Protecting US Investments in Ukraine During the Current Crisis

The tumultuous events currently unfolding in Ukraine raise concerns not only about Ukraine’s political future, but also its overall economic stability. The situation particularly calls into doubt the security and viability of foreign investment within the territory of Ukraine. The protests in Kiev have led to a new political leadership that is fragile and inexperienced. Moreover, the presence of Russia’s military forces in the Crimean Peninsula has prompted strong fears of military conflict and additional bloodshed. During these tense times in Ukraine, US investors would be wise to take stock of their assets in Ukraine and determine whether their interests are adequately protected under the 1996 Bilateral Investment Treaty (BIT) between Ukraine and the United States.

How Does the US-Ukraine BIT Protect US Investments?

The US-Ukraine BIT legally binds Ukraine to provide certain investment protections to US investors and their investments in Ukraine. These protections require, for example, that Ukraine provide national treatment (NT) and most-favored-nation (MFN) treatment during both the pre-investment and post-investment phases of business in Ukraine. This means that, subject to limited exceptions, when US investors seek to invest or have already invested in Ukraine, Ukraine must treat them at least as favorably as they would treat Ukrainian investors and third-country investors, e.g., Russian investors, and their investments.

The BIT also regulates the expropriation of foreign investment, allowing Ukraine to take property but only in accordance with international law standards. Expropriation therefore must be for a public purpose, in a nondiscriminatory manner, in accordance with due process of law, and upon payment of prompt, adequate, and effective compensation. Other BIT protections prevent Ukraine from restricting the transfer of funds related to a US investment or imposing performance requirements on foreign investors, e.g., requiring a US-invested business to use local Ukrainian inputs.

A series of additional broad protections found in the BIT also limit Ukraine’s conduct. Ukraine must: provide “fair and equitable treatment” and “full protection and security” at least as strong as that required by international law; avoid impairing an investment in any way over its full life cycle “by arbitrary or discriminatory measures”; “observe any obligation it may have entered into with regard to investments”; and provide “effective means of asserting claims and enforcing rights with respect to investment” and other investment-related agreements.

All of the BIT’s investment protections are enforceable by the US investor itself through international arbitration, a key feature of the US-Ukraine BIT. Under the BIT, a US investor or its Ukrainian subsidiary may bring an arbitration claim directly against Ukraine for disputes arising under the BIT or other investment-related agreements. This right allows US investors to avoid Ukrainian courts, if they so choose, and have their claims settled in a neutral, third-party venue.

Though the US-Ukraine BIT provides strong protections, these protections are not absolute. For example, the BIT contains a significant exception that allows Ukraine to apply measures “necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.”

How Can the US-Ukraine BIT Protect My Company’s Investments in the Current Crisis?

The current crisis in Ukraine may result in acts or omissions by the Ukrainian government that cause significant injury to US investors. The new and inexperienced leadership may promulgate discriminatory policies, engage in arbitrary practices, or fail to respect property rights in ways that reduce or eliminate existing investment protections, implicating many of Ukraine’s core BIT obligations discussed above. Close attention should therefore be paid to any new government measures that alter or fail to honor the terms of investment contracts or investment approvals, restrict the inward or outward flow of currency, take property, or generally aim to provide the Ukrainian government with greater latitude in regulating foreign investment in Ukraine.

Certain physical destruction of US investments in Ukraine may also fall within the BIT’s ambit. Future demonstrations, rioting, or military conflict may put US investment directly in harm’s way, possibly triggering Ukraine’s responsibility to provide a minimum level of physical protection to foreign investment. The Ukrainian government’s conduct in the aftermath of the crisis should also be monitored, as the BIT obligates Ukraine to provide NT and MFN treatment in relation to measures affecting nationals or companies whose investments suffer losses in its territory “owing to war or other armed conflict, revolution, state of national emergency, insurrection, civil disturbance or other similar events.”

Hard Questions to Arise Under the US-Ukraine BIT

The Ukrainian crisis may also raise uniquely complicated questions regarding the application of the US-Ukraine BIT. First, the legitimacy of the new leadership has not been resolved. Thus, to the extent it pursues measures that affect foreign investment, a key issue will be whether its conduct can be attributed to Ukraine, thus giving rise to Ukraine’s responsibility under the BIT. Second, Russian military forces are now operating in certain parts of Ukraine, raising questions about which nation controls those areas and whether Ukraine has responsibility for any acts or omissions that adversely affect foreign investment located there. Third, the crisis clearly implicates Ukraine’s national security, but to what extent will future government conduct affecting foreign investment fall within the BIT’s “essential security” exception?

Arent Fox’s team of lawyers, with deep experience in investment treaties, investor-State arbitration, and public international law, can guide your company through all the issues that may arise under the US-Ukraine BIT and help you be smart in your world during difficult times.

To read an overview of the key sequence of events in Ukraine and a list of individuals who have been sanctioned by each country, click here.