Unveiling Japan’s Modern BIT Policy: A Review of its Substantive Provisions

By Yosuke Iwasaki (Sidley Austin LLP) and Takashi Yokoyama (Tenzer Arrieta PLLC)[1]

While Japan has signed 36[2] bilateral investment treaties (“BITs”) with predominantly capital importing countries, historically the Japanese government’s investment treaty policy has been veiled in secrecy. While some countries, such as the United States and India, have officially published their own model BITs, Japan has never announced a model text as a template for negotiations. This may make it difficult for foreign government officials to anticipate the overall treaty structure that Japan will seek to adopt when entering investment treaty negotiations with other states. This post aims to highlight certain drafting hallmarks of Japan’s recently signed international investment agreements (“IIAs”) by examining the substantive and procedural provisions from the Japan-Argentina BIT (JAGT), Japan-Armenia BIT (JAMT), Japan-Jordan BIT (JJT) and Japan-UAE BIT (JUT), which were all signed in 2018, and the Japan-Cote d’Ivoire BIT (JCT) and Japan-Morocco BIT (JMT), which were both signed in 2020 (all six treaties collectively, “Treaties”). We will also explain Japan’s modern BIT policy based on two treaty-making approaches – traditional investment protection and modern investment liberalization.

Traditional Protection vs. Modern Liberalization

The JJT, JMT and JUT are generally classified as “Traditional Protection IIAs” as they only cover foreign investments that traditionally qualify as an “investment.” On the other hand, JAGT, JAMT and JCT are categorized as “Modern Liberalization IIAs” as they grant investors a right of admission or they establish the status of investments at the pre-investment stage. In this regard, a Japanese government official testified on 12 May 2020 that Japan’s default position in negotiating a BIT with potential contracting states is to adopt the Modern Liberalization IIAs approach, though it was open to consider the Traditional Protection IIAs approach.[3] Considering that not many countries presently adopt the approach reflected in the Modern Liberalization IIAs, this policy of Japan promoting market access is remarkable internationally. However, the authors consider the modern liberalization approach fits Japan’s global economic position as a capital exporting country to broadly protect Japanese investors in a host state.

Definition of Investment

The definition of investments is generally broad in the Treaties the authors surveyed. The Treaties define an “investment” on an “asset” basis as “every kind of asset owned or controlled, directly or indirectly, by an investor,” extending its application to “any tangible and intangible, movable and immovable property, and any related property rights,” with a non-exhaustive enumeration of “investment” forms that enables arbitral tribunals to interpret the investor’s activities or expenditures into the treaty’s definition of an “investment,” even if it is not listed.[4] In contrast, Article 1.4 of the India Model BIT 2015 constitutes an “investment” on an “enterprise” basis that is conceptually narrower than the “asset” approach embraced in the vast majority of Japanese IIAs.

Aside from this common definition of investments, the Treaties also feature four notable hallmarks.

First, JAGT, JMT and JUT each refer to the “characteristics of an investment” as part of their definition of “investment.” In using this term, they are likely inspired by the four characteristics for the definition of “investment” set out in the Salini test and other ICSID arbitral awards[5]: i) the commitment of capital or other characteristics; ii) a certain duration of performance; iii) assumption of risk; and iv) a contribution to the economic development of the host state. In addition to the inherent “characteristics of an investment” generally required in any investment disputes,[6] the enumerated characteristics will be scrutinized in particular for alignment with the purpose of each Treaty before an arbitral tribunal.

Second, JAGT, JJT and JMT each stipulate that an investment shall be “made in accordance with applicable laws and regulations” in the host state. The requirement of compliance with applicable laws and regulations is rooted in arbitral awards.[7] In this regard, the footnote of JAGT Article 1(a) provides that “[i]t is confirmed that nothing in this Agreement shall apply to investments made by investors of a Contracting Party in violation of the applicable laws and regulations of either or both of the Contracting Parties.” Notably, the “degree of violation” by an investor could be a contentious issue for a tribunal to consider. For example, if an investor does not submit the registration documents required under the Foreign Exchange Law at the time of incorporation and afterward conducted ordinary business activities without any particular violations of law in the host state, it would be disproportionate if the investment treaty regime were to consistently preclude the business activities or expenditures of the investor from investment protection regardless of whether such violation is material or minor.

Third, JAGT, JJT and JMT each explicitly preclude public debts from the definition of “investments.”[8] Unless a treaty unambiguously precludes public debts from the definition of “investments,” the issue of whether public debts legally have the appropriate characteristics to amount to an “investment” could be a contentious one. For the avoidance of disputes, JAGT, JJT and JMT each preclude public debts from the definition of investments.[9]

Fourth, JUT Article 1(a) precludes “natural resources” in the definition of investments because that constitutes “public property” under the UAE Constitution.[10] However, this does not mean that all kinds of assets or business activities relevant to natural resources are consequently precluded from investment protection. For example, a natural resource refinery funded by an investor could constitute an “investment” under the JUT, apart from the natural resources involved themselves.

