ECT’s provisional application: Russia continues to be bound by the investment protections in the ECT

Investors in Russia’s energy sector may well have suffered losses due to recent Russian government measures. These losses may be recoverable by way of arbitration under the Energy Charter Treaty (ECT).

To determine whether protections under the ECT and a claim against Russia are available to them, investors should ask themselves the following questions:

1. Did the country of incorporation of my investment vehicle sign the ECT?
2. Do I have an investment in the Russian energy sector?
3. Was my investment in the Russian energy sector made in or prior to 2009?
4. Has my investment in Russia been affected by Russian government measures?

1. Did the country of incorporation of my investment vehicle sign the ECT?

The ECT is a multilateral treaty that protects investors from signatory countries making investments in other signatory countries. 

The ECT has over 50 signatories, including, inter alia, the European Union, the UK, and Japan. Qualifying investors based in countries that signed the ECT enjoy its protections when making investments into the other signatory states. The investor protections of  the ECT are among the most generous available under any investment treaties. In fact, they are much broader than protections afforded under most Bilateral Investment Treaties (BITs) between Russia and other states. These BITs tend to be more restrictive on the protections available to foreign investors, eg the majority of Russian BITs seek to limit the scope of claims that may be referred to arbitration.

2. Do I have an investment in the Russian energy sector?

The ECT is a sector-specific investment treaty. This means that it only covers investments related to the energy sector. What constitutes an “investment” is defined broadly in the ECT and includes any asset owned or controlled directly or indirectly by an investor, eg shares in a local company, claims to money, returns from an investment, and any property rights, including project financing for energy projects. Generally, the definition is flexible and includes a variety of notions of investment which arbitral tribunals have accepted as qualifying under the ECT.

3. Was my investment in the Russian energy sector made in or prior to 2009?

This is an important question, because only investments made prior to 30 July 2009 benefit from investment treaty protection under the ECT.

Russia terminated the ECT on 30 July 2009. It continues, however, to be obligated to afford investment protection under the Treaty through the mechanism of provisional application as well as the sunset clause.

The “provisional” application of the ECT takes effect where a contracting party has signed the ECT but is yet to fully ratify it (Article 45(1)). This means that investors from other ECT contracting states will enjoy the full set of the ECT’s investment protections in those states where the ECT is merely provisionally applicable. This provisional application also encompasses the ECT’s investor-state dispute settlement mechanisms (Article 26), which include investor-state arbitration. The ECT’s provisional application is only limited in one respect: the ECT does not provisionally apply where such application would be “inconsistent” with the signatory’s constitution, laws, or regulations.

A contracting party may also terminate the provisional application. Such termination means that new investments into the terminating state will no longer be protected. However, existing investments made during the provisional application period and before the state terminated such provisional application will continue to be protected for 20 years – the so-called “sunset” period. Claims for a breach of investment protection standards, such as fair and equitable treatment and prohibition against unlawful expropriation, may therefore still be brought by investors against the terminating state for a period of 20 years after the termination. Investments are thus protected for the entirety of the sunset period, including for any breaches that take place up until 30 July 2029.

Russia signed the ECT in 1994 but never ratified it, therefore the ECT provisionally applied to Russia since 1994. 

In practice, Russia has sought to challenge the provisional application of the ECT. Russia’s main argument is that the ECT cannot provisionally apply to Russia because the dispute resolution mechanism in the ECT is inconsistent with Russian law and constitutional order. To date, all arbitral tribunals dealing with claims against Russia under the ECT’s provisional application have upheld their jurisdiction.

All five tribunals that have considered Russia’s challenges to the ECT’s provisional application, rejected them and confirmed their jurisdiction (Hulley Enterprises, Yukos Universal, Veteran Petroleum, Yukos Capital, and Luxtona). Contrary to Russia’s arguments, the tribunals found that the ECT was not inconsistent with Russian law and favoured an “all-or-nothing” approach, meaning that provisional application encompasses both substantive provisions and the dispute settlement mechanism of the ECT. Thus, all arbitral tribunals held that investors were entitled to bring a claim against Russia. 

Russia tried to challenge these arbitral awards in setting aside proceedings at the seats of each respective arbitration arguing that the tribunals erred in their jurisdictional findings. Yet, the highest courts of the Netherlands (for Hulley Enterprises, Yukos Universal, Veteran Petroleum) and Switzerland (for Yukos Capital) dismissed Russia’s arguments. In the most recent case, Luxtona, Russia also challenged the award on jurisdiction at the seat. The challenge is currently pending before the Ontario Superior Court of Justice.

Thus, if an investor from another ECT contracting state made an investment in Russia’s energy sector between 1994 and 2009, the ECT protections for that investment, and the ECT’s dispute resolution mechanisms, will continue and be valid under the sunset period until 2029.

4. Has my investment in Russian been affected by Russian government measures?

Since its invasion of Ukraine in early 2022, Russia has implemented a series of measures directed against investors from the so-called “unfriendly states”. These measures comprise, inter alia, restrictions on transfer of dividends out of Russia or exiting Russia, energy price caps.

As a result, the value of the investments of foreign investors may have been impaired. 

Insofar as the answer to the above four questions is yes, you (or you company) may be able to pursue a claim against Russia on the basis of the ECT and be awarded compensation. 

While an ECT claim and eventual enforcement is unlikely to be straightforward, it nevertheless represents one of the best available option for businesses facing significant damages and little realistic prospect recouping their losses.