By TIAN Wenjing ZHANG Chen Xu Yue

tian_wen-jingAccording to statistics released by the National Bureau of Statistics, outbound direct investment from China to Russia was USD 2.961 bn in 2015, up by 367.3% year on year. By the end of 2015, the total amount of Chinese FDI in Russia was USD 14.02 bn, second among all 64 “One Belt, One Road” countries by value. As shown by the “Belt and Road Initiative Big Data Report (2016)” compiled by the Leading Group Office for Promoting “Belt and Road” Construction, Russia tops the list of “One Belt, One Road” countries in terms of cooperation-worthiness. With its vast domestic market, stable political environment, complete infrastructural network and friendliness towards investment from China, Russia is obviously a big magnet for Chinese investment and shows enormous potential.

To achieve an optimum tax structure, facilitate financing and improve ease of exit, Chinese investors in Russia tend to use Special Purpose Vehicles (“SPV”) in a third country or region. High profile cases in recent years, such as the Yukos series and the Sanum v. Laos “jurisdiction dispute” also influence the choices of Chinese investors in structuring their investments and selecting investment paths.

The Yukos series consist of multiple cases, including Yukos Universal Limited v. Russia, Ros Invest Co UK Ltd v. Russia and Quasar de Valores SICAV S.A v. Russia. Although initially most arbitral awards were in favor of  investors, this was not to last and in 2016 investor awards in Quasar v. Russia and  Yukos v. Russia were respectively revoked by a Court of Appeal in Sweden and the District Court of the Hague on the ground of “no jurisdiction”.

In another case Sanum v. Laos, the Singapore Court of Appeal overturned the Supreme Court of Singapore’s decision of no jurisdiction in 2015, and confirmed that PCA (Permanent Court of Arbitration) had jurisdiction over an issue involving Macao SAR in relation to Bilateral Investment Treaties “BIT”s signed by China.

The following discussion of the investment structures and paths for Chinese enterprises investing in Russia is based on the Yukos series and the latest developments in Sanum v. Laos, as well as BIT between China and Russia, with a view to better resolving any disputes,.

Key considerations in choosing investment paths: ICSID (International Center for the Settlement of Investment Disputes) arbitration

We consider that ICSID arbitral awards are more easily enforceable and predictable compared with other international tribunals. The BITs between Russia and China, Japan, Singapore, UAE, and others expressly provide that investors may submit disputes for ICSID arbitration.

In Yukos Universal Limited v. Russia, the PCA award was revoked because the Energy Charter Treaty had not been ratified by the signatories although it was signed. This meant that Russia was not bound by it. ICSID arbitration is applied for under the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (“Washington Convention”)., but although Russia has signed the Washington Convention, it has yet to ratify it. So can Chinese investors still submit disputes with Russia to ICSID?

The answer is yes. The China-Russia BIT provides that if the Washington Convention is effective in both countries, investors may submit disputes to ICSID pursuant to the Convention; if it is not effective in one of the countries, investors may choose to apply the Additional Facility Rules of ICSID. Similar arrangements are also contained in Russia’s BITs with other countries.

Additional Facility Rules ICSID arbitration is not as enforceable as ICSID arbitration pursuant to the Washington Convention, but their awards are still more credible with more predictable results than other international investment arbitral awards.

Disputes over jurisdiction are at the core of international investment arbitration. Although Additional Facility Rules exclude the applicability of other terms of the Washington Convention, they expressly provide that Article 25 for ICSID jurisdiction applies.  Article 25 of the Washington Convention means that the definitions of “investment” and “investor” in the Washington Convention and past ISCID awards will apply to ICSID arbitration cases filed pursuant to Additional Facility Rules.

ICSID interprets “investment” and “investor”  favorably to investors. For example, in Siemens AG v. Argentina, the tribunal ruled that both direct and indirect investment qualify as “investment”; in MNSS v. Montenegro, the tribunal ruled that even a shell company established in the country of origin constitutes a qualified investor; in Gas National SDG S.A. v. Argentina, the tribunal ruled that minority shareholders’ interests are also protected by BITs.

Whether or not Russia will ratify the Washington Convention in the future, choosing a BIT that agrees on ICSID arbitration is good for protecting investors’ interests. Therefore, access to ICSID arbitration is still a priority for Chinese investors when planning their investment paths.

