CC BY
18Insur FARKHUTDINO V,
Doctor of the Jurisprudence of sciences, Leading Researcher of the Institute of State
and Law (Sector of International legal researches) of the Russian Academy of Sciences, Editor-in-chief of the Eurasian Law Journal
(Russia, Moscow)
HOST STATE AND FOREIGN INVESTOR: COMMON OBJECT AND DIFFERENT INTERESTS (LEGAL ASPECTS)
The wide investment cooperation is one of the most remarkable trends in the international community and a major tendency in the modern system of international economic relations in the world, within the guidelines of CIS as well. This tremendous expansion within the scope of international business may be explained by the rapid growth in international transportation and communication. International investment flows have also become more important in the process of economic globalization than in international trade in goods and services [1]. Furthermore, the sustainable development is impossible without effective involvement in the world economic processes and active use of advantages offered by direct foreign investment.
On other hand transactions between the recipient states and foreign private investors have the potential to assist the developing countries in utilization of their resources in a more efficient and rational way, to the benefit of both parties. In the result of many thousands TNC advanced as in capacity of main players in sphere of foreign investments it was made some superstructures which controlling the most part of world financial resources restricted the state sovereignty implementation and divide world into "poor South" and "reach North". In other words in the globalization period a free movement of capitals is flown in the conditions of polarize world system in context of economic power and possibilities. Such situation is permanent potential origin of risks, problems and conflicts between developed and developing countries. Small group of leading states control the most of production and consumption, world financial resources even not resorted to political and economic pressure. Their internal priorities and valuable orientation leave traces on all hugest spheres of internationalization [2].
One of the features of investments into economic development is that one party to a transaction is usually a sovereign state, interests, rights and obligations of which significantly differ from those of private actors in the international economy. A state that enters into an investment agreement with a
foreign investor is interested not only in economic profit. It must also take into consideration the political factors (either internal or external), as well as social, cultural and other aspects that are not peculiar to the private investor. The government is also interested in ensuring that profits from such a project will be reinvested in the state in which they were generated, and not transferred to foreign countries. Export of profit may create an impression that the investor is exploiting the nation's resources without providing an appropriate return or consideration. At times, the government will attempt to pressure the investor to transfer the technological and administrative know-how required for implementing the investment project to the local population.
Foreign corporation naturally has other aims, and the conflict between these competing interests may generate serious disagreements between the parties.
The Russian strategy for the attraction of foreign investments includes the following: realizing Russia's scientific and technical potential, particularly at enterprises in the military-industrial complex; promotion of the Russian goods and technologies to the foreign markets; diversification of the Russian export and the development of products that substitute imported goods and services in particular sectors; increase in capital flow to the regions with surplus labour resources as well as with rich natural resources in order to speed up their development; j ob creation; the development of the production infrastructure.
The government is also interested in guarantees that profits from such a project will be reinvested in the state where they were generated, and will not be transferred to third countries. Export of profit may create an impression that the investor is exploiting the nation's resources without providing appropriate consideration. At times, the government will attempt to pressure the investor to transfer the technological and administrative know-how required for implementing the investment project to the local population. Foreign corporation de facto has other aims, so the conflict between these competing
interests may cause serious disagreements between the parties.
In the 90th years of the past century when Russia moved to the market economy it had to provide unilateral guarantees to foreign investors. The revival of Russian real economy system could be achieved only by balanced attraction of national and international investments, as well as by reasonable correlation between inconstant public and private interests.
The active transnational corporations' actions to attract huge financial flows caused by ineffective state regulation can inflict irreparable damage to national security of the country, affect the basis of its economic sovereignty. For example, the realization of the biggest internal investment project "Sakhalin -2" as deliberate assignment for the foreign investors could cause serious damage to the Russian economic interests last decade.
The reasons for underestimating the state public functions in Russia were in predominance in the 90th of past century when there was a tendency for massive privatization of the state property and serious misunderstanding of that situation in respect of the public power's role. Appreciating the positive aspects on the whole it's necessary to point out that the end of administrative governmental methods of economy, especially when the state conducts totally the behavior of its participants it is not impossible to admit some unfavorable consequences of excessive state's falling back from its government functions in the field of economy. The forced liberalization and excessive state's withdrawal from functions of economic administration in the conditions of transition to the market economy brought to the result that the state involuntarily got narrow its direct obligations to be the highest mouthpiece and defender of public interests.
