Статья 'Защита иностранных инвестиций в периоды экономических кризисов.' - журнал 'Международное право' - NotaBene.ru
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International Law
Reference:

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.

angellina749@mail.ru
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.

aatikhomirov02@mail.ru

DOI:

10.25136/2644-5514.2023.2.40420

EDN:

SKMHYU

Received:

10-04-2023


Published:

27-04-2023


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".


Keywords:

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. 

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First Peer Review

Peer reviewers' evaluations remain confidential and are not disclosed to the public. Only external reviews, authorized for publication by the article's author(s), are made public. Typically, these final reviews are conducted after the manuscript's revision. Adhering to our double-blind review policy, the reviewer's identity is kept confidential.
The list of publisher reviewers can be found here.

A REVIEW of an article on the topic "Protection of foreign investments in times of economic crises". The subject of the study. The article proposed for review is devoted to the protection of "... foreign investments in times of economic crises." The author has chosen a special subject of research: the proposed issues are examined from the point of view of international law, international and Russian investment law, while the author notes that "In times of crisis, the country's economy is particularly in need of capital inflows and other investments." The NPA and the convention relevant to the purpose of the study are being studied. A limited amount of Russian scientific literature on the stated issues is also studied and summarized (there is no foreign literature at all), analysis and discussion with these opposing authors is partially present. However, there are other authors (there are many of them) who also study this problem and write about it. But for some reason, not a word about them. At the same time, the author notes: "At its core, investments can be tangible (financial) and intangible." Research methodology. The purpose of the study is determined by the title and content of the work: "... 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 related to 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," the International Center for Settlement of Investment Disputes. In fact, this Center is an international arbitration body ... The Center is not an "international court" in its classical sense, within which the will of one party is usually sufficient for the emergence of powers to consider a dispute," "The most important role in the international legal protection of foreign investments is the institute of insurance against non-commercial risks." They can be designated as the consideration and resolution of certain problematic aspects related to the above-mentioned issues. Based on the set goals and objectives, the author has chosen a certain methodological basis for the study. The author uses a set of private scientific, special legal methods of cognition. The methods of analysis and synthesis made it possible to generalize some general approaches to the proposed topic and partially influenced the author's conclusions. Special legal methods played a certain role. In particular, the author applied formal legal and comparative legal methods that allowed for the analysis and interpretation of the norms of acts of Russian and international legislation (the Convention on the Procedure for Resolving Investment Disputes between States and Foreign Persons) and to compare various documents. In particular, the following conclusions are drawn: "... investing in the economy of foreign states is risky by default (primarily political risk, which will be discussed below), and requires increased legal protection, both at the level of international and national legislation," etc. Thus, the methodology chosen by the author is adequate to the purpose of the article, allows you to study many aspects of the topic. The relevance of the stated issues is beyond doubt. This topic is important in the world and in Russia, from a legal point of view, the work proposed by the author can be considered relevant, namely, he notes "... history knows many cases when, as a result of various events (revolutions, coups, etc.), the "new" authorities of a state whose economy previously attracted foreign investment refused obligations in relation to these investments, enterprises created through foreign investments, etc., were nationalized." And in fact, an analysis of the opponents' work should follow here, and it follows in a very limited volume, the author shows the ability to master the material. Thus, scientific research in the proposed field is only to be welcomed. Scientific novelty. The scientific novelty of the proposed article is beyond doubt. It is expressed in the specific scientific conclusions of the author. Among them, for example, is this: "... 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." As can be seen, this conclusion can be used in further research. Thus, the materials of the article as presented may be of some interest to the scientific community. Style, structure, content. The subject of the article corresponds to the specialization of the journal "International Law", as it is devoted to the protection of "... foreign investments in times of economic crises." The article contains an analysis of the opponents' scientific works in a very limited volume, the author notes that a question close to this topic has already been raised and the author uses their materials, discusses with opponents. The content of the article corresponds to the title, since the author considered the stated problems and achieved the goal of his research. The quality of the presentation of the study and its results should be recognized as not fully developed. The subject, objectives, methodology, research results, and scientific novelty follow from the text of the article. The design of the work meets the requirements for this kind of work. Significant violations of these requirements: the lack of analysis of a large number of modern scientific literature. The bibliography is not very complete, it contains publications, NPAs, conventions that the author refers to. This allows the author to identify problems and put them up for discussion. The amount of literature used should not be appreciated very highly. The presence of modern scientific literature in greater numbers would show the validity of the author's conclusions and possibly influence the author's conclusions. The works of the above authors correspond to the research topic, do not have a sign of sufficiency in everything, and contribute to the disclosure of some aspects of the topic. Appeal to opponents. The author conducted a limited analysis of the current state of the problem under study. The author describes the opponents' different points of view on the problem, argues for a more correct position in his opinion, relying in some cases on the work of opponents, and offers solutions to problems. Conclusions, the interest of the readership. The conclusions are logical, concrete "... against the background of the presence of many intractable problems of international legal protection of foreign investors in crisis situations, 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," etc. The article in this form may be of interest to the readership in terms of the presence in it of the systematic positions of the author in relation to the issues stated in the article after revision. Based on the above, summing up all the positive and negative sides of the article, "I recommend sending it for revision."