Definition of Investor / Denial of Benefits

The Treaties commonly provide that an “investor” shall be either: i) “a natural person having the nationality of that Contracting Party in accordance with its applicable laws and regulations”; or ii) “an enterprise of that Contracting Party,” that “is making or has made an investment.[11] Among the Treaties, JMT Article 1(b) explains in relation to “dual nationality” that “a natural person who is a dual national shall be deemed to be exclusively a national of the State of his or her dominant and effective nationality.” This may not cover a Japanese investor with dual nationality which may be because Japanese immigration law does not recognize dual nationality.

JMT Article 1(b) uniquely qualifies an “investor of a Contracting Party” that is an “enterprise” which is “carrying out substantial business activities” in that Contracting Party. There are some statutory distinctions or differences of legal consequences between JMT and the other Treaties despite the fact that the denial of benefits (“DOB”) clauses in the Treaties also bar an enterprise that does not operate substantial business activities in the home state from enjoying the Treaty’s investment protection.[12] Firstly, excluding such an enterprise from BIT protection through the definition of an investor or DOB clause may result in bifurcation, determining whether the burden of proof shall lie with an investor or a host state. Secondly, there is considerable debate about whether the assertion based on the DOB clause might not go to jurisdiction but rather admissibility or merits,[13] and whether that assertion can be made after the claim is filed or must be invoked at some earlier date in time.[14]

Finally, the Treaties enjoin an enterprise owned or controlled by an investor of a non-Contracting Party that has no diplomatic relations with the host state from enjoying the benefits of the protection.[15]

Most-Favored Nation Treatment

All of the Treaties explicitly preclude the applicability of their MFN provisions to any treatment granted by procedural provisions of any other international agreements. We note that the Modern Liberalization IIAs further proscribe their MFN provisions’ applicability to any treatment granted by substantive and procedural provisions of international agreements signed before the effective dates of the Modern Liberalization IIAs. In this regard, JAGT enjoins its MFN provision’s applicability to any treatment granted by substantive and procedural provisions of international agreements signed before the effective date of JAGT, under Article 3.5, while the other two stipulate the same in the Schedule of Reservation.

Curiously, in barring the MFN provisions’ applicability to substantive and procedural provisions of international agreements signed before the effective dates, the scope of the MFN provisions’ applicability under the Modern Liberalization IIAs is considerably narrower than that provided by the Traditional Protection IIAs despite the investment liberalization policy that Japan wishes to facilitate.

Fair and Equitable Treatment

Each of the Treaties equates FET with the customary international law standard. While India’s Model BIT 2015 Article 3.1 and the Canada-EU Economic and Trade Agreement Article 8.10.2 exhaustively enumerate the elements of FET, Japan is not currently adopting such an approach. Rather, the extremely straightforward wordings of JAMT and JJT’s FET provisions invite interpretation as per their plain and broad meaning by arbitral tribunals. In contrast, the detailed FET provisions in JAGT and JMT may demonstrate that Japan is attempting this type of statutory clarification of the FET standard in some of its IIAs, as endorsed by the Comprehensive and Progressive Trans-Pacific Partnership.[16]

This difference is a result of negotiations between Japan and the other contracting countries. However, we humbly consider this extremely straightforward wordings’ definition could benefit an investor because the FET provision may apply to government action broadly, while the detailed definition could benefit a host state, because an investor shall satisfy the enumerated elements of the FET to prove that the government action breaches it. For broader investment protection, the former approach would be in harmony with Japan’s broader investment protection policy.

Umbrella Clause/Investment Agreement

Among the Traditional Protection IIAs, JUT Article 5.3 adopts an Umbrella Clause providing that: “Each Contracting Party shall observe any obligation it may have entered into with regard to investments … of investors of the other Contracting Party.” In this regard, arbitral tribunals historically diverge on whether and to what extent an Umbrella Clause could apply to a case where an investor alleges a host state’s breach of contract. In SGS v. Pakistan, the tribunal denied the Umbrella Clause’s applicability to a breach of contract between the disputing parties because there was no clear and persuasive evidence that this was the actual intention of the contracting countries.[17] Other tribunals have also underscored that the Umbrella Clause shall solely embrace disputes regarding investment agreements or contracts to which (i) the host state itself is privy as a sovereign (as opposed to separate entities whose actions may be attributable to the state under international law),[18] or which (ii) involve sovereign rather than commercial acts.[19] There are of course, as with many issues arising in investment treaty arbitration, decisions that go the other way. The interpretation of such clauses by a given arbitral tribunal has a potential to limit the scope of obligations arising from an Umbrella Clause of IIAs, such as limiting their application to when a host state acts in a sovereign capacity or when the state itself is a party to the contract. Thus, arbitral tribunals could also restrain the applicability of JUT Article 5.3 depending on their own interpretation of the host state’s actual intention with respect to contractual disputes.

