Protection against Indirect Expropriation under National and International Legal Systems

In recent years, direct expropriation2 has rarely been seen.3 States which wish to import capital do not like to be associated with posing a permanent, non-calculable threat to foreign-owned property but prefer to present themselves as jurisdictions with very stable, reliable and orderly regulatory environments.4 Expropriation, however, has by no means vanished; its execution has just become more subtle.5 Ambiguously or generously worded laws are ‘interpreted’ in a way that suits certain groups in the government or are only enforced when it suits a particular interest; administrative discretion is influenced by factors unrelated to the matter at issue, or administrations fail to conduct their processes in a transparent and comprehensible way. All these measures, turned against a foreign investor, can easily drive him out of business. Virtually all bilateral investment treaties (BITs) and multilateral investment agreements (MITs), therefore, reflect this development and also cover acts of State which may expropriate “indirectly through measures tantamount to expropriation or nationalisation”6 (indirect expropriation7). Moreover, many international investment agreements (IIAs) not only provide rules on (indirect) expropriation but also establish so-called treatment standards “which refer to the legal regime that applies to investments once they have been admitted by the host State.”8 Administrative malfeasance, misfeasance and nonfeasance may also affect the investment adversely without amounting to “indirect expropriation”, constituting a less intense interference with the property. Indeed, there are arbitral awards which, while not accepting a claim based on “indirect expropriation”, established a compensable violation of “treatment standards”, i.e. in particular the “fair and equitable treatment” embodied in BITs or MITs.9 This article will look at six typically posed challenges to foreign investment posed by administrative acts, focusing on the issues of discrimination, mala fide and lack of transparency, and will discuss the response of national and international rules applicable to the situation of indirect expropriation.10 These scenarios are based on Russian legal regulations11 and are inspired by the events in the Commonwealth of Independent States reality but by no means intend to be a reflection of facts. We will show that the internal legal order cannot respond to any of these challenges through striking a just balance between legitimate business interests of the foreign investor and the State’s sovereign right to regulate. Rather, it is the in