RUSSIAN INVESTMENT ARBITRATION UPDATE
Author: Roman Zykov
Why do you believe that there has been such a large increase in BITs over the last couple of years?
The expansion of Russian business abroad. At the beginning of 2000s Russian companies made a number of strategic investments in the ex-Soviet republic while the host states economies urgently required investments and also were weakened by the late 90’s crisis. After the financial crunch the host states decided to review their state revenues, and it affected some of the Russian investments. Most of the BIT’s claims are against Turkmenistan, Ukraine, Lithuania, Mongolia and India. India and Mongolia are very lucrative markets for the telecom and mining industries.
The reason why the investment claims materialized only now is because by 2010-2012 the value of accumulated investments made into the foreign assets reached a significant level (a few billions USD in each case). Another reason is that it is much more difficult to re-enter the markets now than it was 10-15 years before, therefore, it is worth protecting the investments.
Do you see this trend continuing or has the volume of cases going to arbitration through BITs now peaked?
It is hard to say. There is news coming from different parts of the world that Russian companies encounter problems in protecting their investments abroad. Rusal in Nigeria is one of the possible cases where the Nigerian court stripped Rusal of its aluminum plant. The damages may be around USD 200 million. It is important that the Russian Ministry of Foreign Affairs supports Russian companies. At least that was the case with Rusal in Nigeria and Sistema in India.
Are there any disadvantages to the increasing use of BITS compared to earlier legal forums for resolving these problems?
There are no other avenues, other than BITs, available against the Russian state, and very few, besides BITs, available to the Russian companies for protecting their investments. It is understandable that the national courts are not viewed as a proper means of protection irrespectively of the hosting state.
Russia is not a party to the ICSID Convention hence Russian companies can only use the Additional facility. On the opposite, most of the former soviet republics are parties to the ICSID (Armenia, Azerbajan, Belarus, Georgia, Turkmenistan from 1992, Uzbekistan from 1995, Kazakhstan and Ukraine from 2000, Moldova from 2011). In my opinion Russian companies may start using the ICSID Additional Facility more frequently.
Russia withdrew from the Energy Charter Treaty, which applied provisionally until October 18, 2009. I do not expect any other claims than the Yukos claim against the Russian state.
BIT’s remain the only available means for the resolution of investment disputes against Russia. However, Russian companies may also find the Additional facility useful.
What is your view of Sistema’s chances if they do proceed with an arbitration challenged against the Indian Government over the 2G licenses?
Russia-India BIT’s has a two-step arbitration clause. Provided the parties agree, all disputes are first referred to conciliation under the UNCITRAL Conciliation rules. If conciliation fails, all disputes shall be referred to an ad hoc arbitration under the UNCITRAL Arbitration Rules, a panel of 3 arbitrators (the chairman is elected by the arbitrators appointed by the parties).
It all depends on the expected decision of the Indian Supreme Court. In the event of a BIT claim a tribunal will have to establish whether the expropriation actually took place (whether the judgment amounts to the violation under the BIT). Another important question is whether the decisions to grant or revoke licenses was due to some corrupt practices.
I think that Sistema will wait for the outcome of the case in the Indian state court prior to taking any further steps. Again, it all depends on the dispositive of the court’s decision.
Why do you think Sistema but not many other international telecoms players impacted by the Indian decision have invoked Bits?
Sistema’s investment is quite significant: a 56,68% stake in Systema Shyam TeleServices Ltd (SSTL), 22 licenses covering 15 million subscribers and around USD 3 billion investment. This is certainly something to fight for.
Two other telecom operators impacted by the Supreme Court decision are Telenor and Etisalat. While both of them announced quitting India, I believe it does not necessarily mean that they will not arbitrate.
The national anti-bribery rules applicable to Telenor and Etisalat may be the reason for them to quit the market. Other than that, the reasons are not clear to me.
Are there any particularly industries where BITs are more effective or used than others?
All known Russia-related investment claims under the BITs are in the energy, mining and construction areas. I would not say that BITs are used more effectively in some industries than others. It might be interesting that among investment cases administered by the Stockholm Chamber of Commerce investors prevail in only 50% of the cases with the average recovery of around 30% of the amount sought.