Notwithstanding the mutual benefits for both parties there are certain economic risks and hazards that emerge due to the specific nature of the parties to an investment agreement: a sovereign state and a transnational corporation [3].
The problems of state sovereignty have become a hot issue at the stage of globalization when the flows of foreign investments prevail over the stream of international goods and services. Within two decades of quite ambiguous support for investment liberalization, many countries have started to review these policies, and some have introduced adjustments, thereby exercising their right to regulate foreign investment to pursue domestic policy objectives. One of the main areas where a more
restrictive approach in respect of foreign investment has become obvious relates to national security as well as to the protection of strategic industries and critical infrastructure. Security concerns have particularly been invoked in relation to planned investments in so-called strategic industries and critical infrastructure. Thus, the issue has consequences that go far beyond the defense-related activities for which the national security exception was initially designed.
In the present work two contrary tendencies are shown - the antagonism between free capital circulation and so called "regulated regimes". The first policy pursued by developed countries-capital exporters is turned to progressive national control liberalization on questions of admission foreign investments into host country, settlement and future operations in respect of foreign direct investments. Second attitude to foreign investments prevails over in the field of internal economic activity of most countries which suppose that investments in contrast to trade are more effective intervention into sovereignty under national economy.
The sovereign state's problems are intensified when the investment is made to extract the natural resources of the developing country. Natural mineral resources arouse a great deal of national sentiment, above and beyond their economic value in the marketplace. It is necessary to point out that some Russian mass media skillfully used these aspects of national sentiment against the hugest international investment project "Sakhalin-2".
Usually, investment agreements set forth that the foreign investor establishes an industrial, agricultural or commercial project in the host state in an undeveloped area that will be important for the country's economic and social development. The investor is guaranteed to exercise the right for profits that are gained from the project and other various economic benefits as well (i.e., tax benefits, government guarantees, etc.).
These resources are considered by the host state as the natural property of the whole nation. It is difficult for the host state on occasion to accept that a foreign party has control over these resources and that such a party shares the profits made from their extraction [4].
The world experience shows that the foreign investors by using their super mobility are capable of fast accumulate the huge financial resources into separate branches of national economy for extraction maximum profit and with speed take them from state-recipient out.
So the foreign investments have not only favorable opportunities and some risks. The massive transnational capital flows influence the economic sovereignty of developed countries. That is why it is necessary to define the correlation between the interests of state and those of foreign investors by improving the regulation on international and domestic levels.
Even in many developed countries the prevailing trends favored national controls over FDI. Yet the West-European countries sometimes pursue the policy that is directed at determined limitation of foreign investments into the national economy. For example, in Great Britain, a country with the open market, there aren't special legal tools of control over foreign investments; in exceptional instances other legal means are used. The question concerns the matters when the control over the foreign investor's admission in the purpose of national interests protection by way application legislation norms.
The state must independently determines its internal investment policy in accordance with he principle of the sovereign equality of states. The restoration of the real economy sector could be reached at the expense of attraction of domestic and international investments, reasonable correlation between public and private interests. It shall be considered as a purposeful state investment policy. The matter is to take over the control of the capital flows where the investments are necessary for the purpose of the public interests.
The state sovereignty is the fundament of the regulation foreign investments and in the formation of international system in the sphere. It was recognize by norms of international and national law. In practice sovereign states reference to considerations relatively sovereignty in the perspective of admission foreign investments on its national territory.
The sovereign state must protect foreign investors and their property rights. According to principles of international law, the host country, the recipient of an investment, must guarantee foreigners and their property a certain minimum of protection. The minimum standard means that the expropriation can take place in the general interest; should not be done in a discriminatory way; must be coupled only with effective, prompt, and appropriate compensation; must take place according to lawful expropriation procedures, which guarantee the expropriated person sufficient legal protection. The Law on Foreign Investments of 1999 states that foreign investment in Russia will enjoy the full and unconditional legal protection provided by Russian legislation and international treaties. The legal status of foreign
investment and foreign investors' activities should not be less favourable than the one provided for the property, property rights, and investment activities of nationals, with the exception of the cases stipulated by the Russian Law on Foreign Investment.
