A request for expropriation of brewing? – EJIL: Speak!

Background

If it wasn’t so bad, it’d be funny: In March 2022, the part-time, rookie DJ YouTuber Dmitry Tseplyaev (allegedly) has become the ultimate controller of Gazprom’s gas distribution network and gas storage facilities in Germany. The German authorities saw no humor in this situation. On April 4, 2022, they imposed a conservatorship over Gazprom Germania GmbH (“Gazprom Germania”) until September 30, 2022. Germany now controls all Gazprom Germania assets located in Germany. How did we get here ?

When the ownership structure of Gazprom Germania changed, Germany was not officially informed of this change, although it became aware of it later. He didn’t like what he found. The shares of Gazprom Germania had been sold to Gazprom Export Business Services LLC (“Gazprom Export”). She owned 99.9% of herself, while the remaining 0.1% was owned by the Palmary Joint Stock Company (“Palmary”), which was owned by Tseplyaev. As Palmary was effectively the sole shareholder of Gazprom Export, he controlled it and, through it, Gazprom Germania.

Since it was unclear who (actually) controlled Gazprom Germania and the sale had not been officially notified to the German authorities, Germany imposed the trusteeship. The legal basis was the Foreign Trade and Payments Act, which requires changes in ownership of critical national infrastructure to be properly notified to German authorities. Currently, the sale of Gazprom Germania shares is not valid under German law, so ownership still rests with the (original) Russian owners of Gazprom Germania (“Gazprom Russia”). However, they have no control over Gazprom Germania. Is an expropriation request being prepared?

The legal framework: the Energy Charter Treaty and the Bilateral Investment Treaty between Germany and Russia

There are two investment treaties under which Gazprom Russia could file a complaint: the Energy Charter Treaty (“ECT”) and the Germany-Russia Bilateral Investment Treaty (“BIT”). Russia having terminated its provisional application of the ECT, the question arises as to whether Russian investors still have the right to claim it. The relevant provision, Article 45(3)(b), specifies that the ECT remains in force for 20 years after a State has terminated its provisional application of the treaty, while leaving open the question of whether the Investor-owned investments from one state enjoy protection for another 20 years. Given that the sunset clause regarding ECT withdrawals stipulates that investors from withdrawing states continue to enjoy investor status for 20 years, Article 45(3)(b) could be interpreted in such a way to make it compatible with the subset clause, so that Gazprom Russia could file a claim under the ECT. The expropriation clause in the ECT reads as follows:

Investments of investors of one Contracting Party in the area of ​​any other Contracting Party may not be nationalized, expropriated or subjected to any measure or measures having an effect equivalent to nationalization or expropriation (hereinafter referred to as “expropriation ”), unless this expropriation is:

a) for purposes of public interest;

(b) non-discriminatory;

(c) made pursuant to due process; and

(d) accompanied by the payment of prompt, adequate and effective compensation.

In the BIT, under which Gazprom Russia certainly has investor status, the expropriation clause provides:

Measures of dispossession, including nationalization or other measures having similar consequences, may be applied in the territory of one Contracting Party to investments of investors of the other Contracting Party only in cases where such measures of dispossession shall be effected for reasons of public utility, in accordance with the procedure established by the legislation of that Contracting Party and subject to the payment of compensation. These measures must not be of a discriminatory nature.

Although these two clauses are worded differently, their core is the same: States must not directly or indirectly expropriate investments unless they do so for a good public purpose, act within the safeguards of a due process, do not discriminate and pay compensation.

Direct expropriation or indirect expropriation?

Can Germany’s behavior amount to either direct expropriation or indirect expropriation? According UNCTADdirect expropriation “means a compulsory legal transfer of title to the property Where its pure and simple physical seizure” (emphasis added). According to this definition, despite the fact that Germany did not take the title of Gazprom Germania, its action could be qualified as direct expropriation. However, most other definitions of direct expropriation require both the acquisition of title and factual check. Given the prevalence of this definition, it is likely that an arbitral tribunal hearing Gazprom Germania’s claim would be likely to apply it.

