Статья 'Защита иностранных инвестиций в периоды экономических кризисов.' - журнал 'Международное право' - NotaBene.ru
Journal Menu
> Issues > Rubrics > About journal > Authors > About the Journal > Requirements for publication > Editorial collegium > Peer-review process > Policy of publication. Aims & Scope. > Article retraction > Ethics > Online First Pre-Publication > Copyright & Licensing Policy > Digital archiving policy > Open Access Policy > Article Processing Charge > Article Identification Policy > Plagiarism check policy
Journals in science databases
About the Journal

MAIN PAGE > Back to contents
International Law

Protection of foreign investments during economic crises.

Grebenskaia Angelina Alekseevna

4th year student of the Faculty of Law, Financial University under the Government of Russian Federation

125167, Russia, Moscow, 49/2 Leningradsky Ave.

Tikhomirov Andrey Andreevich

4th year student of the Faculty of Law, Financial University under the Government of Russian Federation

125167, Russia, Moscow, 49/2 Leningradsky Ave.










Abstract: Foreign investments play a crucial role in overcoming the economic crisis in individual States, especially if such a crisis is systemic in nature, and domestic entities lack resources that could be attracted to the economy. In this case, foreign investment is often the only way to restore the normal development of the socio-economic sphere. At the same time, in crisis situations, foreign investors themselves require special protection, which in this case are exposed not only to commercial risk (such risk is "normal", and no one is responsible to the investor for it), but also to "political" risk (which is usually inextricably linked with economic), if, for example, an economic crisis leads to a revolution, a coup, or simply a tightening of economic policy, within the framework of which enterprises are nationalized, including those created at the expense of foreign investment.   The currently existing international legal mechanisms, primarily insurance of "political" risk, do not solve the problem due to the fact that it is difficult for insurance companies to receive compensation from sovereign states by way of subrogation. Thus, the importance of national legislation increases - the norms of which should form the investment attractiveness of the state and give foreign investors confidence in protecting their rights even in a situation of economic crisis, for example, in Russia tax benefits are provided for foreign investors in case of adverse changes in the tax burden (the institute of "tax stability") in accordance with Article 9 of the Federal Law "On foreign investments".


foreign investments, foreign capital, investment activity, economic crisis, investment protection, Washington Convention, national law, political risks, insurance, judicial protection of investors

This article is automatically translated. You can find original text of the article here.

Investments, which are investments of resources in various projects, play a crucial role in ensuring stable and sustainable development of national economies, and are especially in demand during economic crises, which are a complex socio-economic phenomenon, generally understood as a sharp decline in the economic indicators of the state, the result of which is a decrease in the welfare, standard of living of citizens. The causes of economic crises can be different, caused by internal and external factors that lead to stagnation in the economy. The main processes forming the crisis state of the economy are:

- significant reduction in production volumes;

- financial insolvency and, as a consequence, bankruptcy of enterprises;

- breaking ties that have developed in production;

- the growth of unemployment in the country [9, p. 145].

Thus, the economic crisis inevitably leads to a system of negative consequences, which often affect not so much the subjects of economic activity as the population itself, respectively, failure to take timely measures to eliminate the causes of the economic crisis, smoothing out its harmful consequences can lead to a social "explosion", and in this case it will be possible to talk about a structural crisis in in all spheres of social life, the consequences of which may be revolution, civil war, the collapse of the state, etc.

