Respective FDI of the EU and Russia and Their Policy Context

Regarding the EU, at the outset it is worth mentioning that unlike the common (i.e. EU‘s ―foreign‖) trade policy that falls within the competence of the Union, the FDI policy was traditionally a shared

competence between the EU and its member states.³³² Accordingly, both the EU and member states are parties to bilateral and international investment treaties, although their respective influences of decision on FDI differ according to diverse stages. Namely, member states charge the European Commission to negotiate the conditions of market access and liberalisation at the pre-investment phase (the latter ensures the respect of the fair and equitable treatment principle³³³ by the host states vis-à-vis foreign investments), while they themselves negotiate commitments with respect to the treatment of foreign investors after their penetration into the host country, mainly through BIT provisions.

But with Lisbon Treaty things change. One of the most notable impacts of new EU legislation on foreign trade policy lies in its provisions relating to FDI. That is, TFUE art.207 extends the EU common trade policy to FDI, which would from now fall within the Union‘s competence. Thus, it is expected that

330 In Roman Civil law the jus gentium (opposite to the jus civile) was a flexible and loosely-defined body of law based on international norms. Thus, the officers of those special tribunals applying jus gentium to diverse multistate cases, had been essentially creating new substantive law for each case.

331 It is recognised, and is confirmed by the most notorious specialists in the field, that the ―doctrine of the precedent‖ (stare decisis) does not govern international arbitration, as it was valued by the author from the conference given by Gilbert Guillaume (former President of the ICJ) ―Le Précédent dans la Justice et l‘Arbitrage International [the Precedent in Justice and International Arbitration]‖, at the IHEID, Geneva, in collaboration with Lalive Lawyers Geneva, June 2, 2010.

332 See Priollaud and Siritzky (2008), op.cit., note 111, p.304 and s.

333 See supra, note 308.

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member states may well lose much of their traditional legal authority to negotiate and/or conclude their own BITs.³³⁴

Concerning the general situation of FDI in the EU 27, two main and interconnected issues are important.

They are the EU enlargement process and new European legislation introduced by the Lisbon Treaty.

In 2004 the ten new members, as well as more recently the two ―latecomers‖ of 2007, have committed themselves to adopting the totality of EU law, i.e. acquis communautaire. Reception of acquis implies, on the one hand, an enhancement of the business environment and the attractiveness of accession countries,³³⁵ which logically attracts greater inward FDI to those countries. On the other hand, its application (e.g., concerning environmental protection or labour standards) generally augment the cost of doing business in new EU member states.³³⁶ Therefore, the ambiguous impact of the acquis on business in general, and on FDI in particular, is the result of a philosophical compromise between a more liberal and a more dirigiste interpretation of what a common market means.³³⁷

With regards the novelties of the Lisbon Treaty, new TUE art. 32 (former TUE art.16), reinforces the obligation of the member states to consult among them (namely, by a compulsory consultation of their partners) before undertaking any action on international scene,³³⁸ and binds them to show mutual solidarity.³³⁹ In practice, recent investor-state jurisprudence confirms some of the doubts and outlines concrete challenges presented to the EU as a party to bilateral and international investment treaties alongside some of its member states, and in its transactions with other state parties. These challenges give rise to avenues in which newly-acceded EU member states, in defence of investor-state claims, are starting to invoke: first of all, a BIT dispute settlement mechanism violates the above mentioned principle of mutual solidarity between member states.³⁴⁰ Moreover, recent ECJ rulings of 2009, ³⁴¹ state that BITs pre-dating the accession of the concerned countries to the EU, which contain unrestricted freedom of transfer of capital and profits for investments clauses, could be in a ―hypothetical conflict‖ with the EU law.

Indeed, TFEU arts. 64, 66, and 75 give the Council powers to impose exchange controls for certain limited or temporary purposes. However, if the Council were to do so, the unlimited freedom of transfer clauses in the relevant BITs would make it difficult or impossible for concerned members to comply with their obligation to cooperate with the Council. In order to avoid these, ECJ recent rulings suggest renegotiating the relevant BITs or to denounce them.

As to the European outward FDI to Russia (accordingly, Russia‘s inward FDI), in particular energy direct investments, at least 75 percent of that FDI comes into Russia from the EU member states.³⁴² For the next few years, Russia is ranked among the five top FDI destinations in 2010-2012 (after China, India, Brazil and the US), while of four top FDI sources, three are EU member states; namely, France, Germany, and the United Kingdom (UK).³⁴³

334 For a comprehensive analysis, see Vis-Dunbar, Damon (ICTSD)(2009). ‖Le Traité de Lisbonne : conséquences pour les Accords internationaux d‘investissement de l‘Europe [The Lisbon Treaty: Implications for International Investment Agreements in Europe ]‖, ICTSD, Eclairage, Vol.8, No.9, November 2009. URL : http://ictsd.org/i/news/eclairage/60762/ , retrieved on September 20, 2010.