On the other hand, Japan’s Modern Liberalization IIAs cover a breach of contract by the host state by the “investment agreement” provision instead of the Umbrella Clause, as the CPTPP Article 9.19 similarly employed this approach. In this regard, JAMT Article 1 defines an “investment agreement” as a written agreement between an investor (or its investment that is an enterprise in the territory) and a host state’s central or local government or authority. JAMT Article 24.6 entitles an investor to submit a claim for the host state’s breaches of investment agreements through Article 24.2 (a)(i)(B) and (b)(i)(B) to arbitration by the state’s “consent” set out in the Treaty. The latter provision further provides that any dispute settlement clauses in an investment agreement between an investor and a host state shall not supersede this “consent.” Japan’s “investment agreement” provisions may clarify the scope and any limitations on the text of the host state’s obligations and issues of privity under an Umbrella Clause. The authors underline that this “investment agreement” provision’s approach is one of Japan’s remarkable features in the Modern Liberalization IIAs that may replace the traditional function of an Umbrella Clause in IIAs.

Expropriation

Each Treaty establishes the four conditions of lawful expropriation: i) a public purpose; ii) in a non-discriminatory manner; iii) upon payment of prompt, adequate and effective compensation; and iv) in accordance with due process of law. “Compensation” is defined as “the fair market value of the expropriated investments” in the Treaties. “Interest” is calculated as “commercially reasonable rate” in the same manner, while the duration of the interest could be interpreted differently in each Treaty. For example, JAGT, JAMT, JGT and JJT compute “Interest” from the date of expropriation until the date of payment, while JMT and JUT do so by “taking into account the length of time until the time of payment.”[20] These two Treaties might evaluate less amount of the interest than the others in the quantum award accordingly.

We note that JAGT Article 11.2 and 11.3 and JMT Annex referred to in its Article 9 enumerate the three conceivable factors in determining whether a government measure constitutes “indirect expropriation,” which are likely influenced by the investment treaty practice of the U.S. and Latin American countries, comprising[21]: i) economic impact of the government action; ii) interferences with distinct and reasonable expectations arising out of investment; and iii) character of the government action. Both Treaties also delineate that government action for legitimate public welfare objectives, such as public health, safety and the environment, would not constitute “indirect expropriation” except in “rare circumstances.” On balance, the phrase “rare circumstances” is likely provided to benefit an investor.

Conclusion

While substantive provisions in each Treaty vary respectively, the authors conclude that the scope of the investment protection under Japan’s Treaties is comparatively broad. This can be seen from the comprehensive definition of an “investment” or “investor” and the FET provisions, interpretation and application of which are much left to arbitral tribunals. We assume that this is not only because Japan is a capital exporting country, but also because of the fact Japan had never previously been a respondent state in investment arbitrations initiated under its IIAs at least before the signing of the Treaties. Japan’s initiatives on the Modern Liberalization IIAs may explain the recent BIT policy.[22] Finally, preservation of State rights to regulate may also be further area of interest for examining how Japan develops the scope of its IIAs in the near future.

  1. The authors received helpful comments from Shimpei Ishido of Nishimura & Asahi in Japan and Charles Tay of Zhong Lun Law Firm in China. The Japan’s modern BIT policy on procedural provisions will be unveiled at the next piece.

  2. This counting of Japan’s BITs does not include multilateral investment treaties and investment chapters of EPAs except for the Japan-Korea-China Investment Treaty signed in 2012. This piece does not analyze the Japan-Georgia BIT signed on 29 January 2021 after our submission to the editorial committee.

  3. Katsuhiko Takahashi’s response at Foreign Affairs and Defense Committee of the House of Councilors, Japan’s Diet on 12 May 2020

  4. See, e.g., JUT Article 1(a), JMT Article 1(a)

  5. Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco [I], ICSID Case No. ARB/00/4, Decision on Jurisdiction of 31 July 2001. Joy Mining Machinery Limited v. Arab Republic of Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction of 6 August 2004

  6. See, e.g., Romak S.A. v. The Republic of Uzbekistan, Award, 26 November 2009

  7. See, e.g., Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award on 15 April 2009

  8. See JAGT Article 1(a)(iii) “a sovereign debt of a Contracting Party or a debt of a state enterprise,” JJT Article 1(a) Note (i) “public debt,” JMT Article 1(a) Note (i) “debt securities issued by a Contracting Party or loan to a Contracting Party or to a public enterprise.”