Why do you believe that there has been such a large increase in BITs over the last couple of years?
The expansion of Russian business abroad. At the beginning of 2000s Russian companies made a number of strategic investments in the ex-Soviet republic while the host states economies urgently required investments and also were weakened by the late 90’s crisis. After the financial crunch the host states decided to review their state revenues, and it affected some of the Russian investments. Most of the BIT’s claims are against Turkmenistan, Ukraine, Lithuania, Mongolia and India. India and Mongolia are very lucrative markets for the telecom and mining industries.
The reason why the investment claims materialized only now is because by 2010-2012 the value of accumulated investments made into the foreign assets reached a significant level (a few billions USD in each case). Another reason is that it is much more difficult to re-enter the markets now than it was 10-15 years before, therefore, it is worth protecting the investments.
Do you see this trend continuing or has the volume of cases going to arbitration through BITs now peaked?
It is hard to say. There is news coming from different parts of the world that Russian companies encounter problems in protecting their investments abroad. Rusal in Nigeria is one of the possible cases where the Nigerian court stripped Rusal of its aluminum plant. The damages may be around USD 200 million. It is important that the Russian Ministry of Foreign Affairs supports Russian companies. At least that was the case with Rusal in Nigeria and Sistema in India.
Are there any disadvantages to the increasing use of BITS compared to earlier legal forums for resolving these problems?
There are no other avenues, other than BITs, available against the Russian state, and very few, besides BITs, available to the Russian companies for protecting their investments. It is understandable that the national courts are not viewed as a proper means of protection irrespectively of the hosting state.
Russia is not a party to the ICSID Convention hence Russian companies can only use the Additional facility. On the opposite, most of the former soviet republics are parties to the ICSID (Armenia, Azerbajan, Belarus, Georgia, Turkmenistan from 1992, Uzbekistan from 1995, Kazakhstan and Ukraine from 2000, Moldova from 2011). In my opinion Russian companies may start using the ICSID Additional Facility more frequently.
Russia withdrew from the Energy Charter Treaty, which applied provisionally until October 18, 2009. I do not expect any other claims than the Yukos claim against the Russian state.
BIT’s remain the only available means for the resolution of investment disputes against Russia. However, Russian companies may also find the Additional facility useful.
What is your view of Sistema’s chances if they do proceed with an arbitration challenged against the Indian Government over the 2G licenses?
Russia-India BIT’s has a two-step arbitration clause. Provided the parties agree, all disputes are first referred to conciliation under the UNCITRAL Conciliation rules. If conciliation fails, all disputes shall be referred to an ad hoc arbitration under the UNCITRAL Arbitration Rules, a panel of 3 arbitrators (the chairman is elected by the arbitrators appointed by the parties).
It all depends on the expected decision of the Indian Supreme Court. In the event of a BIT claim a tribunal will have to establish whether the expropriation actually took place (whether the judgment amounts to the violation under the BIT). Another important question is whether the decisions to grant or revoke licenses was due to some corrupt practices.
I think that Sistema will wait for the outcome of the case in the Indian state court prior to taking any further steps. Again, it all depends on the dispositive of the court’s decision.
Why do you think Sistema but not many other international telecoms players impacted by the Indian decision have invoked Bits?
Sistema’s investment is quite significant: a 56,68% stake in Systema Shyam TeleServices Ltd (SSTL), 22 licenses covering 15 million subscribers and around USD 3 billion investment. This is certainly something to fight for.
Two other telecom operators impacted by the Supreme Court decision are Telenor and Etisalat. While both of them announced quitting India, I believe it does not necessarily mean that they will not arbitrate.
The national anti-bribery rules applicable to Telenor and Etisalat may be the reason for them to quit the market. Other than that, the reasons are not clear to me.
Are there any particularly industries where BITs are more effective or used than others?
All known Russia-related investment claims under the BITs are in the energy, mining and construction areas. I would not say that BITs are used more effectively in some industries than others. It might be interesting that among investment cases administered by the Stockholm Chamber of Commerce investors prevail in only 50% of the cases with the average recovery of around 30% of the amount sought.