In times of crises, the country's economy is particularly in need of capital inflows and other investments, because as a result of such crises, "free" funds, which, even if they do not cover the entire content of investments (intangible assets can also act as such, as will be discussed below), but still form their core, end up inside the country - some entities withdraw them to foreign accounts, others use their assets to somehow support their production, etc., third entities prefer to "freeze" their financial resources for fear of worsening the situation, etc. The state and the economic system in a crisis situation just need additional financial resources. For example, with a decrease in production volumes and the resulting increase in unemployment, it is extremely important to "replace" enterprises on the market that cease their activities for one reason or another, but the state can not always support resources, primarily financial, that allow to support problematic industries. This is where the need for investment arises. At its core, investments can be tangible (financial) and intangible. Material investments, of course, have become more widespread and have a direct positive impact on the economic development of the country – this is primarily a short-term, medium-term and long-term investment of funds in entrepreneurial projects, the purchase of shares and other securities, etc. Intangible investments are the granting of the right to use patents for inventions, industrial designs, utility models, etc. [10, p.90] If you refer to Federal Law No. 160–FZ of 09.07.1999 "On Foreign Investment in the Russian Federation" (hereinafter - the Federal Law "On Foreign Investment"), [3] then here "investments" are also understood very broadly – in addition to all of the above, they also include services and information. It should be noted here that in modern conditions of high-tech industries and the widest application of digital technologies in all spheres of the economy, intangible investments are becoming increasingly important, since, for example, new inventions, utility models, industrial designs, etc., may be in demand for leveling the situation in a particular manufacturing sector, not financial resources, but new inventions, utility models, industrial designs, etc. Accordingly, one or another sector of the economy already requires not so much financial injections as the improvement of the technological, production base, and therefore both international and national legislation provide for an extremely broad understanding of investments, including intangible assets.

At the same time, as D.V. Yulov notes, one of the trends of modern regulation of international investments is a departure from a broad understanding of such investments in favor of a narrower category - "protected investments", which means foreign investments that are particularly significant for the economy of the recipient state. The priority of such investments is due to the fact that a significant number of jobs are created with their help, new sectors of the economy are developing in the country, etc. The allocation of "protected investments" and their increased legal protection - both by public legal mechanisms (legislative norms) and through civil law contracts concluded between the recipient state of foreign capital and a foreign investor, ensures the "point" development of those sectors that are particularly important for the stability of the national economy [11, p. 12]

Investments can be internal and external. The first include investments by national entities with free capital, non-property resources of an investment nature, etc. However, domestic investments can save the economy only when the crisis is local, for example, in certain sectors of the economy or regions of the country, if the crisis is systemic and extends to all socio-economic spheres, as it was, for example, in the first years after the collapse of the Soviet Union, then there are simply no internal reserves this determines the special importance of foreign investments, which, in fact, are practically the only way to overcome the crisis phenomena in the economy.

However, unlike domestic investors, foreign investors face a significant number of objective obstacles and problems that reduce the attractiveness of the economy of another state as an object of investment.  First of all, such obstacles and problems are associated with the complex nature of control by the investing entity over the use and protection of its investments in another state with an "unfamiliar" public legal system. It is obvious that it is a priori preferable for an entity with investment resources to invest them in the economy of its state than to overcome "cross-border" obstacles. It should be noted here that history knows many cases when, as a result of various events (revolutions, coups, etc.), the "new" authorities of a state whose economy had previously attracted foreign investment refused obligations in relation to these investments, nationalized enterprises created through foreign investments, etc. So, for example, paragraph 3 of the Decree of the Central Executive Committee The RSFSR of January 21 (February 3), 1918 "On the cancellation of state loans" [4] were "unconditionally and without any exceptions" canceled foreign loans, including of an investment nature. In the early years of Soviet power, enterprises with a high share of foreign participation were massively nationalized, for example, the Russo-Baltic Wagon Factory, created in 1869, which produced the first Russian car "Russo-Balt", was transformed into a joint-stock company in 1874, and by 1917 foreign investors owned at least 20% his shares. However, in 1918, the plant was nationalized and renamed the First State Armored Plant by the decree of the Council of People's Commissars, respectively, foreign investors lost their investments. At the same time, by the above-mentioned Decree of the Central Executive Committee of January 21 (February 3), 1918, the bonds of domestic loans were not canceled, only the payment of interest on them was canceled [7, p.104]. This example clearly demonstrates the vulnerability of foreign investors, the riskier nature of their investments compared to national investors.