  9. See, e.g., Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5, Poštová banka, a.s. and ISTROKAPITAL SE v. Hellenic Republic, ICSID Case No. ARB/13/8

  10. Katsuhiko Takahashi’s response at Foreign Affairs Committee of the House of Representatives, Japan’s Diet on 10 April 2020

  11. See, e.g., JJT Article 1(b), JMT Article 1(b)

  12. See, e.g., JAGT Article 23.2

  13. See, e.g., Plama v. Bulgaria Decision on Jurisdiction, 8 February 2005; Empresa Eléctrica del Ecuador, Inc. v. Republic of Ecuador, Award, 2 June 2009, para. 71; Isolux Infrastructure Netherlands, BV v. Kingdom of Spain, SCC Case No. V2013/153, Award, 12 July 2016

  14. See, e.g., Ampal v. Egypt, Decision on Jurisdiction, 1 February 2016, paras. 160-170

  15. See, e.g., JMT Article 20

  16. See Article 9.6.2 of Comprehensive and Progressive Trans-Pacific Partnership

  17. See SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, Decision on Jurisdiction, ICSID Case No. ARB/01/13

  18. See, e.g., Impregilo SpA v The Islamic Republic of Pakistan, ICSID Case No.ARB/03/3, Decision on Jurisdiction, 22 April 2005, para. 223, Gustav F W Hamester GmbH & Co KG v Republic of Ghana, ICSID Case No ARB/07/24, Award, 18 June 2010, para. 347(i)

  19. See, e.g., El Paso Energy International Company v. Argentine Republic, Decision on Jurisdiction, ICSID Case No. ARB/03/15, Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic, Decision on Preliminary Objections, ICSID Case No. ARB/03/13, CMS Gas Transmission Company v. Argentine Republic, Award, ICSID Case No. ARB/01/8, Sempra Energy International v. Argentine Republic, Award, ICSID Case No. ARB/02/16

  20. See, e.g., JAGT Article 11.5 and JUT Article 12.3

  21. See, e.g., Middle East Cement v. Egypt, ICSID Case No. ARB/99/6, Award of 12 April 2002. Metalclad v. Mexico, ICSID Case No. ARB(AF)/97/1, Award of 30 August 2000

  22. See Japan’s Action Plan for Promotion of Investment Environment Preservation by International Investment Treaties declared on 11 May 2016

RUSSIAN INVESTORS IN AFRICA:HE WHO DOES NOT RISK WILL NEVER DRINK CHAMPAGNE

(Russian Proverb)

Izabella Prusskaya, Associate, CAREY OLSEN (BVI) L.P.

Africa needs more Russian foreign direct investments to enhance the current Africa-Russian trade ties

Albert M. Muchanga, Commissioner for Trade and Industry of the African Union, during the St. Petersburg International Economic Forum 2018, “Business Dialogue: Russia-Africa”

A changing landscape: industry focus and the nature of investors

Trade between Russia and African countries has strengthened in recent years. For example, the total turnover in trade in 2016 amounted to US$14.5 billion, which is US$3.4 billion more than in 2015,[1] and 2017 again saw record levels of investment.[2] According to the Eurasian Economic Commission, Africa is the only region with which Russia increased its trade in 2016.[3] To dig deeper: in the face of sanctions and unstable political relationships with the United States and Western Europe, Russia is looking for new economic partners.

Russian business interests in sub-Saharan Africa today still mainly lie in the commodities industry. Alrosa, Rosneft, Rostec and Rosatom are already involved in mining projects in Angola, Namibia and Zimbabwe among others. KamAZ and Sukhoi Civil Aircraft are also developing trade projects in the region. VTB has recently opened an office in Angola. Congo, Sudan and Senegal are also cooperating with Russia in the field of oil and gas exploration.

However, these are far from the only areas attracting investment. Agriculture also plays an important role in Russian-African economic relations, with Africa becoming a promising market for Russian grain and agricultural equipment.[4] In turn, many African countries[5] have recently increased the numbers of fruits and vegetables exported to Russia, taking advantage of the favorable market conditions arising after Russia imposed “counter-sanctions” on produce imported from the EU.[6]

Although large companies are still most engaged in the energy and mining sectors, manufacturing, transportation and infrastructure are also growing areas of focus. And this is not the end of a long list of investment opportunities Russian businesses are pursuing in Africa. One interesting example is Lisma, a company from Mordovia, which established a joint venture in Burundi for the production of lamps supplied to the entire East African market. African investors substantially finance the project, and Lisma in turn supplies equipment and technology.

There are some common features associated with the structure of Russian investment into Africa. As a general rule, it is relatively large Russian companies that are operating on the continent. Led by companies such as Gazprom, Lukoil, Rostec and Rosatom, which have investments or interests in Algeria, Egypt, South Africa, Uganda and Angola, Russians are mainly investing in oil, gas and African infrastructure. Most large Russian corporations investing in Africa are at least partially state-owned. Thus, most Russian economic interest in Africa effectively takes the form of public-private partnerships, with the majority of investment projects originating in Moscow, Russia’s financial and industrial center.