335 United Nations Economic Commission for Europe (UNECE) (2001). ―Economic growth and foreign direct investment in the transition economies.‖ Economic Survey of Europe 2001 No. 1. New York and Geneva: United Nations, United Nations publication, Sales No. E.01.II.E.14, 185-226, in Kalotay (2006), op.cit., note 24, p. 492.

336 Kalotay (2006), id.

337 Tupy, Marian L. (2003). ―EU enlargement: costs, benefits, and strategies for Central and Eastern European countries.‖ Policy Analysis No. 489. Washington, DC: Cato Institute. http://www.cato.org/pubs/pas/pa489.pdf . In Kalotay (2006), id.

338 Priollaud and Siritzky (2008), op.cit., note 111, p.116.

339 See supra, pp.37-39.

340 See ECJ, Eastern Sugar, op.cit., note 253.

341 ECJ, Commission v Republic of Austria; ECJ, Commission v Kingdom of Sweden; ECJ, Commission v Republic of Finland.

Op.cit, notes 247-248.

342 2008 statistics. Source: European Commission. Trade - Bilateral relations - Countries : Russia.

343 UNCTAD (2010). World Investment Report 2010. Figure I.21., p.25.

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To summarise, for EU FDI in the context of the Lisbon Treaty and recent ECJ case law, it appears that acquis reception through EU membership resembles a man who gives with his right hand, and then takes part of it back with his left. For instance, investment protection and promotion were always governed by the member states competence. However, with the Treaty of Lisbon modifications, and with the expansive definition of FDI, there exists a real possibility that the Union‘s authority would be extended on this matter. A decision on jurisdiction and admissibility had been taken already within the ICSID with relation to the inconsistency between BIT protection and EU law.³⁴⁴

With respect to the inward FDI, the EU imports vast quantities of energy from third states and is also an important importer of capital investment. In this regard, numerous investment protection treaties exist, both between EU member states inter se and between EU member states and third states. However, conflicts might take place in the future between new EU legislation and existing and future BITs with third countries. If conflicts arise, they could be resolved through international investment arbitration.

When it concerns energy FDI, these could be settled under the ECT investor-state dispute settlement, if the both claimant‘s and defendant‘s countries are parties to the Treaty. Unfortunately, Russian investors for instance are not shielded anymore by the ECT investment protection.

Regarding Russia, recent rapid economic growth at home, high commodity prices, and FDI liberalisation in host countries have been feeding a boom in outward FDI from Russia. Data from this year (based on 2009 estimates) shows that Russia has the second largest stock of direct investments abroad among the emerging economies (USD 248.9 billion), behind only the special case of Hong Kong (China) (USD 834.1 billion).³⁴⁵

Between 1995 and 2007, Russia‘s outward FDI stock was growing more rapidly than the outward FDI stock of the other emerging economies, such as Brazil, China and India.³⁴⁶ However, as a result of the global financial crisis, a sharp downward revaluation of Russian assets held abroad reduced Russia‘s lead vis-à-vis other large emerging economies by the end of 2008.³⁴⁷

Nevertheless, before the crisis, and especially in the preceding three years (2005-2008), Russian FDI expansion via ―Mergers & Acquisitions‖ (M&A) increased by more than ten times compared with the period from 2001-2004. That is, Russian FDI increased from USD 5.5 billion to USD 56.8 billion. Most of these cross-border purchases were in the primary sector, which accounted for 59 percent of M&As in January 1997–June 2008.³⁴⁸ Notably, regarding the geographical distribution of acquisitions abroad, the data shows that Russian firms have generally targeted developed country firms, especially in Europe and North America.³⁴⁹

The data set on cross-border M&As also allows one to measure the size of round-tripping transactions in outward FDI, under which foreign affiliates of Russian firms, typically established in offshore financial centres such as Cyprus, the Netherlands and the British Virgin Islands,³⁵⁰ invest back to the Russian Federation. Such deals amounted to almost USD 7 billion over January 1997-June 2008, accounting for ten percent of the total FDI.³⁵¹ Some 50 to 60 Multinational enterprises (MNEs) account for a large part of Russian assets abroad, with outward FDI among this group dominated by such giants as Evraz, Gazprom, Lukoil, Norilsk Nickel, Rusal, Severstal, etc. The majority of Russian MNEs operate in four

344 ICSID, Micula and others v Romania, op.cit, note 254.

345 UNCTAD (2010), op.cit. note 343, Annex table 2.

346 See Box figure I.2.1., ibid., p. 7.

347 UNCTAD, Cross-border Merger & Acquisition database, available at: http://stats.unctad.org/fdi/. In Panibratov, Andrei and Kalman Kalotay (2009). ―Russian outward FDI and its policy context‖, Columbia FDI Profiles, Country profiles of inward and outward foreign direct investment issued by the Vale Columbia Center on Sustainable International Investment, No. 1, October 13, 2009.

