The crippling economic sanctions the West imposed in response to Russia’s invasion of Ukraine have led to Russian retaliation. Russia’s symbolic sanctions of President Biden and Canadian Prime Minister Justin Trudeau may get headlines, but the real economic consequences of Putin’s frustration are falling on companies that have made years of investments in Russia.
Exemplary is Russia’s treatment of Peppa Pig (yes, that Peppa Pig). Hasbro sought enforcement of its trademark for the popular British children’s cartoon in Russia; that case was rejected by a Russian judge explicitly in light of the “unfriendly actions of the United States of America and affiliated foreign countries.” Russia’s attitude towards Peppa Pig is not limited to a laughable kids cartoon. Russia has adopted measures that effectively allow it to steal foreign intellectual property with no consequences.
Russia has since moved on from intangible property to the tangible. Airlines (among them, Russia’s Aeroflot) typically lease their fleets. Western sanctions have effectively ensured that the over 500 foreign-leased airplanes currently in Russia—estimated by some to be worth in excess of $10 billion—have no commercial routes to fly. Normally, the multilateral treaty “Cape Town Convention” would allow lessors to quickly recover their planes when a leasing airline cannot pay. The lessors now want their planes back but Russia has passed a measure allowing its airlines to expropriate foreign-owned planes by simply re-registering them in Russia.
Undoubtedly, these will not be the last expropriatory measures the Russian government takes against foreign investors. Mercedes-Benz is already mulling the possibility that it could lose over €2 billion in Russian assets. Companies worldwide, from McDonald’s to Proctor and Gamble to Pepsi and Shell have already pulled out, with Russian retaliation likely. Meanwhile, Russia has adopted legislation calling for the appointment of external administrators for any companies that cease operations and are more than 25% foreign owned while imposing severe capital controls and allowing repayment of foreign-currency denominated debt in rubles. Russian courts are highly unlikely to provide any relief to foreign investors harmed by these measures.
International arbitration may provide a remedy to foreign investors whose assets have been targeted by Russia. Russia is party to more than 60 bilateral investment treaties (BITs) in force today, including treaties with the Netherlands, United Arab Emirates, Singapore, Lithuania, Moldova, Argentina, Japan, Turkey, South Africa, Finland, Norway, Italy, Denmark, Sweden, Spain, Germany, France, the United Kingdom, and Canada. These treaties protect foreign investors against expropriation and other forms of mistreatment and are directly enforceable through binding investor-state arbitration. The Netherlands-Russian treaty, for example, guarantees “fair and equitable treatment,” protection against direct or indirect expropriation without compensation, most-favored nation protection, and free transfer of payments in a convertible currency. Protected investors may enforce these rights directly through arbitration before the Stockholm Chamber of Commerce, with the resulting awards collectable against Russian state assets around the world.
Russia’s invasion of Ukraine has made it an economic pariah. As Russia increasingly retaliates against foreign investors, investor-state arbitration offers a realistic path for recovery against the Russian state.
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