New frontiers for Russian investment: two innovative case studies

It is clear that there are an increasing number of Russian investment projects in African nations – and the following examples from Angola highlight that Russia’s presence on the continent is constantly forging new frontiers, in terms of both reach and scale.

Roskosmos has long been a partner of Angola in the space industry and Roskosmos currently plans to produce and launch the second satellite in Angola, Angosat-2.

The first satellite, Angosat-1, was launched into orbit at the end of 2017. The export contract for Angosat-1 amounted to US$327.6 million and was signed on 26 June 2009 between the Angolan Ministry of Telecommunications and Information Technology and Rosoboronexport. The Russian corporation Energy was appointed as the main contractor. In 2011, Vnesheconombank, Roseximbank, VTB and Gazprombank entered into a loan agreement with the Angolan Ministry of Finance, under which the African country got a credit line for US$278.46 million for a period of 13 years. In 2015, the construction of a satellite flight control center began in Luanda, the capital and largest city in Angola. Angola financed the construction of ground infrastructure at a cost of US$54.3 million.

In some cases, Russian investors play a dominant role in key industries – and they are using this position to deepen cooperation with host states. Another large Russian investor in Angola is Alrosa, a Russian group of diamond mining companies accounting for 95% of country’s diamond production and 27% of the global diamond extraction.[7]

According to those documents, Alrosa will participate in the project through the subsidiary company Katoka (Alrosa owns 32.8%), which will receive a 50.5% share in the new structure. Taking into consideration the results of a preliminary feasibility study, the development of Luashe is of a considerable economic interest to the project participants. The Luele kimberlite pipe found in the Luashe exploration field is the largest discovered in the world in the last 60 years.[8]

Substantive protections for investors under bilateral investment treaties

Currently, Russia is a party to eleven BITs with African countries,[9] of which six are currently in force – namely with Angola (2011), Egypt (2000), Equatorial Guinea (2011), Libya (2010), South Africa (2000) and Zimbabwe (2014).[10] Interestingly, while South Africa has terminated its BITs with a significant number of Western nations, its BIT with Russia remains in force.

The BITs in force between Russia and African nations have several features in common as regards the dispute resolution mechanisms. Each of them contains an article providing for investor-state dispute settlement (“ISDS”) and generally reflects a so-called “traditional” approach to dispute resolution, providing for arbitration as one of the available options. All of the dispute resolution clauses in those BITs are multi-tier and provide for negotiations as a preliminary step in resolving investor-state disputes (the “cooling-off period”). If the parties are not able to resolve their disputes in the course of negotiations, then the investor may apply to the competent court of the country where the investment was made or resort to arbitration.

Other features of the BITs’ provisions on arbitration do, however, vary – in particular, as regards the applicable arbitral rules, which govern proceedings between parties and can impact on a wide range of issues including timing of the arbitration, composition of the tribunal, confidentiality and emergency relief. For example, Article 10 of the South Africa-Russia BIT provides for either arbitration under the Arbitration Institute of the Stockholm Chamber of Commerce Rules (“SCC Rules)” or through an ad hoc arbitration in accordance with UNCITRAL Arbitration Rules (“UNCITRAL Rules”) – but not ICSID Rules. The older BITs, which entered into force in 2000, provide a more limited choice of arbitration options for the investors. The Egypt-Russia BIT provides only for UNCITRAL ad hoc arbitration, in its Article 10.

In contrast to the older BITs, the more modern Russian BITs with Angola, Libya and Zimbabwe represent a new generation of texts, which explains why they provide for an ICSID arbitration option. This is in line with Article 11 of the Angola-Russia BIT, Article 12 of the Zimbabwe-Russia BIT and Article 8 of the Libya-Russia BIT, all of which provide for investors to bring a claim via either ad hoc arbitration in accordance with UNCITRAL Arbitration Rules, or arbitration under the ICSID Convention. In practice, the arbitral rules most frequently used by Russian investors in claims against states are UNCITRAL Rules (12 cases) and SCC Rules (6 cases), with three filed under the ICSID Additional Facility Rules, two of which in 2018.[11]

The Russian-African BITs in force provide various types of protection for investors. Compensation shall correspond to the actual value of the expropriated investment and shall be paid without an unjustified delay.

Another substantive protection available for Russian investors under BITs with African countries is an obligation of host states to provide fair and equitable treatment of the investment (“FET” standard). The standard has been developed through case law, protection from discriminatory treatment or damage to investments (that amount to less than expropriation). FET is contained in the vast majority of international investment agreements as one of the main standards for the protection of foreign investors,[12] including in those six Russian-African BITs currently in force.

A third frequently used standard of investment protection, which is closely connected with FET standard, is the Most-Favoured Nation Treatment (“MFN” standard). It requires the host state not to treat an investor differently than other foreign or domestic investors based on the fact that it comes from a particular country. Based on MFN clauses contained in all Russian-African BITs in force, Russian investors shall receive equal trade advantages as the “most favoured nation”, for example, trade or tax advantages.

