Russian bond default - Litigation and bilateral investment treaties

On 11 May 2022, bondholders of the 4.5% 2022 Russian sovereign bonds submitted a default notice via Euroclear demanding the payment of approximately $1.9 million in accrued interest payments in respect of the delayed principal repayment upon maturity of the bonds. The bonds matured on 4 April 2022 but the payment of principal and interest due at maturity was not made until 2 May. Russia did not include accrued interest beyond 4 April 2022 in its payment, which the Credit Derivatives Determinations Committee has decided by a Supermajority amounts to a Failure to Pay Credit Event. In addition to this reported default, there have been growing concerns of further defaults on international market Russian sovereign debt.

With Russia’s sovereign bond documentation usually incorporating non-submission to jurisdiction and no waiver of sovereign immunity clauses, how can bondholders enforce their rights in the English Courts and what other possible forms of redress (such as Bilateral Investment Treaty claims) are available?

Litigation in the English Courts

Although most of Russia’s bond documentation is English law governed, there are challenges to bringing a claim against Russia in the English Courts, particularly as that documentation contains non-submission to jurisdiction clauses. Such a claim would require permission of the English Courts to serve on Russia outside the UK and then to serve the claim through diplomatic channels. Establishing that the English Courts have the appropriate jurisdiction, however, might be opposed on the grounds of both state immunity and the fact that the UK is not the forum conveniens.

Section 1 of the State Immunity Act 1978 (the “SIA”) and express terms in the bond documentation indicate that Russia may be entitled to rely on state immunity from suit. The SIA does provide an exemption to this immunity so long as the dispute is in relation to a ‘loan or other transaction for the provision of finance’, so analysis of underlying instruments to which any default relates would need to be conducted to determine whether such an exemption applies.

Any application would also need to show that the English Courts are the forum conveniens (ie the most appropriate forum for the interests of all parties) for the dispute. This is a question of the location of the parties, documents and witnesses, and the law applicable to the contract under dispute (which for the Russian Eurobonds is, usually, English law). This test also considers the interests of justice. An English Court may, for instance, have concerns about the appropriateness of Russia being positioned as a potential alternative forum for hearing any suit. Furthermore, the English Courts may retain jurisdiction where there is a real risk that justice will otherwise not be obtained due to a lack of judicial independence, or the real possibility of corruption.

Although convincing the English Courts that the UK is an appropriate jurisdiction may be possible, bondholders would likely face other jurisdictional challenges including attempts by Russia to seize a court in a different jurisdiction and the eventual issue of enforcement. There are also prima facie difficulties in attempting to enforce an English Court judgment in Russia against Russia itself. There is no treaty in place with Russia requiring the Russian Courts to respect English Court judgments.

An Alternative: Bilateral Investment Treaties

Bondholders may therefore wish to consider bringing a claim under a Bilateral Investment Treaty (a BIT). A BIT is a treaty between two states that provides qualifying investors with certain minimum protections in relation to their investments.

Russia has over 60 BITs in force at present. Despite a few notable omissions (such as Ireland), there is extensive coverage throughout Europe. Treaties typically offer guarantees of fair and equitable treatment, no arbitrary or discriminatory measures, no expropriation of assets without prompt and adequate compensation, and free transfer of funds. Where a BIT contains an ‘umbrella clause’, an investor may also be able to elevate a contractual claim to the level of an investment treaty claim. Although dependent on the wording of the treaty and the factual position of the investor, it is possible that Russia’s current position may give rise to a BIT claim.

Provided that a claimant qualifies as an investor with an investment under the terms of a treaty, they are entitled to benefit from the protections offered under it. If the relevant treaty also contains an offer to arbitrate which is wide enough to cover the dispute, an investor may bring a BIT claim before an international arbitral body. This provides an alternative form of redress, before a neutral arbitral tribunal, and possibly resulting in a more enforceable eventual award.

Historically there have been successful BIT claims relating to sovereign bonds against Argentina, albeit under treaties with different terms. Awards, furthermore, do not need to be enforced in Russia or the country of the award’s seat. If necessary, awards can be enforced in any of the over 160 countries that have signed the New York Convention on the recognition and enforcement of foreign arbitral awards. The Russian Federation is a contracting state for the purposes of the New York Convention as a successor to the USSR which ratified the treaty in 1960.

Other key advantages of bringing a BITs claim include that:

• the definitions of investor and investment under BITs are generally very wide. A number of tribunals have previously held that sovereign bonds may qualify as investments;
• many BITs also permit claims by indirect investors, meaning that even if there are other companies in the corporate structure between the investor and the investment, this may not prevent a company higher up the chain from bringing a claim; and
• the corporate chain may, in fact, provide access to more than one BIT claim if the intervening companies are incorporated in other jurisdictions with BITs in place with Russia. Each company in the chain may be able to bring a claim in order to increase the chances of success although they would not be able to make double recovery.

Our team is already advising on these matters and can provide further information on request. Please contact members of our team should you wish to discuss this further.