348 Id.

349 Id.

350 Russian Federal State Statistics Service (Rosstat) data, available at :

www.gks.ru/bgd/free/b04_03/IssWWW.exe/Stg/d02/91inv21.htm . In Panibratov and Kalotay (2009), id.

351 UNCTAD, cross-border M&A database, op.cit., note 347. In Panibratov and Kalotay (2009), id.

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major industries: oil and gas, metallurgy, finance, and telecommunications. Despite the concentration of outward FDI among a limited number of large MNEs, the total number of Russian firms investing abroad probably exceeds 1,000.³⁵² Notably, the ten largest announced M&A transactions in January 2005-December 2008 mainly involved Russian resource-based firms (e.g., Norilsk Nickel, Evraz Group, Gazprom, Lukoil).³⁵³

A large number of those Russian MNEs are motivated by strategic considerations rather than by short-term profitability, reflecting the role of state-owned enterprises in the outward FDI. Notably, many of the MNEs headquartered in Russia have become truly global players, as they possess global brand names, management skills and competitive business models, among other traits. –Ranked by foreign assets, Lukoil and Gazprom particularly exhibit these traits.³⁵⁴

As it was mentioned in the first chapter of this study,³⁵⁵ the Russian state has played – and continues to play an important role in the emergence of Russian outward FDI. Indeed, Russian state enterprises are granted a set of advantages on behalf of the Russian state (financial capabilities, access to loans from the central bank, administrative support, etc.) that facilitate the enterprises‘ internationalisation.³⁵⁶ In particular, when it comes to companies in the energy sector, the law makes Russian majority ownership mandatory, regardless if this ownership is by the Russian state or by private Russian nationals.³⁵⁷

In sum, Russia‘s outward FDI, regardless of its various bottlenecks, continues to penetrate foreign markets.³⁵⁸ In particular, Russian energy companies are keen to gain access to downstream assets in European states, i.e. they aim to sell their goods and provide services to the European final consumers.

Regarding inward FDI, inflows to the Russian economy increased again in 2008.³⁵⁹ However, growing inward FDI implies growing uncertainty with respect to some contractual obligations vis-à-vis investments made in Russia.

Namely, with the most recent amendments of Russian investment-related legislation,³⁶⁰ the situation is unclear as to arbitration clauses, and enforcement of arbitration awards abroad. It could be argued that this new legislation introduces a requirement that relevant investor-state disputes may not be heard by way of institutional or ad hoc arbitration outside Russian boundaries.

Meanwhile, the bulk of FDI in the country continues to be in natural resource-related projects, such as extraction and oil and gas refining. Over time, the ECT increasingly protects such FDI in Russia. Again, if Russia ratified the Treaty, Russian investments abroad would be shielded in the same manner. On the other hand, statistically, a closer look at FDI in the Russian Federation reveals that a substantial proportion of inflows merely reflect the return of offshore capital held by Russian residents in Europe.³⁶¹

352 Panibratov and Kalotay (2009), ibid., p.2

353 UNCTAD, cross-border M&A database, Panibratov and Kalotay (2009), id.

354 UNCTAD (2010), op.cit., note 343, Box I.2., p. 7.

355 See supra, pp.26-29.

356 Panibratov and Kalotay (2009), op.cit., note 347.

357 It is mainly governed by the Federal Laws N 57-FZ and N 58-FZ of April 29, see supra, p.46.

358 Russian MNEs, continued to look for strategic assets in developed countries, mainly in downstream energy activities in the oil sector. UNCTAD (2010), op.cit., note 343, p. 51.

359 UNCTAD (2009). World Investment Report 2009, Figure II.22.

360 The wording of Federal Law N108-FZ amending as of July 2, 2008 the Federal Law N115-FZ (2005), the latter being broadly used in the energy sector, appears to subject disputes between a grantor (the state) and a concessionaire to be resolved through to a Russian seat. See supra, p47.

361 For example, nearly half of inward FDI in 2008 was invested in oil production and exploration, according to statistics reported by the central bank, though no new major acquisitions or large investments by foreign firms in the Russian oil industry were reported to have taken place. Since a large share of inflows in 2008 originated in the Netherlands, it is likely that it was mainly Gazprom‘s financial services affiliate in that country which was channeling money back into the Russian energy industry. In addition, special purpose entities in Cyprus and the British Virgin Islands also appear to have been involved in such investments. UNCTAD (2009), op.cit., note 359,., p. 74 (Box II.5.1.). See also Rosstat (2009), op.cit., note 350.

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Thus, since a considerable amount of natural-resource-based FDI is financed from round-tripping Russian capital, and following the recent Yukos rulings regarding the denial of benefits,³⁶² there may be a chance that in the next 20 years a fraction of claims under the ECT will be brought by Russian residents, who have incorporated their companies in the EU member states, against Russian government.