Where BITs are in force, therefore Russian investors in Africa are covered by the main substantive protections. Enforcing such protections is a matter of dispute settlement, subject to the clauses in the treaty covering the investor’s recourse.

Investor-state dispute settlement under bilateral investment treaties.

Russia is no stranger to investment arbitration – and even though Russia has more famously participated in such proceedings on the side of the host state, there have also been 22 cases where Russian investors filed claims against states under investment treaties.[13] The first such case was brought in 2004,[14] with several investment arbitration proceedings initiated by Russian investors in previous years still pending[15]. There has been a recent surge in claims by Russian investors, with six such cases brought in 2018[16] following just two in 2017[17] and three in 2016.[18] However, only one of these cases to date has involved an African host state – Egypt.

The PCA case of MetroJet (Kogalymavia) Limited v. Arab Republic of Egypt relates to a plane crash that took place in the Egyptian desert region of the Sinai in 2015. This crash killed all 224 passengers, the majority of which were Russian citizens. The Russian airline, Metrojet, together with the Turkish tour operator, Prince Group, are claiming at least US$200 million in an investment treaty claim against over the suspected terrorist attack.[19]

The Claimants brought their claim in 2017, seeking compensation for both direct damages caused by the crash and the loss of their investment in the Egyptian economy. The airline, which stopped flying shortly after the crash and filed for bankruptcy shortly after, is seeking US$90 million in damages. The Turkish tour operator is seeking US$111 million.

Optimizing BIT protections: structuring investment through a third country

In the case that Russian investors are unable to access adequate protections under the applicable BIT between Russia and the African host nation, investment structuring is an important means of optimizing the protections available to the investor. This is generally achieved by choosing a state with a favorable BIT between it and the target nation, in which to incorporate an investment vehicle to act as a conduit for funds. The purpose is to allow the Russian investor, by virtue of the domicile of the investment vehicle, to achieve superior investment protection pursuant to the terms of the preferred BIT.

The United Kingdom is a popular choice for such investment structuring, with 21 BITs with African countries currently in force.[20] However, it remains to further see whether Brexit will make it more attractive to structure investments in certain EU member states through the UK in order to take advantage of BIT protection.

It is to be noted that in March 2018 the Court of Justice of the European Union held, in the famous Achmea case that BITs between EU member states are invalid as their investor-state dispute settlement provisions are incompatible with the EU single market. Based on this, a treaty of 29 August 2020, the so-called “Termination Agreement” will terminate all intra-EU BITs between ratifying states. The UK has declined to join it, so investments under those BITs may continue to be structured via the UK so as to attract relevant BIT protection. This would have the added advantage to Russian investors of potential treaty protection in EU States that would not be provided by structuring through States – such as those mentioned below – which have signed the Termination Agreement. However, this may be in danger due to the infringement procedure which the EC has commenced against the UK for refusing to sign the Termination Agreement.

Another popular choice for investment structuring is France, with 23 BITs in force with African states.[21] Other jurisdictions such as the Netherlands may also be favorable, particularly in circumstances where they offer additional taxation benefits to an investor. These considerations should ideally be considered at the outset of an investment, or at least well before it could be said that any potential treaty dispute has arisen or could likely arise. If a switch comes only after the start of a dispute it is unlikely to benefit from protection.[22] The latter approach may lead an arbitral tribunal to reject a claim on the grounds that the claimant engaged in an abuse of process by switching the investment vehicle after knowing that a dispute had arisen or was likely to arise, as happened for example in Mobil Corporation v Venezuela and Banro American Resources Inc. v. Congo.[23]

There are already two examples of Russian investors taking advantage of third-country investment vehicles in bringing a claim under an alternative BIT, although not yet in Africa. In Naumchenko and others v. India (2012) the claim was brought under the Cyprus-India and Russia-India BITs; and in Nadel & Ithaca Holdings Inc v. Kyrgyzstan (2012), the claim (now discontinued) was brought under the Kyrgyzstan-United States of America BIT. Insofar as alternative BITs provide greater protection, Russian investors considering a new venture should seek advice on the most appropriate jurisdiction for incorporating an investment vehicle, taking into account substantive protections, the ISDS mechanism and any enforceability benefits.

Enforcement of awards: the availability of ICSID arbitration and the New York Convention

Famously, the ICSID Convention provides the most widespread and effective means of enforcing investment arbitral awards among its member states, with mandatory recognition and enforcement of arbitral awards by local courts. According to the survey conducted by ICSID in 2017, Member States reported 85% compliance with ICSID awards of costs and/or damages in favor of the claiming party and post-award decisions issued from 14 October 1966 until 1 April 2017.[24] The ICSID Convention applies only to disputes between state members of the Convention, and nationals and companies of member states. To be a member, a state must both sign and ratify the Convention.