The Russian Constitution declares that guarantees will be provided for the integrity of economic space, free transfer of goods, services, and financial resources, support for competition, and freedom of economic activity. In the Russian Federation, recognition and equal protection are given to private, state, municipal, and other forms of ownership. The right of private property is protected by law. Article 35 of the Constitution provides that everyone has the right to have property and possess, use, and dispose of it, both personally and jointly with other people. No one may be deprived of property otherwise than by a court decision. Forced confiscation of property for state needs may be carried out only with compensation. The right of inheritance is guaranteed. The principle of the inviolability of private property is stated and regulated in the Russian acting Civil Code.
The legal regime of foreign direct investments includes national and international legal regulation. The foreign investments are needing in special legal regulation by reason of the juridical nature of international investment relations. In principle legal regulation of foreign investments is determined by national legislation. The latter is formed by laws of the state on the territory of which foreign investments are carried out. But instability of transition countries' legislation and corresponding risks incite foreign investors to search for the ways of deviation from the host state law and seek international law protection. It accounts for increasing amount of international bilateral and multilateral treaties. In the whole the foreign investments having as a matter of fact private legal character are simultaneously needing in international legal regulation in correspondence with the international interstate treaties for example with participation of Russia.
At present unified standards of governmental regulation of investment processes contribute to international capital flow. These generally accepted international investment standards operate in accordance with multilateral agreements under the auspices of international economic organizations, e.g, the World Trade Organization (WTO). Yet it would be an exaggeration to apply unified legal principles and norms to the process of tapping of global investment law. Clearly economic integration has quickened the pace of cross-border investment. In this sphere countries are also showing their keenness
in accepting international standards. The fact that countries, especially developing countries, are trying hard to offer foreign investors favorable terms as an incentive has drastically reduced and in the some cases even removed the fare of nationalization which was most troublesome to foreign investors.
The legal framework for foreign direct investments, as it exists today consists of a wide variety of national and international principles and rules, of diverse origins and forms, differing extensively in their strength and specificity. They operate at several levels, with extensive gaps in their coverage of issues and countries. And national law is still of paramount importance. It establishes the relevant legal concepts and categories, creates the broader legal environment for the operation of TNCs and reflects in its diversity the prevailing currents and trends on the topic.
The international legal framework for FDI, however, is still uncertain and incomplete. There is no comprehensive global agreement on the subject. Existing multilateral instruments are partial and fragmentary.
The Russian Federation is a party to various international agreements related to foreign investment. Provisions in the international agreements take precedence over conflicting domestic legislation. In principle, the guarantees granted to a foreign investor in accordance with a national legislation and international treaties can be divided into three groups, as follows: guarantees providing inviolability of property, which is a foreign investment in the territory of a host country; guarantees providing a right of a foreign investor to use results of his activity carried out in the territory of a host country; and guarantees connected with the settlement of investment disputes.
A typical investment treaty might offer investors various substantive rights, separately or in combination. First, host states guarantee investors will receive adequate compensation in the event an investment is expropriated. Second, host states promise not to enact currency controls in order to promote the free flow of capital. Third, host states promise to not discriminate on the basis of nationality. This often means states promise to not treat investors worse than their own citizens (the right to "National Treatment") or other foreigners (the right to "Most Favored Nation" or MFN treatment). Fourth, host states promise to provide investments with fair and equitable treatment. Fifth, host states promise to provide full protection and security to investments. Sixth, host states guarantee that investments will not be treated less favorably than the minimum standard of treatment required by customary international law.
Finally, in what is sometimes referred to as the "Umbrella Clause", states promise to honor commitments made as regards investment.
The interaction of two legal systems - national and international - is a great factor of legal development. It sets special problems for national law and international law being two independent but closely cooperating legal systems. Their solution is assumed in the Russian Constitution (part 4 of Article 15).
International rules and concepts operate in constant reference to national ones. While the number and importance of international norms keep increasing, their interplay with national ones remains at the heart of the matter. International agreements of various types are of increasing importance as elements of the legal framework for FDI.
The strength of international legal system is based on the consensus of states, world community and not on the state itself. International law is composed of basic principles of impletmenting state sovereignty in concrete investment treaty relations.
Pursuant to the Law on Foreign Investments of 1999, direct foreign investments in the Russian Federation may be made into any assets or sector of the economy, as long as it is not prohibited by the legislation. Russia has retained the right to make exemptions from the application of the national regime to such spheres as banking, production of fissionable materials and related products, ownership rights on agricultural products, the use of natural resources, etc. Russia imposes restrictions on direct foreign investments in strategic sectors of the economy (such as foreign trade of defense industry products). In certain fields, such as banking and insurance, there are restrictive provisions, which limit direct foreign investments to specific levels regarding their proportion to the amount of Russian entities operating in the particular sector.