Thus, investing in the economy of foreign countries is risky by default (first of all, political risk, which will be discussed below), and requires increased legal protection, both at the level of international and national legislation.

If we turn to the international level, then first of all it should be noted the Washington Convention of 1965 "On the Procedure for Resolving Investment Disputes between States and Foreign Persons" [1], the norms of which established the International Center for Settlement of Investment Disputes. In fact, this Center is an international arbitration body, its competence includes only those disputes whose parties have expressed written consent to their consideration by the Center [12, p.24]. Accordingly, the Center is not an "international court" in its classical sense, in which the expression of the will of one party is usually sufficient for the emergence of powers to consider a dispute. The Center is precisely a voluntary arbitration body, and is authorized to consider a dispute only if the parties agree to submit their dispute to the Center for consideration. At the same time, such consent can be both preliminary and subsequent - in the first case, the parties provide in advance that in the event of a dispute over the use and protection of investments, such a dispute will be competent to consider the Center, or they turn to it to resolve the dispute that has already arisen, expressing mutual recognition of its jurisdiction in relation to this dispute. Thus, it is an arbitration body, and not an international public body.

The Institute of insurance against non-commercial risks plays an important role in the international legal protection of foreign investments.  In fact, it is the increased risk, moreover, not of an economic, but of a political nature, that is one of the factors that may cause the unwillingness of a foreign entity to invest in the economy of the state. Accordingly, it can be concluded from this that insurance instruments are necessary for the development of international, foreign investments.

It has already been noted above that investing in foreign economies a priori involves risk, while the risk here is primarily due not to commercial, but political factors. Commercial risk is an integral, natural part of any business activity, embedded in its essence, the foundation. A foreign investor may, for example, invest financial resources in a manufacturing enterprise that produces a particular product, but due to various factors, these products will ultimately not be in demand on the market, respectively, the investor will not be able to recoup his investments. However, this is a "normal" entrepreneurial risk, for which no one is responsible to the investor and should not be responsible. Here, in fact, it does not matter in principle whether the investment is internal or external – in any case, it is subject to commercial risk, which is an integral part of the investment – the subject may receive a large profit as a result of his investments, or, conversely, lose all his investments, in such situations legal protection is not required, because the risk here is objective and assumed by default. But the risk of a political nature (for example, that a revolution or coup will occur in the country in which the funds are invested, as a result of which enterprises created by a foreign investor will be nationalized) has a fundamentally different nature and requires mandatory protection of a foreign investor.  Of course, domestic investors are also at risk in such events, but it is foreign investments that usually suffer the "main blow" as a result of social explosions – this is often due to international political factors when the "new" state authorities enter into political conflict with states that previously supported the "old" authorities (while due to such support there are quite a lot of investments from this foreign country), which indirectly or even directly affects foreign investors.

In this sense, as Yu.S. Makshantseva writes, the institute of subrogation, operating in the system of international investment law, is of great importance. As part of the insurance subrogation, a company that has covered the losses of a foreign investor from political force majeure has the right to claim the amount of insurance compensation paid from the state in which, due to political factors, the investor lost his investments. However, the application of this traditional institution of investment insurance against non-commercial risks is complicated by the fact that the defendant at the request of the insurer, declared by way of subrogation, is a sovereign state with judicial immunity, which makes it very problematic for a private insurance company to be able to compensate for its costs of paying insurance compensation by collecting the amount of insurance compensation from the state receiving the investment in the order of subrogation [6, p.111] .