As Russia has signed but not yet ratified the ICSID Convention,[25] Russian investors will need to use third country investment structuring, in order to participate in conventional ICSID arbitrations and benefit from the associated enforcement mechanism. Availability of the ICSID enforcement mechanism will, of course, also depend on the ratification status of the host state. To date, 38 African nations have ratified the ICSID Convention,[26] so the mechanism is in principle quite widely available on the continent.

The ICSID Additional Facility Rules provide one alternative for Russian investors, where investment structuring is not an option. These Rules are available for the arbitration of investment disputes where only one side is a party or national of a party to the ICSID Convention.[27] As such, Russian investors can in principle bring arbitration against an African host state under the ICSID Additional Facility Rules where the host state has ratified the ICSID Convention, and the applicable BIT permits ICSID arbitration. Although awards under the Additional Facility Rules are not enforceable pursuant to the ICSID Convention, such awards still have the advantage of credibility and are generally favorable for enforcement. Further, one of the proposals in ICSID’s current Rules Amendment Project is to extend the Additional Facility Rules to cases where both the claimant and the respondent are not ICSID Contracting States or nationals thereof. If this proposal is ultimately approved, Russian investors would (subject to the terms of the BIT) have access to arbitration under ICSID Additional Facility Rules regardless of the counterparty state.

The New York Convention provides an alternative enforcement mechanism to the ICSID Convention, where the arbitration has been carried out pursuant to other arbitration rules such as UNCITRAL. It is subject to local laws (where assets are based) regarding sovereign assets. However, it is applicable simply if the award is rendered and enforced in New York Convention contracting states – which represent a significant majority of African states.[28] As such, this enforcement mechanism will be more widely accessible to Russian investors in cases where investment structuring is not employed.

Contractual protections and contract-based arbitration

Beyond general investor-state protections, investors may also seek to incorporate an arbitration clause into a written and binding investment agreement with the state – although of course, this is likely to be a heavily negotiated point. Where successful, this approach will enable investors to bring claims against the host state in circumstances where there is no applicable BIT, the applicable BIT offers inadequate substantive protections, or the BIT does not provide for resolution of disputes via international arbitration. In all cases, investors will need to ensure that the investment agreement is drafted to incorporate the requisite substantive protections directly, and that the arbitration clause is appropriately drafted. This mechanism is a powerful but underutilized option: the statistics show that around 16% of all the arbitration cases filed under different ICSID Rules are based on contractual agreements between the parties in the dispute (112 out of 704), with the majority of Respondents from either Latin American or African countries.

ICSID permits arbitration on a contractual basis as well as pursuant to a BIT[29] and suggests a well-developed set of model clauses for this purpose.[30] As for treaty claims, Russian investors will need to structure their investment through a third party vehicle in order to allow investors to take advantage of the ICSID enforcement mechanism, although the arbitration clause could of course specify alternative rules, for example UNCITRAL, and seek to rely on alternative enforcement mechanisms. Contract-based arbitration is also permissible under the ICSID Additional Facility Rules, which as noted above may apply where either the host State or the State of origin of the investor is a Party to the ICSID Convention. ICSID also provides suggested drafting for this scenario in its model clauses.

A role for BRICS organizations in investment disputes?

Since South Africa joined the BRICS in 2010, the dispute resolution mechanisms of this informal grouping of nations have rapidly evolved, leading to new means of settling disputes between Russia and South Africa. The Shanghai International Economic and Trade Arbitration Commission established the BRICS Dispute Resolution Center Shanghai (“BRICS DR Center Shanghai”) in October 2015. This center accepts cases involving parties from BRICS countries and provides arbitration and alternative dispute resolution services. A similar center is now operational in New Delhi.

Moreover, the Moscow Declaration signed on 1 December 2017 proposed the “establishment of a Panel of Arbitrators and common institutional rules to coordinate and merge the functioning of the BRICS Dispute Resolution Centers already established […] and the proposed Centers in Brazil, Russia and South Africa“. Though such a panel has not yet been established, the representatives of the BRICS member states are actively discussing the future structure and functioning of such a panel. The proposed centers in Brazil, Russia and South Africa will, most likely, use BRICS DR Center Shanghai as an analogue.

The BRICS seem to be a good example of regionalizing dispute resolution mechanisms by setting up various centers for settling disputes between the member states. Together with the ever-increasing integration of African economies, recently heralded by the newly implemented African Continental Free Trade Area (“AfCFTA”), and its forthcoming Investment Protocol, this ongoing trend towards regionalization may yet see a specialized dispute resolution center for investment claims between CIS and the African Union.

Conclusion

Africa is a promising investment target with rapidly developing use of arbitration due to the continent’s progressive integration into the global economy and its evolving experience in resolving international disputes. The investment protection measures included in investment treaties allow investors to adapt the structure of their investment to benefit from those protections.

