Home Insights Investment treaties in conflict zones: lessons for investors

Investment treaties in conflict zones: lessons for investors

When investing internationally, individuals and corporations enjoy protections under investment treaties in force between the State of their nationality and the State in which they invest (i.e. the Host State). That protection usually extends to investment in the ‘territory’ of the Host State.

The notion of a State’s territory typically equates to a geographical area that is subject to the sovereignty of a nation State. This is at least how ‘territory’ is defined under international law.[1] Many investment treaties also define the term ‘territory’ and, by reference to that definition, circumscribe the spatial scope of application of the protections afforded to investors under the treaty. The definition of ‘territory’ in many investment treaties extends to areas over which the State exercises certain sovereign rights and jurisdiction but not full sovereignty (e.g. the State’s exclusive economic zone and continental shelf). 

The location of an investment in the territory of a Host State is usually uncontroversial. But there are situations which complicate matters. Increasingly companies invest in offshore natural resources projects which may be located in areas beyond a State’s territory in the conventional sense. Offshore natural resources may be located in areas where maritime boundaries are unsettled or in maritime zones claimed by two or more States. And as recent history sadly reminds us, foreign investments may be impacted by war and end up under the control of an occupying State which claims the occupied territory as its own.

These situations heighten the risks for the investor. This is because such situations may disentitle the investor from relief under an investment treaty against expropriatory or otherwise harmful Host State acts or omissions, simply because the investment is not located within the area defined in the investment treaty to comprise the Host State’s ‘territory’. 

Recent investment treaty jurisprudence has shed light on these matters and in this Part 1 of our insight series on the territorial scope of investment treaties, we consider protections available to investors in territories under unlawful occupation, drawing from recent cases arising from Russia’s annexation of Crimea. 

Was the investment made in the ‘territory’ of the Host State?

A key component of most investment treaties is that they protect investments made in the territory of the respondent or Host State.  

As a consequence, prior to the merits of an investor’s claim being adjudicated, the investor must establish the arbitral tribunal’s jurisdiction over their claim by demonstrating (among other things) that their investment was made in the territory of the Host State.  

In determining if this condition is met, arbitral tribunals will typically have regard to the physical bounds of the Host State’s territory, i.e. the area over which the Host State exercises its sovereign jurisdiction. The question is complicated where the territory of the investment is subject to a territorial dispute, unsettled boundary lines or competing claims to sovereignty.  

Until recently there has been relatively limited investment treaty jurisprudence on these matters. This has changed with the surge of investment treaty disputes initiated in the aftermath of Russia’s unlawful occupation and subsequent annexation of Crimea, in relation to investments located in the annexed territory. 

Cases arising from Russia’s annexation of Crimea

Background to the Crimean conflict

On 22 February 2014, the then-Ukrainian President Viktor Yanukovich departed Ukraine following protests against his administration. On 27 February 2014, armed individuals seized control of the Crimean parliament and ministerial building, and raised the Russian flag above the building. The leader of the Crimean ‘Russian Unity Party’, Sergei Aksyonov was named Prime Minister of the Crimean territory. Russia passed legislation on 1 March 2014 granting President Vladimir Putin’s request for use of Russia’s armed forces on the territory of Ukraine. 

On 16 March 2014, a public referendum on the issue of ‘incorporation’ was held on the Crimean Peninsula. The results were 96% in favour of ‘incorporation’, despite widespread allegations of electoral fraud.

On 18 March 2014, the ‘Republic of Crimea’ and now-called ‘Federal City of Sevastopol’ signed an incorporation treaty with Russia, which was subsequently ruled constitutional in Russia and approved by both Russia’s houses of parliament.

By 17 April 2014, Russia had consolidated control over the Crimean Peninsula and President Vladimir Putin stated that Russia had established conditions for “the free expression of the will of the people living in Crimea and Sevastopol”.  

