Turkey: Russia and Turkey Talk Sanctions

Last Updated: 9 February 2016
Article by Mark D. Skilling

In the following we highlight some of the more important recent developments in the deteriorating relationship between Russia and Turkey since the November 24th downing of a Russian warplane by Turkey. For the most part these developments have involved the threat of, and in some cases the actual imposition of, sanctions by Russia against Turkish citizens and companies doing business in Russia.

Given all the talk about sanctions, we also address below an important development in international law that recognizes new limitations on the freedom of states to impose sanctions – referred to here as "countermeasures" – when the countermeasures harm the investments of foreign investors. More specifically, recent decisions by ICSID arbitration tribunals have taken into account the significant change brought about by the proliferation of investment treaties in the past few decades and the concurrent creation of a "private right of action" in non-state actors.

As a result, foreign investors are increasingly able to pursue treaty claims in their own right for damages suffered at the hands of states hosting their investments, including claims for damages caused by countermeasures. One of the treaties in play here is the Turkey-Russia Bilateral Investment Treaty ("BIT"). Whether Russia – or Turkey, if it too gets involved in the countermeasure game – breaches any of its obligations under the BIT as a result of the countermeasures it has or may adopt deserves serious attention by foreign investors impacted by such countermeasures.

Recent Developments:

Perhaps needless to say, since the Russian jet was shot down the relationship between Russia and Turkey has been in a tailspin. Russia has demanded Turkey's apology for downing the warplane, prosecution of those responsible and payment of compensation.

Presumably to induce Turkey to submit to these demands, Russia has among other things issued two Presidential Decrees, one on November 28 and the other on December 30, both of which are aimed, at least partially, at limiting the freedom of Turkish citizens and companies doing business in Russia. For example, the November 28th Decree purports to ban the use in Russia of certain services by Turkey-based companies while the December 30th Decree provides that certain Turkish construction companies are prohibited from signing new contracts after January 1st.

In addition, the visa-free regime for Turkish citizens travelling to Russia has been suspended. So too, according to some reports, has the work on the Turkish Stream, a gas pipeline being built across the Black Sea, as well as the work by the state-owned Russian company Rosatom on Turkey's first nuclear power plant. Restrictions on the importation from Turkey of certain agricultural products as well as certain textile products have also been imposed. Just this past week, Russian President Putin announced that sanctions on Turkish companies working in Russia would be increased.

In response, Turkey itself is ramping up both its rhetoric and other efforts to counter Russian actions, evidenced by its threat of "retaliatory sanctions" and its more recent claim that it is "preparing to file a complaint against Russia's economic sanctions to the World Trade Organization". 

With foreign trade volume between the Turkey and Russia alone having exceeded $31 billion in 2014, the impact of the deteriorating relations between Russia and Turkey on both Turkish and Russian citizens and companies has been significant and will only increase. It seems likely Turkish and Russian businesses may already have suffered actionable damages, such as from the breach of individual contracts between Russian and Turkish parties[1]. As important is the possibility that countermeasures may have resulted in, or will result in, breaches of obligations owed to foreign investors pursuant to the Turkey-Russia BIT.

The Turkey-Russia Bilateral Investment Treaty:

Relevant foreign investment protections found in the Turkey-Russia BIT that may come into play here include, among others, the promise by both Turkey and Russia:

  • Of "fair and equitable treatment" (BIT, Art. II.2 and Art. III.1);
  • Of "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 any of the countermeasures in question – imposed or contemplated – may give rise to a viable claim under the BIT is, of course, a mixed question of fact and law that can only be assessed after a thorough investigation. That said, it is no stretch to imagine situations where the countermeasures in question might give rise to such claims. The fact that many of these are directed at private Turkish citizens and companies – rather than, say, targeting the interests of the Turkish military – raises serious questions about the promised "fair and equitable" treatment.

Countermeasures as an Acceptable Response to alleged Wrongful Conduct:

The most likely response by Russia to countermeasure-related damage claims by Turkish investors in Russia pursuant to the BIT would be that the acts complained of were acceptable "countermeasures" taken in light of an "international wrongful act" of Turkey, i.e. the shooting down of the Russian warplane.

As a general rule, for such a defence to be successful it would have to be shown that the countermeasures were (i) "taken in response to a previous international wrongful act of another state and must be directed against that state" and (ii) the state taking the countermeasures must have "called upon the state committing the wrongful act to discontinue its wrongful conduct"[2]. Other considerations for the trier of fact and law are that the effects of any given countermeasure must be "commensurate with the injury suffered" and that its purpose must be "to induce the wrongdoing state to comply with its obligations under international law"[3].