In modern conditions, insurance companies that provide insurance services to investors either refuse to insure investments in the economy of states where there is a risk of complication of the socio-political situation, or set extremely high insurance rates, which is why investments are often simply unprofitable for investors. One of the solutions to this problem could be the complicity of recipient States in the payment of insurance premiums [13, p.36]

In general, at the level of international legislation, there are mechanisms to protect investors' political risk, this is primarily investment insurance against such risk, but in fact insurance companies are reluctant to insure investments in the economy of politically unstable states due to the fact that subrogation is extremely difficult here. It should be understood that political and economic crises are usually intertwined – either one of them precedes the other, or they occur simultaneously, respectively, insurance against political risks is the most important tool for protecting foreign investments even in an economic crisis. It seems that at present an effective solution to this problem is hardly possible – this requires rebuilding the foundation of international political and legal relations and actually giving up judicial immunity of sovereign states so that private insurance companies can claim damages from them by way of subrogation.

The most important role in the protection of international investments is played by the national investment regime, which is understood as the procedure for regulating relations for the protection, promotion and restriction of foreign investment, which is expressed in a set of legal means that characterize a special combination of interacting permits, prohibitions, as well as positive obligations that create a special direction of regulation [8, p.22]. In other words, the investment regime is a special intersectoral phenomenon in which legal, economic and political principles are intertwined, collectively forming the subjective attitude of a particular state to foreign investors.

If we turn to the investment regime of Russia, here the issues of protection of foreign investments are regulated by the already mentioned Federal Law "On Foreign Investments". Guarantees to foreign investors are provided for in Articles 5-15 of this Federal Law, some of them are designed to ensure the interests of foreign investors during the economic crisis. So, for example, we can consider article 9, which defines a special procedure for the taxation of priority investment projects if, as a result of changes in national tax legislation, there has been a significant increase in the tax burden – this just happens during periods of economic crises. In such cases, foreign investors on priority projects can use the institute of "tax stability" when, under certain conditions, they have the right to apply the "old" tax rates during the payback period of the investment project.

In addition, as noted in science, the most important mechanism for protecting the rights of foreign investors in Russia are the conditions of paragraph 2 of Article 422 of the Civil Code of the Russian Federation [2] on the immutability of the provisions of the contract when adopting a new law (except in cases when the new law explicitly states its retroactive effect). Such stability of civil legal relations is an important stimulating moment that allows foreign investors to build their business strategy for a long time [11, p.16].

Judicial protection plays a crucial role in ensuring the rights of foreign investors in the conditions of economic crisis. As the analysis of judicial practice shows, most often the interests of foreign investors are violated as follows:

- illegal interference of state authorities in the activities of foreign investors;

- refusal to foreign investors to register a legal entity on the territory of Russia, its branch or representative office;

- discrimination of the rights of foreign investors in comparison with national business entities (i.e. the establishment of restrictions not provided for by law), etc. [5]

It should be noted here that the right to protectionism in itself is beyond doubt, and in many cases the establishment of certain restrictions for foreign investors is reasonable and, in fact, the only possible one – for example, in modern conditions it is impossible to imagine the admission of American or European investors to the development of software for the Russian Ministry of Defense, law enforcement agencies, etc. – such admission would be a direct threat to national security. However, in normal, regular conditions, discrimination of foreign investors is unacceptable.

In general, the above allows us to conclude that against the background of the presence of many intractable problems of international legal protection of foreign investors in crisis situations, the importance of the investment regime increases, including national legislation, the norms of which should form the investment attractiveness of the state and give foreign investors confidence in protecting their rights even in a situation of economic crisis. Such a role in Russia, for example, is played by the institute of "tax stability" for foreign investors, the provisions of Part 2 of Article 422 of the Civil Code of the Russian Federation on the immutability of the terms of the contract. The institution of "priority" ("protected") investments enjoying increased legal protection is also interesting, for example, intangible investments in the IT sphere are currently in high demand in Russia, respectively, they need special legal protection - both by law and by bilateral agreements between the Russian Federation and relevant foreign investors. In addition, it is possible to think about the participation of the state in the payment of insurance premiums of foreign investors, if the amount of such contributions is too large and makes investments not so profitable that they become the interests of the investor. 

Link to this article

You can simply select and copy link from below text field.

Other our sites:
Official Website of NOTA BENE / Aurora Group s.r.o.