Russian Sanctions against Turkey and BIT Claims

by Orçun Çetinkaya, Moroğlu Arseven

Following the downing of a Russian jet by Turkey on 24 November 2015, Russian-Turkey relations have entered into a new phase. Russia imposed a series of economic measures and sanctions against Turkey. Turkish individuals and companies who invested in Russia where they spent decades have been negatively affected from those measures. There might be claims in future under Turkey- Russia BIT if those sanctions continue.

SANCTIONS

The first step in this direction was a decree prohibiting Turkish products along with other sanctions, approved by the President of Russia Vladimir Putin on 28 November 2015. With this presidential decree (numbered 583), the legal ground was prepared for economic embargos on Turkey and Turkish goods and services.

Following this decree, the Russian Government fleshed out the decree’s commercial sanctions with an Executive Order on 30 November 2015 (numbered 1296). On 28 December 2015, some amendments were introduced to the previously approved decree, indicating the specifics and scope of previously determined sanctions.

Major sectors that are affected by the commercial sanctions are construction, tourism and hotel management, architecture, engineering-technical projects (technical tests, research, analysis) and woodworking.

Additionally, from 1 January 2016, it is also prohibited for companies that are subject to Turkish legislation and/or controlled by Turkish citizens to do business with the Russian government or municipalities, regardless of the sector these companies operate in. A public statement by the Russian government explains that the sanctions in the Executive Order do not apply to projects contracted before 1 January 2016.

The types of the sanctions, limitations and prohibitions applied by Russia against Turkey include:

Imports of Agricultural Goods, Raw Materials and Food Products Prohibited:

The Russian government imposed an embargo on Turkish products, especially fruits, vegetables, flowers, chicken, turkey and salt. In this regard:

Fruits: Orange, fresh or dried, Tangerine (all kinds and hybrids), fresh or dried, grapes, fresh, apple, fresh, pear, fresh, apricot, fresh, peach and nectarine, fresh, plum and sloe, fresh, strawberry, fresh;

Vegetables: Tomato, fresh or cooled, onion, fresh or cooled, Cauli and broccoli, fresh or cooled, cucumber and gherkin, fresh or cooled;

Birds: Pieces and giblets of chicken, frozen, pieces and giblets of turkey, frozen;

Others: Clove, fresh, salt and pure sodium chloride; sea water.

Turkish Companies Prohibited from Carrying Out Certain Activities in Russia:

In certain operation fields, prohibitions and limitations apply to the activities of companies and organizations which are headquartered in Turkey, or are controlled by Turkish citizens.

Russian legislation defines criteria for “control” in Articles 5(1) and 5(2) of the Federal Law titled Order of Foreign Investment in Economic Structures Strategically Important for State Defense and Security, numbered 57-F3 and dated 29 April 2008. Accordingly, persons are deemed to have authority to control the company or organization where they:

– Hold more than 50% of votes as shareholders,

– Hold less than 50% of votes as shareholders, but control the company’s decision making mechanism,

– Are authorized to appoint the CEO or more than half of the executive body members of the company or organization, or

– Are authorized to appoint more than half of the board of management or the executive body without any conditions,

Another important point is that sanctions in the decree also cover Turkish companies with their headquarters located in Russia. However, the Russian government failed to indicate the fields of operation for companies which are subject to these sanctions.

As for the operation fields included, The Resolution of the Government of the Russian Federation No. 1457 dated 29 December 2015 approved the list of certain types of works which are banned for performance in the territory of the Russian Federation by organizations under the jurisdiction of Turkey as well as organizations controlled by Turkish citizens effective from 1 January 2016.The restriction covers the following operation fields:

– construction of buildings, construction of engineering and special construction works.

– activities in the area of architecture and engineering design, technical testing, research and analysis.

– activities of travel agencies and other organization providing services in the tourism sector.

– operation of hotels and other places of temporary residence.

– works and services for the state and municipal needs.

– woodwork.

It is important to note that here is an exemption from this ban for works (services) performance of which is envisaged by the contracts entered into before the adoption of the Resolution of the Government of Russian Federation No. 1457 dated 29 December 2015, for the term of validity of such contracts.

Employing Turkish Citizens Prohibited

Employers and contractors are prohibited from employing Turkish citizens as of 1 January 2016. However, Turkish employees which were already in an employment or legal relationship with an employer in Russia on 31 December 2015 may continue to be employed.

The Russian government however created an exemption for 53 companies to continue employing Turkish citizens:

Visa-Free Travel Agreement Suspended

The visa-free travel agreement between Russia and Turkey has been suspended from 1 January 2016. Previously, Russian and Turkish citizens could travel freely between the two countries without a visa.

Charter Flights from Russia to Turkey Banned

The Russian government has banned charter flights to Turkey, except those used to bring Russian tourists from Turkey back to Russia. Additionally, supervision of regular commercial flights has increased.

Tourism Banned

Russian tour operators and tourism agencies have abstained from selling Russian citizens tour packages to Turkey.