A variety of instruments provide for investment protection for Russian investors in Africa. The scope and level of protection will vary from country to country and depend on the local legislation and treaties in force. Importantly, the scope and level of protection must be evaluated before investing into Africa, since potential investors might be better served by structuring their investment through a third country in order to benefit from stronger protections. While the significant majority of African states have now ratified the New York Convention,[31] which provides a good means of award enforcement, innovation by Russian investors via third-country structuring may allow access to the ICSID Convention, under the egide of the World Bank.

As of today, African countries are parties to more than 900 BITs, generally with non-African countries;[32] and the majority of African states are also Member States of ICSID Convention. Although there has only been one known investment claim by a Russian investor in Africa, cases are likely to develop alongside the growth of Russian investments on the continent. It may be too early to determine whether any of the investors would face particular problems in Africa in connection with the initiation of investment arbitration. However, “forewarned is forearmed” and Russian investors are well advised to analyse investment protections applicable to them, in order to invest and risk with confidence before they drink champagne.

  1. FDI Intelligence. The Africa Investment Report 2016. Available at: Analyseafrica.com.
  2. Trends Report by FDIMarkets.com, 2017: as at the date of this publication, 2017 was the year “in which the highest numbers of projects were recorded”.
  3. Id.
  4. For example, Russia supplies wheat to Morocco, South Africa, Libya, Kenya, Sudan, Nigeria and Egypt.
  5. Egypt, Côte d’Ivoire, Benin, Nigeria, Guinea-Bissau, Central African Republic, Guinea, Burkina Faso, and Mali.
  6. More about Russia’s counter-measures at: https://www.politico.eu/article/putin-extends-counter-sanctions-against-eu/
  7. 2017 global natural diamond production forecasted at 142M carats worth US $15.6B”. Available at: MINING.com
  8. See at: http://www.alrosa.ru/алроса-примет-участие-в-освоении-круп/
  9. BITs not in force with: Morocco, Namibia, Nigeria, Algeria, Ethiopia.
  10. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/175/russian-federation
  11. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/investment-dispute-settlement/country/175/russian-federation/investor
  12. FAIR AND EQUITABLE TREATMENT. UNCTAD Series on Issues in International Investment Agreements II. P. 7. Available at: https://unctad.org/en/Docs/unctaddiaeia2011d5_en.pdf
  13. UNCTAD Investment Policy Hub, accessed at: https://investmentpolicy.unctad.org/investment-dispute-settlement/country/175/russian-federation/investor
  14. Bogdanov v. Moldova (I), which was initiated in 2004 under SCC Rules (Stockholm Chamber of Commerce). Mr. Bogdanov initiated three more claims against Moldova in 2005, 2009 and 2012, with two awards in favour of the investor and two in favour of the state.
  15. See for example Paushok v. Mongolia (2007), Naumchenko and others v. India (2012), Tatarstan v. Ukraine, Deripaska v. Montenegro (2016) and Boyko v. Ukraine (2017).
  16. Gazprom v Ukraine (2018), GRAND EXPRESS v. Belarus (2018), Lazareva v. Kuwait (2018), Manolium Processing v. Belarus (2018), MTS v Turkmenistan (II) (2018), RusHydro v Kyrgystan (2018).
  17. Boyko v. Ukraine (2017); MetroJet (Kogalymavia) Limited v. Arab Republic of Egypt (2017).
  18. Deripaska v. Montenegro (2016), Tatarstan v. Ukraine (2016), Evrobalt and Kompozit v. Moldova (2016).
  19. Garrigues. PCA to decide claim against Egypt over plane crash. Available at: https://www.garrigues.com/en_GB/new/international-arbitration-newsletter-march-2020-regional-overview-middle-east-and-africa
  20. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/221/united-kingdom
  21. UNCTAD Investment Policy Hub, accessed at https://investmentpolicy.unctad.org/international-investment-agreements/countries/72/france
  22. See, for example: Philip Morris Asia Limited v. The Commonwealth of Australia, (PCA Case No. 2012-12)
  23. Banro American Resources, Inc. and Société Aurifère du Kivu et du Maniema S.A.R.L. v. Democratic Republic of the Congo, ICSID Case No. ARB/98/7
  24. Including both Convention and Additional Facility awards
  25. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  26. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  27. Article 2 of the ICSID Additional Facility Rules
  28. Database of ICSID Member States, accessed at https://icsid.worldbank.org/en/Pages/about/Database-of-Member-States.aspx
  29. Article 25(1) of the ICSID Convention
  30. See at: https://icsid.worldbank.org/en/Pages/resources/ICSID-Model-Clauses.aspx
  31. New York Convention Contracting States, accessed at http://www.newyorkconvention.org/countries
  32. See at: http://aefjn.org/en/bilateral-investment-treaties-a-continuing-threat-to-africa/