In Archer Daniels Midland et al. v. United Mexican States, the majority of the three-arbitrator tribunal relied upon this rule when it rejected a countermeasures defence raised by Mexico. In that arbitration, Mexico had amended its tax code to impose a 20 percent excise tax on soft drinks and syrups and the same tax on services used to transfer and distribute these products. The claimants, U.S. corporations that produced corn syrup in Mexico, alleged the amendment violated provisions of Chapter Eleven of the North American Trade Agreement ("NAFTA"), which includes substantive protections for investors similar to those found in the Russia-Turkey BIT listed above[4].

In defence, Mexico claimed the amendment to the tax code was a countermeasure whose purpose was to induce the U.S. to comply with certain NAFTA obligations. The panel's disagreed, concluding the evidence showed that "protection of the Mexican sugar industry was the true motive and intent" underlying the amendment[5].

More important – given two subsequent ICSID decisions – is the Concurring Opinion of the third arbitrator, Arthur Rovine. Rovine took the position that the countermeasure defence was simply unavailable under the circumstances, concluding "countermeasures cannot ... eliminate, supersede, or suspend the rights of NAFTA investors to legal redress should the countermeasures constitute a breach of Chapter Eleven"[6]. Referring to NAFTA – but using language we believe equally applicable to other investment treaties, such as the Turkey-Russia BIT – he observed:

... an investor needs predictability and stability, encouragement from the host state, legal standards that include basic minimum protections of investments, a right of legal redress in case of breach of any of those protections by the host state, and an atmosphere in which an investor need not fear that his investment will be diminished or taken because his host state has a trade dispute with his home state[7].

Rovine's view was adopted by tribunals in two subsequent ICSID arbitrations, both of which also concerned claims brought by U.S. investors in Mexico pursuant to NAFTA's Chapter Eleven and arose out of the same amendment to the tax code. Thus, in Corn Products International v. United Mexican States, it was held that:

... the doctrine of countermeasures, devised in the context of relations between States, is not applicable to claims under Chapter XI of the NAFTA. Those claims are brought by investors, not by States. A central purpose of Chapter XI of the NAFTA was to remove such claims from the inter-State plane and to ensure that investors could assert rights directly against a host State. The Tribunal considers that, in the context of such a claim, there is no room for a defence based upon the alleged wrongdoing not of the claimant but of its State of nationality, which is not a party to the proceedings[8].

Similarly, in Cargill v. United Mexican States the tribunal held that Mexico's "argument that its actions were countermeasures cannot have the effect of precluding the wrongfulness of those actions in respect of a claim asserted under Chapter 11 by a national of the allegedly offending State"[9]. In reaching this decision the panel observed that the "fact is that it is the investor that institutes the claim, that calls a tribunal into existence, and that is the named party in all respects to the resulting proceedings and award"[10].

In summary, authority now exists recognizing that a state – even when legitimately aggrieved by the wrongful conduct of another state – should not be free to fashion countermeasures that harm certain foreign investors, such as those protected by BITs. Whether countermeasures implemented and that may be implemented in the aftermath of the downing of the Russia jet by Turkey run afoul of this authority deserves careful consideration by foreign investors negatively impacted by them.

[1] In such a situation, however, the breaching party may have a readymade force majeure defence for any failure to perform if the failure were the result of restrictions imposed by the countermeasures.

[2] Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. United Mexican States (ICSID Case No. ARB(AF)/04/5) Award dated 21 November 2007, ¶126.

[3] Ibid. The countermeasures defence has been codified in the ILC Draft Articles on State Responsibility for Internationally Wrongful Acts. See, e.g., Art. 22 ("Countermeasures in respect of an internationally wrongful act") and Art. 49 ("Object and limits of countermeasures"). 

[4] See, e.g., NAFTA, Art. 1105.1 (promises foreign investors "fair and equitable treatment" and "full protection and security").

[5] Id. at ¶150. The majority also concluded that, even if it assumed the intent of the countermeasures was to induce the U.S. to comply with its international obligations, the means of attempting to do so did not meet the "proportionality requirement" given the countermeasures disproportionately impacted private investors. Id. at ¶¶152-160.

[6] Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. United Mexican States (ICSID Case No. ARB(AF)/04/5) Concurring Opinion of Arthur W. Rovine dated 21 November 2007, p. 1.

[7] Id. at ¶84 (emphasis added).

[8] Corn Products International Inc. v. United Mexican States (ICSID Case No. ARB(AF)/04/1) Decision on Responsibility dated 15 January 2008, ¶161(emphasis added).

[9] Cargill, Incorporated v. United Mexican States (ICSID Case No. ARB(AF)/05/2) Award dated 18 September 2009, ¶429.

[10] Id. at ¶426. It should be noted that the precedents cited in this piece are not binding. That said, arbitral panels will often follow other tribunals' decisions when they find those decisions consistent and persuasive. See, e.g., Bayindir v. Pakistan (ICSID Case No. ARB/03/29) Final Award dated 27 August 2009, ¶145 (a tribunal "ought to follow solutions established in a series of consistent cases. ... By doing so, it will meet its duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law").

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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