Transportation Prohibited

Supervision has increased for Turkish sea transportation companies operating in the Sea of Azov and Black Sea ports, as well as companies involved in land transportation through Russia. The number of trucks and lorries from Turkey which are accepted to pass through Russia is now limited. In 2015, around 8,000 trucks and lorries were accepted to pass through Russia. However, this number is set as at a maximum of 2,000 for 2016.

Joint Activities Suspended at Government Level

Commercial and economic activities between Turkey and Russia at the government level have been suspended. However the Russian government has appointed their Ministry of Economy to negotiate with Turkey about:

– The bilateral Agreement on Trade in Services and Investments,

– The Middle-term program for economic, trade, scientific, technical and cultural cooperation for 2016-2019,

– Formation of the joint Fund for Financing Investment Projects in Russia and Turkey.

IMPLICATIONS OF SANCTIONS

Russia’s sanctions directly affect Turkey, Turkish companies and Turkish citizens. However, they also indirectly affect many European and American companies. Some of these companies face severe procurement problems where they have production facilities in Russia, yet source raw materials or parts required for these facilities from Turkey.

On the other hand, it is positive that the sanctions exclude on-going investment undertakings in Russia, as well as Russia’s gas exportation to Turkey. These are the two largest goods and services exchanged between the countries.

It is important to note that penal clause or compensation claims will inevitably arise for Turkish and foreign parties which are unable to fulfil their undertakings and are forced to cancel reservations. It is not a surprise that objective impossibility and force majeure objections are being discussed the parties.

Serious and legitimate concerns emerge regarding the rights and obligations of parties involved in agreements which are already executed in Turkey for future expected businesses in Russia, or agreements which would have been executed in connection with the on-going agreements in Russia.

TURKEY- RUSSIA BIT AND ICSID CLAIMS

Turkey and Russia had been good partners economically and politically for many decades. Foreign trade volume between Turkey and Russia around $31 billion in 201. The impact of sanctions therefore Sea will be hard to swallow for both sides of the Black Sea.

The sanctions have already started to show their effects on Turkish- Russian business relations. Long terms contracts are being re-negotiated if not cancelled already, force majeure or objective impossibility are being raised by the parties in rather an amicable way at this stage.

However, there are rumours now spreading across Turkish business that certain Turkish conglomerates consider withdrawing from Russia by selling out their assets despite their decades-long presence in and dedication to Russia.

Even though Turkish investors assess their options in Russia as amicably as possible there are queries from various circles whether or not those sanctions give rise to treaty claims under Turkish Russia BIT.

The Turkey-Russia Bilateral Investment Treaty:

Usual foreign investment protections can be found in the Turkey-Russia BIT.  Under the BIT both Turkey and Russia promise among others:

 “fair and equitable treatment” (BIT, Art. II.2 and Art. III.1);

 “full protection and security” (BIT, Art. II.2);

that “[n]either Contracting Party shall impede by discriminatory measures the management, operation, maintenance, use, acquisition, expansion or disposal of investments” (BIT, Art. II.2); and

that foreign investments “shall not be expropriated” without “prompt, adequate and effective compensation” (BIT, Art.VI).

Whether or not any negative treatment, emerged as a result of sanctions imposed by Russia, could fall into the relevant BIT in respect of admissibility and merits should obviously be decided on a case by case basis but the fact that the sanctions ultimately affect the interests of private Turkish citizens and companies could be seen by Turkish investors as a reliable foothold.

Should Turkish individuals or companies raise BIT claims, it is likely among others that Russia could put forward that it had to put those sanctions in place as countermeasures against the international wrongful act of Turkey in the form of downing a Russian jet.

Russia must show in such a case that those countermeasures were taken due to the international wrongful act of Turkey and those measures should be directed against Turkey. However, it will be debated heavily whether those measures are aimed at Turkey or harm ultimately its nationals in Russia.

Equally, Russia should prove that sanctions must have called upon Turkey committing the wrongful act to discontinue its wrongful conduct. When this stance is taken by Russia, it will be considered whether the effects of those sanctions are commensurate with the injury suffered the purpose of which must be inducing Turkey to comply with its obligations under international law.

In the ICSID practice, it is now almost settled that countermeasures cannot be adapted in such a way to harm certain foreign investors who are under BIT protection even if those countermeasures are taken with a view to force that state to end its international wrongful act.

In fact, in Archer Daniels Midland et al. v. United Mexican States, in Corn Products International v. United Mexican States and in Cargill v. United Mexican States the view taken by the tribunals was that countermeasures cannot be an excuse to breach BITs the purpose of which is to protect the investors

While the authority set out by ICSID might provide a degree of confidence to Turkish investors in Russia if they are/ will be harmed as a result of sanctions, a thorough consideration should nevertheless be given in respect of admissibility and merits before making any submission to ICSID.

Considering the stadiums and other facilities required to be built for the FIFA World Cup to be held in Russia in 2018 which are by and large contracted to Turkish companies, Sberbank’s activities in Turkey, Rosatom’s nuclear plant construction in Turkey, as well as all other reciprocal commercial projects and benefits, the clear and wise decision might be to lift the sanctions altogether. However, if this cannot be done in the near future, it is best for both Turkey and Russia to ease these sanctions to keep the commercial effects at minimum.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s