Bilateral investment treaties as a guarantee for investment relations / Двусторонние инвестиционные договоры как гарантия инвестиционных отношений

Аннотация:

В статье рассматривается правовой характер двусторонних инвестиционных договоров. Материал также оценивает эффективность таких соглашений в качестве инструмента в международных инвестиционных отношениях. В статье также перечисляются правовые основания для заключения инвестиционных контрактов в Республике Узбекистан и в Российской Федерации.

Annotation:

This article examines the legal nature of bilateral investment treaties. It also assesses the efficiency of such agreements as an instrument in international investment relations. The article also enumerates legal grounds for concluding investment contracts in the Republic of Uzbekistan and the Russia Federation.

Tags: foreign investments, investment agreements, bilateral agreements, protection of foreign investors’ rights

Об авторе: Артем Мансуров

About the author: Artyom Mansurov

Верблюд, Ляби Хауз, Бухара, Узбекистан

The use of bilateral investment treaties (BIT) to control investment relations aims to reach a range of goals. On the one hand, BIT are intended to attract as many foreign investors as possible granting them a whole set of various guarantees through the application of legal regimes. On the other hand, BIT must help the state preserve its ability to perform its public tasks and functions and protect its own interests. Studying the practice of resolving disputes involving BIT, for example those where Russia acted as the defendant, provides an opportunity to assess the efficiency of Russian BIT in pursuing the aforementioned goals.

Academic literature provides different data as to the amount of BIT in the world[1]. But according to some credible sources some 169 states had signed over 1500 agreements of such sort by 1998[2]. In fact every developed state and over 90 developing states are parties to at least one such agreement[3].      Germany scores best in this respect with over 70 such agreements. It is narrowly followed by Russia with over 50 agreements[4].

One of the essential factors that led to a rapidly growing number of BIT was the strong desire of citizens and companies in an expanding range of developed states to make direct investments in other states and, in connection to this, the emerging necessity in a reliable international legal protection. Foreign investors could never rely solely on the laws of a capital importing state because that would increase investment risks. As it follows from historical experience, developing states are known to have altered their legislation after an investment had been made. In the 60-s and 70-s of the 20^th century there were multiple instances of capital importing governments impeding investments or even seizing them.

But the prime reason for making BIT in the 80-s and 90-s of the past century was that developing states were increasingly in need of foreign investment following a decrease in foreign aid from developing states. By concluding BIT with various capital exporting states developing economies and economies in transition initiated a massive attraction of capitals. This tendency is likely to continue in the 21^st century.

Therefore, it is possible to infer from the examined material that BIT have proven to be a rather efficient mechanism for foreign investors to protect their interests. All cases in which a claimant was successful in proving his status as a foreign investor and whose deposits were recognized as investments having been lost as a result of the actions on the part of the capital importing state were eventually decided in favor of the claimant (investor). Using the mechanism of BIT-based litigation allows to strip the state of its privileged position as a sovereign public entity which significantly raises the chances of a foreign investor to win an arbitration case. The efficiency of BIT is indirectly verified by the fact that Russia, since the 2000-s, has been very careful about signing and ratifying such agreements. For instance, the BIT with Cyprus has not yet been ratified where most active are the agents seeking to avoid taxation in Russia making Russia reluctant to constrain itself in opposing dishonest participants of investment agreements. There is no denying that this circumstance encourages growing investments from the states that Russia has already signed and ratified a respective BIT with.

However, it would do well to remember that in an overwhelming majority of cases investors failed to receive the amount they had requested in the complaint. In some cases the issued compensation did not even cover the litigation expenses. The amount of compensation paid by Russia in connection to the Yukos case was incommensurate to the dividends already received by the state and those to be received in the future from the assets of such a large oil company. All in all, a far-sighted approach in approving the content of a BIT allows to secure the ability of the state to perform its public tasks and functions granting it the opportunity to protect its own interests including through a considerable limitation of the competence of a corresponding arbitration body while deciding potential disputes and protecting the state from abusive claims of investors. The resolution on the case of  Ros Invest CO UK Ltd v. The Russian Federation where the RNB resorted to arbitration to expand its jurisdiction for matters not directly provided for in a clause on dispute settlement between the foreign investor and the importing state in the BIT has not been solidified by a continuous and consistent practice and does not set a disadvantageous precedent for a capital importing state including Russia. However, in order to avoid potential troubles it is recommended, while signing a BIT on granting the most favored nation status, to insert such provisions into the body of the agreement specifying that the given regime is not applicable to procedural matters.