Ukrainian investors commence proceedings against Russia

Since Ukraine’s annexation of Crimea in 2014, at least 10 cases have to date been commenced by Ukrainian investors in the territory of Crimea against Russia under the 1998 Agreement on the Encouragement and Mutual Protection of Investments between Russia and Ukraine (Russia-Ukraine BIT, or the BIT), seeking to hold Russia accountable for the loss and damage to their investment following Russia’s assertion of control over the Crimean peninsula

Like many other bilateral investment treaties, the Russia-Ukraine BIT protects investments made by investors of one State party in the territory of the other State party from expropriatory and other unlawful acts by that State party.

Some of these cases have resulted in awards but many remain pending and all were confidential until recently. That changed when two awards issued in Stabil LLC et al v Russian Federation[2] – a dispute commenced by 11 Ukrainian corporations over investments in a number of petrol stations in Crimea – surfaced in enforcement proceedings brought against Russia in the US. 

The Stabil awards are interesting as they reveal how the tribunal tackled the thorny issue of jurisdiction to hear a dispute brought by Ukrainian investors in relation to investments in a territory which, under international law, still belongs to Ukraine. The awards also illustrate when an investor caught in inter-state hostilities may have a treaty claim against an aggressor State.

Stabil LLC v The Russian Federation

Beginning on 22 April 2014, paramilitary forces and officials of the self-declared ‘Republic of Crimea’ seized control of a number of petrol stations and storage facilities controlled by several Ukrainian petrol companies (the Claimants). 

Despite enacting legislation guaranteeing pre-existing property rights in Crimea on 25 and 31 July 2014, the State Council of the Republic of Crimea issued decrees nationalising the Claimants’ properties on 3 September 2014. The actions against the Claimants resulted in the complete loss of their investments in Crimea.

In 2015, the Claimants commenced proceedings against Russia under the Russia-Ukraine BIT seeking compensation for their lost investments. They alleged that Russia breached its obligations under the BIT, including by unlawfully expropriating or discriminating against foreign investments without compensation. 

The Claimants submitted that their investments were seized and discriminated against as a consequence of their connection to Ukrainian businessman Igor Kolomoisky, who the Russian administration sought to target. Members of the Claimants were given the choice to either work for the newly appointed ‘Prime Minister’ of Crimea or leave the territory immediately.

Tribunal accepts jurisdiction based on Russia’s de facto control over Crimea

Under the provisions of the Russia-Ukraine BIT, the tribunal could only exercise jurisdiction over the dispute if, relevantly, the Claimants had made an ‘investment’ in the ‘territory’ of Russia.

The BIT defines ‘territory’ to comprise “the territory of the Russian Federation or the territory of Ukraine and also their respective exclusive economic zones and the continental shelf as defined in conformity with international law.”

Having regard to that definition, the question of whether Crimea fell within “the territory of the Russian Federation” at the relevant times was central to the Tribunal’s decision on jurisdiction. 

Russia refused to appear in the proceedings. Ukraine intervened as a non-disputing party. Neither the Claimants nor Ukraine contended that Crimea no longer forms part of Ukraine’s sovereign territory. They also expressly steered clear of asking the tribunal to determine the legality of Russia’s annexation of Crimea. Rather, the Claimants submitted that what constitutes Russia’s territory comprises “all territories which are ‘controlled and administered’ by” Russia. 

The tribunal agreed with the Claimants that it did not need to express a view about the legal status of the annexation and of Crimea under international law. Instead, it relied on what it considered to be the ordinary meaning of the term ‘territory’, which it found included “areas over which the Contracting Parties exercise jurisdiction and de facto control, even if they hold no lawful title under international law”.  

While the interpretation of an investment treaty’s spatial scope of application will ultimately depend on the specific terms in the treaty, including its definition of the term ‘territory’, the tribunal’s approach may nonetheless have general relevance to the interpretation of the ordinary meaning of the term ‘territory’.

That meaning, according to this tribunal, is broader than the traditional meaning of territory under international law, the latter being inextricably connected to the concept of State sovereignty. The tribunal’s interpretation indicates that a State may be liable for actions occurring in a territory over which it exercises de facto control, despite that territory remaining part of another State under international law.   

Russia found liable

On the merits of the dispute, the tribunal found that Russia had breached its obligations under the BIT by unlawfully expropriating the Claimants’ investments without providing prompt and adequate compensation. 