But an adventurous arbitral tribunal could legitimately apply the UNCTAD definition, notably by insisting that a simple “physical seizure” can constitute a direct expropriation. If physical seizure involves taking control of the assets making up the investment and stopping dividend payments from the investment to the investor, how is this different from taking an investor’s security? If it is accepted that there is no difference, then it is worth asking whether Germany’s trusteeship includes control over dividend payments. The administrative act who performed the guardianship is unclear on this issue. It notes that the transfer of assets from Gazprom Germania is subject to Germany’s approval. If the “assets” include dividend payments, an adventurous arbitral tribunal might view conservatorship as a direct take.

The time element and Tthe relevance of Gazprom’s misconduct

But there is more to an expropriation than an act of taking. Whether a grip is direct or indirect, it must have a certain duration. It is the temporal element of an expropriation. Neither ECT nor BIT offer any clues about “too long” duration, but there was one instance where this question arose, in particular Wena Hotels against Egypt. The investor was deprived of his investment for almost 12 months. Egypt described this deprivation as “ephemeral”, thus ruling out expropriation. The arbitral tribunal disagreed. Thus, temporary deprivations can be qualified as expropriations, but is a deprivation of around six months, as is the case with Gazprom Germania, sufficient? This is a pending question.

Another outstanding question asks: Does Germany expropriated Gazprom Germania or Gazprom Russia brought this situation upon itself? This is where Gazprom Russia’s misconduct under German law becomes relevant. The relevant background is that Gazprom Russia violated the Foreign Trade and Payments Law by failing to notify Germany of the change in ownership structure, which in turn provided Germany with a legal basis for impose guardianship. A similar situation occurred in Genin vs Estonia. Estonia revoked the investor’s business license on the basis of formal illegalities committed by the investor. The investor argued that Estonia had illegally expropriated its investment, but the arbitral tribunal saw things differently: Estonian law gave Estonia a power of rescission and it was entitled to use this power without incur international liability.

But this right goes no further, because in the case of Western vs Ecuador shows. Ecuador also canceled the investor’s operating license in accordance with national law, but this cancellation amounted to an illegal expropriation. The reason? This reaction was disproportionate. This is a warning to Germany: German law might allow the imposition of guardianship, and this reaction based on German law will be respected by arbitral tribunals, but this respect only extends to proportionate reactions. This begs the question: when does Germany’s reaction become disproportionate? Very briefly, it is considered that the longer it lasts, the more likely the guardianship will be perceived as disproportionate (and the more likely the time element will be satisfied). Germany will have a reasonable amount of time to resolve the issue with Gazprom Germania, but once that time has elapsed, it will appear that Germany imposed the conservatorship for reasons other than clarifying the ownership issue.

Defenses for Germany?

But isn’t there such a (legitimate) reason, especially that Germany wants to control major energy-related infrastructure at a time of strained Russian-German relations? Minister Habeck admitted that this factor was part of his decision-making calculus. Could it serve as a defense if the guardianship is deemed expropriative?

Certain seemingly applicable defenses may be summarily dismissed. Germany cannot invoke any security-related exception to help itself because in the ECT this exception (see Art. 24(3)) cannot be invoked to defend an expropriation (Art. 24(1)) , whereas, in the BIT, there is no such exception. Another option for Germany is to invoke a defense drawn from general international law, in particular from necessity. But any advocacy based on necessity is likely to fail. Necessity only applies in “exceptional cases”, which ultimately means that an arbitral tribunal should be slow to find it. Germany could be convinced that the proper functioning of its gas storage facilities and its gas distribution network is an “essential interest”, but it will be difficult to convince an arbitral tribunal of this.

It would be easier for Germany to claim that this outcome is “legitimate public policy”. With this argument, Germany would appeal to the defense of police powers. This defense justifies (expropriatory) conduct that proportionally pursues legitimate public policy, such as control of major energy-related infrastructure. Satisfying the element of proportionality will always be difficult, but this defense is Germany’s best hope, but there is a catch: it can only be invoked in respect of indirect expropriations.

Take home message: Germany safe, for now…

Where does that leave Germany? As a preliminary point, the qualification of guardianship in direct or indirect control will be decisive, keeping an eye on a future means of defense of police powers. Whether guardianship is indeed expropriatory will largely depend on how long it is maintained – the longer, the more likely it will turn from an administrative sanction into an expropriation. When it comes to the possible defenses it could invoke, Germany has few options, except for the defense of police powers.