In summary, BIT between states regulating mutual encouragement and protection of investments are directed to ensure international legal protection from primarily non-commercial risks. The establishment of clear, accessible and feasible rules working toward a better investment climate and building confidence between states constitutes a vital booster for foreign investment. In order to attract foreign investments, states are not only required to encourage its companies to invest its financial resources into another state but also pay attention to inviting technology, know-hows, modern management and so on[5].

Studying foreign experience of the legal regulation of investment agreements is relevant due to the fact that it opens prospects for a deep examination of the nature of such agreements and allows to single out aspects that may be used to improve national legislation in this sphere.

One characteristic of the legal regulation of investment agreements in the Republic of Uzbekistan is that it is carried out at the level of bylaws.

Its fundamental source is the Regulation on the procedure for concluding and carrying out investment agreements approved by the resolution of the Cabinet of Ministers of the Republic of Uzbekistan, 2^nd August, 2005, №180 “About additional measures for stimulation of attraction of direct private foreign investments” (hereafter — The Regulation, 2^nd,August, 2005).

The legislation of the Republic of Uzbekistan regulating investment and the status of investors (the Law of the Republic of Uzbekistan, 30^th, April, 1998, “On foreign investment”, the Law of the Republic of Uzbekistan, 30^th, April, 1998, “About guarantees and measures of protection of the rights of foreign investors”, the Law of the Republic of Uzbekistan 24^th, December, 1998, “On investment”) does not contain norms pertaining to the regulation of  investment agreements.

Paragraph 1 of Part 1 of The Regulation, 2^nd,August, 2005 provides that investment agreements  are concluded between the Cabinet of Ministers (the Government) of the Republic of Uzbekistan and a foreign investor if the latter is given guarantees and protective measures (reliefs and preferences) in addition to those established by the legislation.

Therefore, national investors are not eligible to act as a party to an investment agreement in the country under consideration. Foreign investors may enter into such agreements only when they are granted additional reliefs and preferences.

Paragraph 1 of Part 1 of the Regulation, 2^nd,August, 2005, also states that this law has been designed in accordance with Article 4 of the Law of the Republic of Uzbeikstan “About guarantees and measures of protection of the rights of foreign investors”. As mentioned above, this law does not contain any provisions regulating investment agreements.

The aforementioned article affirms that a foreign investor may be granted additional guarantees and protective measures. It also specifies the requirements and the procedures for claiming them.

Particularly, a foreign entity may be granted this kind of advantages while making an investment in: fields of high priority ensuring sustainable economic growth, progressive structural change in the state economy; high priority projects contributing to the strengthening and expansion of the export potential of the republic, its integration into the global economy; in small and medium-sized businesses processing raw and other materials, producing consumer goods and services, improving employment among the population[6] .

A similar but not identical list of investment directions allowing for the possibility to receive additional advantages by foreign investors is contained in Paragraph 2 of Part 1 of the Regulation 2^nd,August, 2005.

As it follows from Paragraph 6 of Part 2 of the Regulation 2^nd,August, 2005, additional guarantees and protective measures (reliefs and preferences) may include guarantees from the Government of the Republic of Uzbekistan , a special customs, tax and payment regime, state monitoring of project progress, assisting in funding investment projects, incorporation into the investment program or other measures under the legislation.

According to Article 4 of Part 4 of the Law of the Republic of Uzbekistan “About guarantees and measures of protection of the rights of foreign investors” additional guarantees and protective measures are granted to foreign investors through special decisions of the Government of the Republic of Uzbekistan.

It is worth noting that these benefits may be used either by a foreign investor himself or a legal entity using foreign investments established by that investor[7].

Therefore, considering the legal procedures of Part 1, Paragraph 1 of the Regulation 2^nd, August, 2005 and Article 4 of the Law of the Republic of Uzbekistan “About guarantees and measures of protection of the rights of foreign investors” for an investment agreement to be concluded there need to be a special resolution by the Cabinet of Ministers of the Republic of Uzbekistan as a prerequisite which will constitute the basis for a foreign investor to receive additional guarantees and protective measures (reliefs and preferences).

It is worth mentioning that under Part 1, Paragraph 6 of the Regulation 2^nd, August, 2005, in case a foreign investor is granted additional benefits he is bound to make a contract which may be interpreted as an exception from the civil law principle of freedom to make contracts.

What is the purpose of making an investment agreement in the Republic of Uzbekistan? The answer is provided in Paragraph 3 of the Regulation 2^nd, August, 2005, which states that an investment agreement is concluded to ensure that the obligations of a foreign investor receiving additional guarantees and protective measures are met.

