Russia’s war against Ukraine affected many people and businesses, leaving a global impact. Foreign countries (States) imposed sanctions affecting the Russian economy during the war. Russia, in turn, imposed its own economic measures on foreign investors. There are two avenues to seek compensation from Russia for losses faced by these foreign investors: 1) international investment arbitration against Russia or 2) proceedings in Ukrainian courts.
Russia and Ukraine entered into an agreement in 1998—the Agreement on Mutual Protection of Investments (“Agreement”). Per the Agreement, Ukraine is to protect and encourage the investment of Russian businesses made on its territory. Similarly, Russia is to protect the investment of Ukrainian businesses on Russian territory. Therefore, both States are obliged to compensate for losses if they have damaged investments from foreign investors. Investment arbitration is a mechanism to resolve disputes between foreign investors and the State that hosted its investment.
Claims in Investment Arbitration vs. Claims in Ukrainian National Courts
Investors have the ability to seek compensation from Russia, for damages caused by Russia or expropriation of the investor’s business, through the Investor-State arbitration process. However, there are some restrictions. Investors are not able to seek compensation for personal injury or loss of personal property if it does not amount to an “investment” under the meaning of the bilateral investment treaty between Ukraine and Russia. Furthermore, investors do not have the ability to seek compensation for damages suffered by reason of Russia’s missile or artillery strikes on Ukrainian territory. Under Oschadbank v. Russian Federation, investors can only seek compensation for investments made after the Agreement (after 1998).
Pursuing damages through national courts, however, is not much easier. There are several procedural hurdles caused by Russia’s war against Ukraine. First, Russia is not an individual, and criminal proceedings normally are only available against individuals. But, unlike investment arbitration, investors can seek moral damages and damages for lost income and property. Therefore, in Ukrainian national courts, the only established procedure for investors to seek damages against Russia is a civil claim.
Effect of State-Imposed Sanctions on Russian Foreign Investments
Russia’s invasion of Ukraine triggered sanctions adopted by the European Union (“EU”). The EU imposed a number of financial restrictions, including prohibiting financing the Russian Federation, its government, and the Central Bank; holding accounts of Russian clients; entering into transactions with the Central Bank of Russia; providing credit rating services to any Russian person or entity; and providing public financing or financial assistance for investment in, or trade with, Russia. Among other financial prohibitions, the EU also imposed restrictions in other sectors, including transport, trade, energy, specific regions, and media. The United States (“U.S.”) also imposed a number of sanctions on foreign investment in Russia, focusing mainly on U.S. persons and entities. Some sanctions include a ban on new investment in Russia by U.S. persons, sanctions targeting Russian banks, and controls and restrictions on imports, exports, and debt.
Russia’s Economic Measures Imposed on Foreign Investors
Russia imposed a number of economic measures on foreign investments after various States imposed international sanctions against Russia. Some economic measures include a prohibition on foreign currency export of cash or monetary instruments exceeding $10,000 in value, restrictions on debt payment for the fulfillment of specific loan obligations by the Russian Federation to foreign creditors, banning imports and exports of certain products until December 31, 2022, and a temporary restriction on loans non-Russian residents can receive from Russian residents. Further, patent holders associated with States that imposed sanctions will not receive any of the actual proceeds from the use of their designs, models, and inventions. This includes the production and sale of goods.
Investment Treaty Arbitration
As disputes continue, foreign investors may find that investment arbitration is the most promising course of action when seeking compensation for lost and devalued investments due to the economic measures in Russia. International investment law is independent of national legal systems, as it is a treaty-based regime. Foreign investors and investments are protected from unfair interference by a host government. International investment treaty arbitration provides a neutral forum that Russia and Ukraine’s courts do not. Investors can bring an action before international arbitration tribunal, heard by independent arbitrators, in a neutral, fair forum. Because Russia has 62 bilateral investment treaties, investors covered by one can bring an action against Russia, claiming damages for the unlawful measures of Russia. This action would be heard before an international arbitration tribunal.
Investment treaty arbitration will become a powerful tool for investors seeking compensation for the violation of their rights by the Russian Government.
 Oschadbank v. Russian Federation, PCA Case No. 2016-14
 See Steven F. Hill, et al. Between a Rock and a Hard Place: The Sanctions Climate for Foreign Investment in Russia – Part I of II. (April 19, 2022) https://www.klgates.com/Between-a-Rock-and-a-Hard-Place-The-Sanctions-Climate-for-Foreign-Investment-in-Russia-Part-I-of-II-4-19-2022.
 See Decree No. 81 of 1 March 2022 titled, “On Additional temporary economic measures to ensure financial stability in Russia” (“Decree No. 81”), Paragraph ; see Steven F. Hill, et al. Between a Rock and a Hard Place: The Sanctions Climate for Foreign Investment in Russia – Part I of II (April 19, 2022). https://www.klgates.com/Between-a-Rock-and-a-Hard-Place-The-Sanctions-Climate-for-Foreign-Investment-in-Russia-Part-I-of-II-4-19-2022.
 See Decree No. 95 of 5 March 2022 titled, “On the temporary procedure for fulfilling obligations to certain foreign creditors” (“Decree No. 95”), Paragraphs  – , see Steven F. Hill, et al. Between a Rock and a Hard Place: The Sanctions Climate for Foreign Investment in Russia – Part I of II (April 19, 2022).
 See Decree No. 100 of 8 March 2022 titled, “On the application of special economic measures in the field of foreign economic activity in order to ensure the security of the Russian Federation” (“Decree No. 100”), Paragraph ; see Steven F. Hill, et al. Between a Rock and a Hard Place: The Sanctions Climate for Foreign Investment in Russia – Part I of II (April 19, 2022).
 See Decree No. 79 of 28 February 2022 titled, “On the Application of Special Economic Measures in relation to Unfriendly Actions of the United States of America and Allied Foreign States and International Organizations” (“Decree No. 79”), Paragraph ; see Steven F. Hill, et al. Between a Rock and a Hard Place: The Sanctions Climate for Foreign Investment in Russia – Part I of II (April 19, 2022) https://www.klgates.com/Between-a-Rock-and-a-Hard-Place-The-Sanctions-Climate-for-Foreign-Investment-in-Russia-Part-I-of-II-4-19-2022.
 See Steven F. Hill, et al. Between a Rock and a Hard Place: The Sanctions Climate for Foreign Investment in Russia – Part I of II (April 19, 2022) https://www.klgates.com/Between-a-Rock-and-a-Hard-Place-The-Sanctions-Climate-for-Foreign-Investment-in-Russia-Part-I-of-II-4-19-2022.
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