arbitrators in Ukrnafta and Stabil v. Russia asserted that Russia’s unilateral public declarations that Crimea was an essential part of Russia gave rise to legal obligations to protect the investments. Therefore, the investment tribunals concluded that the territorial scope of the BIT extends to territories that have been annexed by a State even if the BIT does not expressly indicate the same.
II. The Temporal Scope of the BIT
Considering that the BIT does not mention a particular point in time after which an investment is covered under the BIT in cases of annexation, the tribunals had to examine the object and purpose of the BIT to determine its temporal scope. Tribunals held that per Article 31 of the VCLT, if the BIT did not expressly provide a temporal scope, it must be determined by interpreting the object and purpose of the treaty. The preamble of the BIT states that “…creating and supporting the favourable conditions for mutual investments…” is a part of the object and purpose of the BIT and therefore no limitations contrary to the preamble should be placed on the temporal scope of the BIT. Based on this reasoning, the arbitrators in Everest v. Russia found that the BIT does not require the investments to be made ab initio, i.e. after the BIT has been signed. Furthermore, even the Swiss Supreme Court which reviewed the award given in Ukrnafta v. Russia stated that no interpretation of the BIT would support a limitation that only investments made after the signing of the BIT were covered.
The issue of the temporal scope of the BIT has been a more polarising and controversial subject as compared to the territorial scope of the BIT. Russia argues that it never intended for the investments made in Crimea before its annexation to be considered as foreign investments within Russia. Furthermore, considering that the definition of ‘investments’ in the BIT has a legality requirement stating that the investment must be “… in conformity with the latter’s legislation (Host State),” Russia argues that none of these investments conformed with Russian legislation. As these investments were made when Crimea was controlled by Ukraine, they were made according to Ukraine’s legal requirements and do not constitute an investment in Russia as they do not fulfil the legal requirements in Russia. Based on these arguments, the Paris Court of Appeal, though generally pro-arbitration, set aside the award in Oshadbank v. Russia, deeming that the tribunal lacked jurisdiction ratione temporis. It is, however, important to note that the facts in this case are slightly different from the rest as the investment was made in Crimea before 1992, in the direct aftermath of the Soviet Union’s fall. Considering that Article 12 of the BIT states that it “… shall apply to all investments made by the investors of one Contracting Party in the territory of the other Contracting Party as of 1 January 1992…” this case clearly falls outside the scope of the BIT.
Therefore, the question of the temporal scope of the BIT cannot be definitively answered as it would depend on the timing of the investment.
Russian Strategy to Have Awards Set Aside
Initially, Russia chose not to participate in investment treaty arbitration proceedings brought against them concerning investments in Crimea because it believed that the tribunals lacked jurisdiction. However, once it noticed that multiple tribunals were assuming jurisdiction in cases where it could have easily argued that the temporal scope of the BIT was not fulfilled, it decided to change its strategy and challenge the tribunal’s jurisdiction at the preliminary stage itself.
Russia tried having the awards set aside by appealing to the relevant courts on jurisdictional grounds. Furthermore, it employed a disingenuous method of protecting almost all of its assets abroad by attributing them to the State’s sovereign immunity. It claimed that the assets were essential for Russia to protect its sovereignty, thereby prohibiting the Host State from appropriating the assets to the investors. It also issued diplomatic notes stating that any country’s attempt to enforce an award by attaching Russian assets would result in reciprocal seizures of that country’s assets in Russia. Thus, it ensured that all the claims are effectively rendered unenforceable, thereby denying compensation and all other recourses through other countries.
Through a detailed examination of various investment tribunals’ decisions on the status of investments in Crimea, this article demonstrated how Ukrainian investors uniquely made use of the Investor-State Dispute Settlement system to receive protection under the BIT. It looked at the complex jurisdictional conundrum posed to the tribunals and examined the territorial and temporal scope of the BIT. Furthermore, it traced the legal strategy employed by Russia in prior investment disputes, thereby providing a glimpse into their potential approach in future investment disputes. The Crimean Model has created a precedent for future Investor-State disputes in newly occupied regions like Donetsk and Luhansk. Therefore, it has become imperative to reassess the enforcement mechanisms within the ISDS system to ensure that arbitral awards passed by future tribunals are not rendered unenforceable in this manner.