Paragraph 5 of the Regulation 2^nd, August, 2005 provides that an investment agreement is concluded between the Government of the Republic of Uzbekistan represented by the Ministry of foreign economic relations, investments and trade of the Republic of Uzbekistan and a foreign investor (investors). The literal interpretation of this law leads to believe that an investment agreement may have both two (including multiple entities on the investor’s side) and three and more investors if several foreign investors are parties to the agreement as independent entities.

Paragraph 1 of Part 7 of the Regulation 2^nd, August, 2005 contains provisions obliging the sides to reach agreement (on essential terms) before the conclusion while Part 2 specifies the provisions that may be incorporated into the agreement.

Specifically, the obligations of an investor include ensuring the due amount of investment, production volume, a guaranteed degree of localization and quality of the product, the exports volume of own-produced goods and services and the payment of credits guaranteed by the Government of the Republic of Uzbekistan.

Additionally, paragraph 7 of the Regulation 2^nd,August, 2005 contains conditions specifying time constraints imposed on the feasibility study, the conclusion of labor contracts, funding sources, implementation schedule, supervision procedures over the project and the procedure and time limits for the investor to submit reports on the progress in fulfilling his liabilities.

At the same time Paragraph 7 of the Regulation 2^nd, August, 2005 does not mention a possibility which would allow the state to agree on a provision stating its right to waive immunity from prosecution and preliminary injunctions.

Although Paragraph 3 of the Regulation 2^nd, August, 2005 states that an investment agreement in the Republic of Uzbekistan is concluded to ensure that foreign investors who are given additional guarantees and protective measures (reliefs and preferences) fulfill their obligations, Paragraph 7 of the same law requiring that legal  responsibilities of the parties be incorporated does not detail the consequences resulting from a failure (or improper fulfillment) to comply with the terms of an agreement by the investor.

In order to conclude an investment agreement a foreign investor is required to file a number of documents to the Ministry of foreign economic relations, investments and trade of the Republic of Uzbekistan. They include:

1. draft agreement
2. essential economic data based on a technical and economic assessment (feasibility study)
3. resolution of the Ministry of Justice providing legal expertise of the draft agreement
4. resolution of the Ministry of Finance, the Ministry of Economy and the State Tax Committee providing tax reliefs and preferences in addition to those already established by the law to foreign investors and (or) an entity under formation using foreign investments[8].

The general rule is that besides filing an application and a draft agreement to a competent body a copy of a document verifying the status of an investor, which can be a legal or natural person, should be provided.

Under the laws of the Republic of Uzbekistan it is possible to request additional information from the investor which may be relevant for making the decision on entering into an agreement.

Under paragraph 10 of the Regulation 2^nd, August, 2005, an investment agreement signed by a foreign investor and the Ministry of foreign economic relations, investments and trade of the Republic of Uzbekistan shall be approved by the Cabinet of Ministers of the Republic of Uzbekistan.

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[1] A.A. Danelyan, E.Z. Farhutdinov. International investment arbitration: Study guide. – M.: Saint Petersburg,. The Center for Humanitarian Initiatives, 2013 – p. 124

[2] Y. Ershov, N. Tsvetkov. We tried our best, you know the rest // Investment in Russia 2000.№2

[3] UNCTAD. World Investment Report 1998 trends and determinants. New York and Geneva. P. 83

[4] M.I. Khalil Treatment of Foreign Investment in Bilateral Investment Treaties // ICSID Review-Foreign Investment Law Journal. 1992. Vol. 7. P. 339.

[5] A.A. Danelyan, E.Z. Farhutdinov. International investment arbitration: Study guide. – M.: Saint Petersburg,. The Center for Humanitarian Initiatives, 2013 – p. 124

[6] Article 4 of Part 2 of the Law of the Republic of Uzbekistan “About guarantees and measures of protection of the rights of foreign investors”

[7] Paragraph 5, Clause 8 of the The Regulation on the procedure for concluding and carrying out investment agreements approved by the resolution of the Cabinet of Ministers of the Republic of Uzbekistan, August, 2, 2005, №180 “About additional measures for stimulation of attraction of direct private foreign investments”

[8] Paragraph 8 of The Regulation on the procedure for concluding and carrying out investment agreements approved by the resolution of the Cabinet of Ministers of the Republic of Uzbekistan, August, 2, 2005, №180 “About additional measures for stimulation of attraction of direct private foreign investments”