Following Crimea's disputed referendum to join the Russian Federation, held under Russian military occupation, and Russia's annexation of Crimea which has not been recognized by the vast majority of the international community, the burning question for many foreign investors in Crimea is, "how can we protect our investments there?"

While Russia's Federal Constitutional Law No. 6-FKZ dated March 21, 2014 on the admission of the Republic of Crimea into the Russian Federation provides that most existing permits and licenses, which were issued by the Ukrainian authorities, would be deemed effective for the term of their validity, there is no guarantee that such permits and licenses would not be cancelled by a new Russian or Crimean government. Under these circumstances, would Ukraine, Russia or the Crimean government be responsible to a foreign investor under international law for any adverse government action affecting the foreign investment? Unfortunately, there is no easy answer; the difficult political situation leads to some difficult legal realities, particularly under investment treaties. These questions are not apparently limited to Crimea as pro-Russian protesters seized the regional government building in the Ukrainian city of Donetsk and are reported to have declared independence from Ukraine as the "Donetsk Peoples' Republic," and then voted for a referendum to be held before May 11, 2014 on whether to join Russia. If the "dismemberment" of Ukraine continues, the question of how foreign investors can protect their interests there will continue to assume paramount importance.

Both Ukraine and Russia have concluded a web of bilateral investment treaties ("BITs") with other countries. The BITs may provide international law protections to investors which are incorporated in the respective foreign country party to these treaties and which have made a qualifying investment in Crimea. They permit foreign investors to hold a government responsible for any adverse action or inaction affecting the investment under international law such as, for example, uncompensated expropriation, failure to provide full protection and security (including the physical protection of the investment) and fair and equitable treatment, or discrimination. Examples of such actions, in addition to expropriation without compensation, may include: (i) failing to honor contractual and other undertakings made with respect to foreign investments, including licenses or permits; (ii) demanding payment or other obligations from investors while investors' operations are suspended due to the political situation on the ground; (iii) taking steps to protect domestic investments in Crimea, or investments of an investor of a third country in Crimea, but failing to provide similar treatment to other foreign investors; or (iv) failing to act in a manner that would protect foreign investors' investments when such an act was reasonably possible.

Assuming a foreign investor has made a qualifying investment in Crimea and either the Crimean government or the Russian government takes an adverse action against the foreign investment, the investor's recourse would most likely not be against Ukraine under Ukraine's BITs. The international community, including the United Nations, is likely to continue to see Crimea as part of Ukraine under international law, so that it could be argued that Ukraine remains responsible under its BITs for any acts taken on its sovereign territory which may amount to a breach of the international law obligation to provide foreign investments with "full protection and security." However, it would be difficult to attribute the actions of the Crimean government to Ukraine in view of the fact that Ukraine does not consider the Crimean government to be legal or legitimate and to the extent that the Crimean government and the territory of Crimea is effectively controlled by Russia. It would also be impossible to hold Ukraine responsible for the actions of the Russian government in Crimea. Ukraine also may attempt to rely on the international law defence of necessity under the circumstances. Ukraine, of course, may be held liable under its BITs for any actions or omissions by the Ukrainian or the then Crimean government at the time when Crimea was effectively controlled by Ukraine. By the same token, Ukraine also may be held liable for violation of any contractual obligations to the relevant investors in Crimea depending on the terms of the contract at issue.

Another option at the investor's disposal may be to seek damages from the Russian Federation in international arbitration proceedings under an applicable Russian BIT. BITs generally protect investments made in the "territory" of the Contracting States to the BIT. The claims would depend, inter alia, on whether Crimea is a part of the "territory" of the Russian Federation in order to found jurisdiction against the Russian Federation under Russia's BITs. A sample review of Russia's BITs, namely of the France-Russia, U.K.-Russia, Germany-Russia, and Netherlands-Russia BITs, confirms that the term "territory" is not defined in these treaties. The term "territory" is likely to be interpreted by reference to domestic law (Ukrainian and Russian law in this case) and international law and in the event of conflict international law is likely to prevail over domestic law. Although Russia's annexation of Crimea is not considered to be in accordance with international law and has not been recognized by any major country, this would be ordinarily a defense that Russia would have to raise in the arbitration proceeding. Given that both Russia and the Crimean government consider Crimea to be lawfully part of Russia, it is unlikely that Russia would raise the defense, at least not in a non-confidential public arbitral proceeding. In any event, to the extent Russia contends publicly that Crimea is lawfully a part of its territory, Russia may be precluded from raising the defense in the arbitral proceedings or in subsequent award enforcement proceedings.

On the other hand, the tribunal's jurisdiction under BITs is based on consent, and even if Russia consents that its territory includes Crimea, this may be insufficient because it would be important how the other Contracting State to the relevant BIT interprets the term "territory" of the Russian Federation in the BIT. For example, as France, the Netherlands, UK and Germany have not recognized Russia's annexation of Crimea as lawful under international law, there would appear to be no consent for the arbitration of disputes arising out of investments made in Crimea under Russia's BITs with these countries. More fundamentally, a tribunal may be reluctant to exercise jurisdiction over an investment made in an illegally annexed territory on the ground that it would violate the rule of law and hence international public policy. International tribunals have sometimes declined to exercise jurisdiction on public policy grounds over claims based on contracts or rights arising from illegal acts such as corruption, fraud, or misrepresentation. These cases, however, may be distinguishable because it is not the claimants that would have committed the illegal act but rather the respondent – Russia – and if the foreign investor is not granted recourse against Russia under the relevant BIT, it would be left with no protection at all.

