Freshfields Bruckhaus Deringer LLP | 3 October 2023
Ukraine’s termination of its Bilateral Investment Treaty with Russia: what happened and what it means for potential future claims
by Eric Leikin, Noah Rubins KC, Sofia Svinkovskaya
Since the beginning of the full-scale Russian invasion and following its severance of diplomatic relations with Russia on 24 February 2022, Ukraine has announced numerous exits from international treaties signed with Russia and Belarus. Recently, there have been several reports (here and here) on Ukraine’s intention to terminate the Agreement between the Government of the Russian Federation and Cabinet of Ministers of Ukraine on encouragement and mutual protection of investments (Ukraine-Russia BIT or the BIT). The process and implications of the termination have, however, been surrounded by some confusion. In this blog post, we seek to provide clarity in this regard.
In short, the law terminating the Ukraine-Russia BIT was passed on 10 August 2023, and the termination will become effective on 27 January 2025. As a result of the operation of the BIT’s so-called “sunset provision”, Ukrainian and Russian investments made in the territory of the respective other country prior to 27 January 2025 remain protected under the BIT until 27 January 2035.
The timeline of the BIT termination
The Ukraine-Russia BIT was signed on 27 November 1998 and ratified on 15 December 1999 and 2 January 2000 by Ukraine and Russia respectively. The treaty entered into force on 27 January 2000.
According to the Ukrainian explanatory legislative documentation, the process of termination of the BIT was triggered on 13 December 2022, when the Security Service of Ukraine sent a letter “regarding the urgent termination of the BIT” to Prime Minister Shmyhal. Interestingly, one day prior, on 12 December 2022, a group of Russia’s State Duma deputies submitted a bill “to denounce agreements on the promotion and mutual protection of capital investments” with the so-called “unfriendly states” (with Ukraine being deemed as such). As of today, it appears that the process of finalising the bill in the State Duma has not gone further.
On 18 April 2023, Ukrainian Cabinet of Ministers approved a draft law on the termination of the Ukraine-Russia BIT (the Draft Law). The text of the Draft Law, as submitted to the Verkhovna Rada for approval, contained two provisions – (i) to terminate the BIT; and (ii) for the law to enter into force on the next day after its publication – which was justified in the explanatory note based on a fundamental change in circumstances.
Subsequently, following several rounds of revisions and amendments, Verkhovna Rada passed the Law of Ukraine No. 3329-IX on 10 August 2023. It entered into force on 7 September 2023 after it was signed by President Zelenskyy on 4 September 2023. According to the official website of the Verkhovna Rada, the Ukraine-Russia BIT will be terminated on 27 January 2025.
Effect of the termination
The scope of the BIT protection after its termination is of essential interest for investors. Crucially, the Ukraine-Russia BIT contains a sunset clause in Article 14(3), stating that the rights and obligations provided for under the treaty for investments which were carried out before the termination of the BIT will remain in force for a further ten years following the termination.
As noted above, the initial version of the Draft Law cited “a fundamental change of circumstances” as the reason for the Ukraine-Russia BIT termination, referring to Article 62 of the Vienna Convention on Law of the Treaties. The explanatory note of 19 April 2023 specified that the martial law imposed in Ukraine was “not an essential basis for the parties’ consent to be bound by the [BIT].” The note further explained that the “application of the special procedure due to a fundamental change in circumstances” would allow Ukraine to determine the date of termination of the BIT in accordance with international standards, depending on the termination provisions set forth in the BIT.
This reasoning sparked a legal debate within the Ukrainian government. For instance, the Central Scientific Experts Office, which is part of the Apparatus of the Verkhovna Rada, recommended against basing termination of the BIT on a “fundamental change in circumstances” under Article 62 (1) of the VCLT. It concluded that by doing so, it would “remain unclear” whether the sunset clause contained in the Ukraine-Russia BIT would “continue to apply after termination, on the basis of which Ukrainian investors will protect their rights infringed by the Russian Federation”.
In a similar vein, the Verkhovna Rada’s Committee on Foreign Policy and Interparliamentary Cooperation also concluded that the reference to a “fundamental change of circumstances” could jeopardise the admissibility of Ukrainian investors’ future BIT claims against Russia. It then cited an “analysis and comparison” of damages caused by the Russian Federation to Ukraine and its citizens and legal entities (estimated at approximately US$600 billion) on the one hand, with the potential losses incurred by the Russian Federation and its citizens in connection with the confiscation of their assets, on the other hand. On this basis, all drafters agreed that maintaining the Ukraine-Russia BIT for 10 years after its termination would be “more beneficial” for Ukraine and its citizens. Therefore, the Committee concluded that it would be “in the national interests of Ukraine” not to use the reference to a fundamental change of circumstances, but instead to terminate the BIT in accordance with its provisions (i.e., Article 14(2)), leaving the possibility of initiating investment arbitrations by “Ukrainian victims of the actions of the Russian Federation (including state bodies)” until 2035 as “undisputed”.
These obligations were subsequently acknowledged by the Ukrainian Ministry of Economy in a revised explanatory note dated 20 June 2023, stating “with respect to investments made prior to the date of termination of [the BIT] and covered by it, the provisions of all other articles of [the BIT] shall remain in force for the next ten years after that date.”
Since the beginning of the full-scale Russian invasion, Ukrainian citizens and legal entities have suffered significant losses. Considering that the conflict is ongoing, the damages are likely to continue to rise. As shown by the line of successful “Crimea cases” brought under the Ukraine-Russia BIT after the illegal 2014 annexation of the peninsula, investment arbitration offers Ukrainian investors one of the few viable avenues to seek compensation against Russia. According to the publicly available information, nine ISDS cases are currently pending against the Russian Federation under the BIT. Moreover, several Ukrainian investors and entities have recently expressed their intention to initiate arbitration proceedings against Russia for the alleged seizure of their assets in the occupied territories (for example, see here and here). Therefore, despite Ukraine’s recently announced termination of the BIT, and thanks to the continued application of its sunset clause, the treaty may yet give rise to a number of future claims.