Second Peer Review

Peer reviewers' evaluations remain confidential and are not disclosed to the public. Only external reviews, authorized for publication by the article's author(s), are made public. Typically, these final reviews are conducted after the manuscript's revision. Adhering to our double-blind review policy, the reviewer's identity is kept confidential.
The list of publisher reviewers can be found here.

The subject of the study. The reviewed article "Protection of foreign investments in times of economic crises" is devoted to issues of legal regulation, in particular, the analysis of legal measures to protect foreign investments in times of economic downturn. Research methodology. The methodological apparatus of the article consists of modern methods of scientific cognition: historical, formal-logical, legal-technical, formal-dogmatic, comparative jurisprudence, etc. The author of the article also used such scientific methods and techniques as deduction, modeling, systematization and generalization. The work also used a combination of theoretical and empirical information. Relevance. Of course, the topic of the article is important and significant at the present stage. In times of economic crises, foreign investment is one of the ways out of difficult situations. As the author of this article correctly notes, the "attractiveness" of investments in the national economy for foreign investors is possible only through reliable legal protection measures. Scientific novelty. Due to the changing political and economic situation in the world, many legal mechanisms need to be improved, we believe that the topic of the article has a scientific novelty, since the author has attempted to analyze the legal regulation of foreign investments and identify existing problems and propose ways to solve them. Style, structure, content. In general, the article is written in a scientific style, the author uses special scientific terminology. However, the article is not devoid of stylistic and grammatical errors, typos. For example, "The institute of insurance against non-commercial risks plays an important role in the international legal protection of foreign investments." Also, the author allows repetitions of words in sentences (is...is). It can be noted that the article is structured, although there is no formal division into separate parts. In addition, the introductory part of the article does not contain a statement of the problem that the author is working on in his research. It should be noted that the author's conclusions and suggestions are well-reasoned. In general, the content of the article reveals the stated topic. Although the name needs to be adjusted, since the work was done in a legal scientific specialty, in international law. It may be added to the title "Legal protection measures ....". However, this is only a wish, at the discretion of the author. Bibliography. In general, a sufficient number of bibliographic sources have been studied, including publications of recent years. The links to the sources are designed correctly. Appeal to opponents. The work contains references to the opinions of other authors, all borrowings are made correctly, in the form of citations with links to the source of the publication. Conclusions, the interest of the readership. The article "Protection of foreign investments in times of economic crises" can be accepted for publication, as it meets the requirements for scientific works of this kind, the topic of the article is relevant, has practical significance and is characterized by scientific novelty. The article may be of interest to specialists in the field of international, civil and tax law, as well as teachers and students of law faculties and universities.
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