Foreign investors also should be mindful of the definitions of investment in Russia's BITs. Although these definitions are relatively broad, the Netherlands-Russia BIT, for example, defines investment as, inter alia, "rights to conduct commercial activity, including rights to prospect, explore, extract and exploit natural resources, granted under contract or under the legislation of the Contracting Party in the territory of which such activity is undertaken." A similar definition is present in the Germany-Russia BIT. Assuming an investor's production sharing agreement is with the State of Ukraine and its rights to develop hydrocarbons arose in part under Ukraine's legislation, a question arises as to whether the investor's rights constitute an investment under Russia's BITs. The Russian Federal Constitutional Law No. 6-FKZ dated March 21, 2014 on the admission of Crimea into the Russian Federation preserves the validity of "ownership" rights, "rights to use", "benefits", and "permits", issued by the government and other official bodies of Ukraine and the Autonomous Republic of Crimea (as it was then a part of Ukraine). It may be contended that on the basis of this law, the Russian Federation has made a representation and an undertaking to foreign investors to continue to honor contract rights to develop hydrocarbons in Crimea granted by Ukraine and the then Ukrainian Crimean Government and that Russia's failure to abide by this undertaking can be actionable under an applicable Russian BIT. It is a more complicated question whether Russia has agreed to honor hydrocarbon rights arising from Ukrainian legislation and not specific contracts.

Even if the adverse action was taken by the Crimean government and not by the Russian government, the actions of the Crimean government are likely to be attributable to the Russian State. As Crimea has now been incorporated as a territorial unit of Russia (a matter governed by domestic law), the Crimean government may be considered an organ of the territorial unit of Crimea and its conduct is thus attributable to the Russian Federation for purposes of attribution of responsibility to Russia under international law. If the action was not taken by an organ of the Crimean Government such as, for example, one of the new Crimean ministries or government agencies but rather by a Crimean or a Russian state-owned entity, the actions of such a state-owned entity could be attributable to Russia if the entity was exercising elements of governmental authority or through a demonstration of a factual relationship between the entity in question and the Crimean government or the Russian government, i.e., demonstrating that the entity was acting on the instructions of, or under the direction or control of, the Crimean government or the Russian Federation in carrying out the allegedly unlawful acts in question (e.g., discrimination or uncompensated expropriation). The analysis would be more complicated if the state-owned entity is owned by the Ukrainian State.

Foreign investors also should be aware of the issue of jurisdiction ratione temporis over their claims against Russia. A review of the same Russia BITs noted above confirms that the timing of any claim made against Russia by foreign investors is important. For those of Russia's BITs, such as the U.K.-Russia BIT, that limit their applicability to disputes which arose after the BIT's entry into force, the date when, for example, Russia's BITs would enter into force for Crimea is significant and accordingly the dispute must arise after that date. A foreign investor may be able to argue that as soon as Crimea became de facto and de jure (at least domestically) a part of Russia's territory, as it has become by now, Russia's obligations under its BITs arose vis-à-vis foreign investors in Crimea. For this reason, any disputes arising after this date should be within the scope of the BIT.

There is a further dimension to all of this. Both Russia and Ukraine are parties to the European Convention on Human Rights and, in particular, to Protocol No. I, article 1 of which protects the right of peaceful enjoyment of property. This would be breached by any unlawful taking of property of a natural or legal person falling with the jurisdiction of the system as per article 1 of the Convention itself. The concept of jurisdiction here includes territory falling within the overall effective control of another state party, so that in principle Russia could be liable for a breach of the Convention articles (including relevant Protocols) with regard to Crimea. While Ukraine has indeed commenced an inter-state action in Strasbourg against Russia, it is possible that a company falling within the jurisdiction of Russia could make an application to the European Court of Human Rights for a violation of the property rights enshrined in Protocol No. I. This is, in addition, quite apart from Russia's general liability under the international law rules of state responsibility for breaches of international law with regard to events in Crimea, including maltreatment of aliens. This could well raise the prospect of cases brought in foreign jurisdictions with regard to any property wrongly taken in Crimea and being sold or otherwise dealt with outside of Russia and Crimea.

Without a doubt, the situation is fluid, uncertain, and few of the foregoing analyses are tested in international bilateral investment treaty jurisprudence. In fact, if anything, they demonstrate situations in which bilateral investment treaties, for all their benefits for investors, may not be effective in protecting foreign investment. But, at least, investors may have colorable arguments, and are certainly not left without any potential remedy at all other than local courts. That said, in light of the fact that bilateral or multilateral investment treaties may not provide the most robust cover for foreign investors in these difficult situations, investors are advised to use several avenues of protection and redress now and in the future including political stratagem, diplomacy, commercial negotiations, potential insurance options, and the like.

Jones Day would like to thank Professor Malcolm Shaw QC of Essex Court Chambers for his assistance in the preparation of this client alert.

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.