The tribunal ordered Russia to compensate the Claimants for the expropriation of their investments, with interest calculated from the date of the expropriation. In addition, the tribunal ordered Russia to bear 75% of the arbitration costs and the costs of the Claimants’ legal representation and assistance. 

Findings and conclusions of particular note in the tribunal’s award on liability were: 

  • In order to determine whether Russia could be held responsible for breaches of the BIT, the tribunal was first required to determine whether the actions of the State Council of Crimea and paramilitary forces in the region could be attributed to Russia. Relying on rules of customary international law regarding attribution of internationally wrongful acts,[3] the tribunal found that the State Council of Crimea had been created as a structural part and an organ of Russia, and its actions could be attributed to Russia.

    As for the actions of the paramilitary forces, those too were attributable to Russia, given that, as the tribunal found: the paramilitary forces had been expressly authorised to exercise governmental authority in Crimea; they had been empowered under the internal law of the ‘Republic of Crimea’ to exercise government functions and police powers; and alternatively, Russia had acknowledged and adopted the paramilitary conduct as its own.[4]

  • Under the BIT, Russia was permitted to nationalise or expropriate foreign investments only if the expropriation was: in the public interest; not discriminatory; in accordance with procedures established by law; and accompanied by prompt, adequate and effective compensation. In breach of these requirements, the tribunal found that the nationalisation of the Claimants’ assets:

    • was not in the public interest;

    • was discriminatory, as it had been targeted specifically at the Claimants’ investments because of their connection to the Ukrainian businessman Igor Kolomoisky;

    • failed to meet the requirements of due process, as the Claimants were not afforded a real opportunity to challenge the nationalisation of their investments or petition for their right to continue operations, and their complaints were ignored by the Crimean and Russian authorities; and

    • was not met with adequate and prompt compensation, despite the Claimants’ properties having retrospectively been listed by the State Council of Crimea as being entitled to compensation under Crimean Property Law – because, according to the tribunal, it was reasonable to conclude that any attempt to obtain compensation would have been futile.

The Claimants also alleged, among other things, that Russia breached other BIT provisions, including the prohibition on discriminatory measures and substantive guarantees imported through the BIT’s most favoured nation clause – that is, the requirements that investments be accorded fair and equitable treatment and full protection and security. However, having found Russia liable for unlawful expropriation, the tribunal did not consider it necessary to decide on these further breach claims.

Key takeaways

The publishing of the awards in Stabil LLC v The Russian Federation is timely due to the escalation of the ongoing conflict between Russia and Ukraine. 

The awards will likely embolden other investors to seek compensation from Russia for Russian activity in any occupied or annexed territory, or territory over which Russia is exercising de facto control, which detrimentally affects their investments. Issues relating to attribution for loss of investments may be more easily resolved by reference to the decision, particularly in light of the Russian military’s now-direct involvement in Ukrainian territory.

The decision may also bear relevance to investors operating in other disputed territories or maritime areas that remain undelimited under international law, who seek greater security in protecting and obtaining compensation for the loss of their investments.  

As a key takeaway, individuals and corporations investing in areas that are impacted by geopolitical conflicts should take note of the Stabil tribunal’s novel approach to interpreting the notion of ‘territory’ in an investment treaty context, as well as its analysis of the circumstances in which the State exercising jurisdiction and de facto control over a particular area might be found liable for breaches of investment treaty protections.

In Part 2 of our series on investment treaty protections available to investors who hold assets in occupied and disputed territories we turn to considering other scenarios in which the proper ‘Host State’ may be difficult to identify.

[1] Island of Palmas (Netherlands v US) (1928) 2 RIAA 829, 838

[2] PCA Case No 2015-35.

[3] These rules have been codified in the International Law Commission’s Articles on the Responsibility of States for Internationally Wrongful Acts UN Doc. A/RES/56/83 (2001) – in particular Articles 4, 5 and 11.

[4] Stabil LLC et al v The Russian Federation, PCA Case No 2015-35, Final Award dated 12 April 2019 (Final Award) at [106]-[204].


Nastasja Suhadolnik

Head of Arbitration

Cara North

Special Counsel



This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.

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