Singapore and UAE are the preferable seats for SPVs

Generally, in addition to access to ICSID arbitration, to assess whether a BIT is favorable to investors, factors to be considered include:

  • Limitations on the scope of “investment”
  • Determination of non-natural person investor’s nationality
  • Requirements on the actual operation in the country of origin by protected “non-natural person investor”
  • Permission for dispute resolution through international arbitration
  • Limitations on arbitral matters (eg. agreement that only levy-related disputes may be submitted for arbitration)

A comparison is made of these factors in the China-Russia BIT and BITs between Russia and countries that are often chosen as seats for SPVs:

捕获Be cautiouswith investing in Russia via Hong KongFrom the table, it can be seen that the major differences between BITs with Russia and other countries are: (1) permission for ICSID arbitration, and (2) limitations on arbitral matters. Regarding BIT terms alone, the Russia-Singapore, Russia-UAE and China-Russia BITs protect investor interests best. Chinese investors, therefore, should prioritize Singapore and UAE as seats for SPVs

Many Chinese investors choose Hong Kong as an “economic bridge” to foreign countries as Hong Kong is closely related to mainland China economically and politically. In Sanum Investments Limited v. the Lao People’s Democratic Republic, the Singapore Court of Appeal’s judgment confirmed a BIT signed by China and Macau SAR. In an early case, Mr. Tza Yap Shum v. the Republic of Peru, the arbitral tribunal decided that Hong Kong residents could be protected by Chinese BITs.

Arbitration of international investment disputes adopts the principle of “following precedents” . That is to say, the above two cases may be invoked in similar cases and could be considered favorable to Chinese investors who intend to invest in Russia via Hong Kong.

However, when it comes to the BIT between China and Russia signed in 2006 (“China-Russia BIT”), the situation is different. Article 1 of the China-Russian Federation BIT provides that “Unless the Parties agree otherwise, the Treaty does not apply to the HK and Macau SARs.” Accordingly an arbitral tribunal will give precedence to the rules of “literal interpretation” as defined in Article 31 paragraph (1) of the Vienna Convention on the Law of Treaties in situations where it is applicable[i].

As the China-Russia BIT has explicitly excluded its application in Hong Kong and Macau, it may be difficult for SPVs set up in Hong Kong to rely on it. To date, Hong Kong has signed BITs with 18 countries such as the UK, Japan and Korea, but there is yet no BIT between Hong Kong and Russia. As a result, SPVs set up in Hong Kong may not invoke the China-Russia BIT to get protection.

Pre-designed investment structure

Tribunals tend to acknowledge the use of “Treaty Shopping” in international investment, namely allowing investors to establish SPVs or structure a multinational business to take advantage of the availability of a more favorable BIT.

In Yukos Universal Limited v. the Russian Federation, PCA did not refuse to exercise jurisdiction on the grounds that Yukos Universal Limited was a shell company controlled by a Russian national. In Sanum Investments Limited v. the Lao People’s Democratic Republic, it was accepted that Sanum Investments Limited may rely on China-Laos BIT to initiate arbitration before PCA, while the parent of Sanum Investments Limited may also rely on Lao-Dutch BIT to initiate arbitration before ICSID to get double protection.

However, tribunals do not accept “Treaty Shopping” in all circumstances. In Mobil Corporation v Venezuela, Mobil Corporation transferred its investment in Venezuela to its newly-established company in the Netherlands after the investment dispute had arisen, and it initiated arbitration before ICSID based on the Netherlands-Venezuela BIT. ICSID then denied the application on the grounds that “Treaty Shopping” after a dispute had been identified constituted an abuse of rights. In cases like Phoenix Action, Ltd. v. the Czech Republic and Banro American Resources Inc. v. Congo, the tribunal on similar grounds has refused to let the investors use “Treaty Shopping”

It can be seen that an investor may not be able to apply to certain dispute tribunals if the investor tries to structure an investment after a dispute to take advantage of “Treaty Shopping”. Chinese investors need to be aware that they should choose the optimum investment structure at the beginning and engage legal counsel at an early stage.


Many disputes cannot be settled by commercial dispute resolution under the Federal Law on Arbitration in the Russian Federation, including disputes over corporate governance, privatization and public procurement contracts. However, international investment arbitration based on Russia’s obligations to international law does not have limits in this regard. Consequently, the effect of BITs and related protection in international investment arbitration is more important.

Statistics show that 36% of all the cases decided by ICSID in 2015 were dismissed due to lack of jurisdiction, while 72% of those which were heard were decided in favour of investors[ii]. We can see that disputes over jurisdiction account for a large proportion of international investment arbitration cases and investors must pay attention to the selection of investment paths.

Against the background of the “One Belt, One Road” strategy, there are both opportunities and challenges in overseas markets, including Russia. Mastering and using the rules of the game of international investment is necessary for every Chinese investor. Investors must learn lessons from experienced investors in exploring the Russian market, and choose investment paths and structures in the early stages of a project to maximise returns and to protect their interests.


[i] Article 31 paragraph (1) of the Vienna Convention on the Law of Treaties provides that “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.”

[ii] ICSID 2015 Annual Report, P.30