Not long ago, we published an update on the EU’s efforts to terminate the application of the Energy Charter Treaty between EU Member States and force Hungary to align with the EU’s position. This time, we report on yet another step taken by the EU and its Member States (except Hungary again) to curtail the application of the ECT – this time concerning Russian and Belarussian investments in the EU. This latest step by the EU adds to the wide-ranging sanctions regime that the EU has implemented in response to Russia’s illegal invasion of Ukraine.

Thus, in June 2024, just before the EU’s withdrawal from the ECT, the EU, its Member States (excluding Hungary), and Euratom adopted a declaration invoking Article 17 ECT to deny benefits to investments and investors from Russia and Belarus. While neither country is a party to the ECT, this move aims to prevent Russian and Belarussian investors from circumventing European sanctions by restructuring their investments using intermediary companies and thus enjoying the benefits of the ECT.

What does this mean for Russian and Belarussian investors?

1. No more shell companies: Russian and Belarussian investors who own or control a legal entity organized in an ECT Contracting Party but have no substantial business activities there can no longer benefit from ECT protection. This means Russian and Belarussian investors are prohibited from accessing investment protection standards under the ECT by establishing shell companies in ECT Contracting Parties.

2. Denial of benefits to any investments: The declaration broadly denies the advantages of the ECT under Article 17(2)(b) to ANY investments made by Russian or Belarussian investors (as defined in Article 1 ECT). As declared, the EU and its Member States have adopted and continue to maintain sanctions against Russia and Belarus due to the war in Ukraine. These sanctions prohibit transactions with entities from these states and would be violated or circumvented if ECT benefits were granted to investors from these countries. While the EU has already adopted sanctions against specific persons, goods, and services, the declaration supplements those sanctions by broadly denying all ECT protections to Russian and Belarussian investments.

The declaration may potentially raise complex issues concerning its applicability before future tribunals.

First, while the EU Council Decision describes the declaration as a “complementary procedural step to avoid investor-state dispute settlement proceedings,” Article 17 refers only to the denial of benefits under Part III of the ECT (substantive protections). Affected Russian and Belarussian investors may therefore potentially argue that its invocation should not affect the jurisdiction of arbitral tribunals to consider claims.

Second, but perhaps not last, the usual question of timing when denial of benefits comes into effect would need to be considered in any future dispute. As different approaches to the issue exist in jurisprudence, investors may argue that it should not apply to investments made or even to disputes which crystallized before the declaration’s adoption.

In light of these developments, Russian and Belarussian investors must navigate an increasingly complex legal landscape, raising significant questions about the future of their investments in the EU.

By Alexey Pirozhkin and Dániel Dózsa