According to the Russian legislation among 11 main guaranties allowed by Federal Law "On Foreign Investments in the Russian Federation" from July 9, 1999 there are three guarantees that are directly devoted to securing foreign property from withdrawal. Firstly, we mean the guarantees of contributory compensation in the event of nationalization and requisition of foreign investor's property or commercial organization with foreign investments. In the part 1 of Article 8 it is said: "The property of a foreign investor or commercial organization with foreign investments shall not be subject to compulsory seizure, including nationalization or requisition, except for instances and on the grounds which have been
established by a federal law or international treaty of the Russian Federation.
Another two Articles (11,12) of the Law on Foreign Investments in the Russian Federation allow non-admission of indirect or latent forms of withdrawal of foreign investments: 1) guarantee of use on the territory of the Russian Federation an transfer out of Russia of revenues, profits, and other lawfully received monetary assets; 2) guarantee for foreign investor of an unhindered export from the Russian Federation of property and information in documentary form or in form of electronic carriers which was initially imported to the territory of the Russian Federation as a foreign investment.
So Russian legislator tried to secure foreign property in the conditions of economic instability, because the higher level of legal protection of foreign investments is one of key tasks in formation of favorable investment climate.
The compensation payment is a fundamental principle in case of nationalization and requisition. The Article 8 of the Law on Foreign Investments in the Russian Federation envisages "In case of nationalization the value of the property nationalized or other losses shall be compensated to a foreign investor or commercial organization with foreign investment".
Unfortunately this acting law did not perceive the generally accepted in international law provision about possible nationalization only in case when this measure is applied "for public purpose" and also "prompt, adequate and effective compensation". In our opinion there is a certain deviation from the former Law on Foreign Investments of the RSFSR (4 July 1991) which envisaged: "Foreign investments ... shall not be subject to nationalization and not be subjected to requisition or confiscation except in the exceptional instances provided for by legislative acts, and when such measures are adopted in social interests". Further it was envisaged: "Foreign investors shall have the right to compensation of losses, including lost advantage, caused to them as a result of the fulfillment of instructions of State agencies of the RSFSR or their officials which are contrary to legislation prevailing on the territory of the RSFSR or also as a consequence of the improper effectuation by such agencies or their officials of duties provided for by legislation with respect to a foreign investor or enterprise with foreign investments (Article 7).
The acting Law directly have not foreseen in contrast to the old Law that the provision that a payable compensation shall be equivalent to the fair market value of the expropriated investment. The
Law on Foreign Investments in the most unambiguous manner envisages that compensation shall be paid without a delay in such currency in which investments primary were done or in other foreign currency acceptable for the foreign investor and confines the formulation "value of nationalized property and other losses compensated"(part 2 Article 8).
The countries-exporters conventionally strive for the protection of their citizens and companies from unfavorable discriminational consequences and try to secure granting admission regime that is less favorable than regime which grants economic subjects of recipient state or investor of the third party. In this case the host state while deciding the question concerning admission of a foreign investment project must assume an unambiguous attitude in order to interact with partner country under the investment contract in the same way as it treats the investors from another countries.
The sovereign state has the full right to coerce that institution and terminate the foreign investment relations on its territory with due regard to legal prescription and regulations.
If the question is institution and liquidation of their citizens investments in the territory of another country the international law establish the restrictions in using of sovereign state the powers on using of compulsion. In these cases the state can only impose restrictions relatively on operations which are conducted with violation of its legislation or internal regulations. However it is not in its authority to remove the consequences of actions that contradict its national law since they are implemented in the host country.
In accordance with the World Bank Guidelines on the Treatment of Foreign Direct Investment (II. Admission, point 4):
"A State may, as an exception, refuse admission to a proposed investment:
(1) which is, in the considered opinion of the State, inconsistent with clearly defined requirements of national security; or
(2) which belongs to sectors reserved by the law of the State to its nationals on account of the State's economic development objectives or the strict exigencies of its national interest."
It is said further in this recommendatory multilateral document that "restrictions applicable to national investment on account of public policy (ordre public), public health and the protection of the environment will equally apply to foreign investment" (point 5).
As provided by this international legal document the state applying the system of admission must
simplify the making of investments by private persons of other states as well as avoid creation of unwarranted complicated legal procedures fulfillment of which is necessary for obtaining admission.
Each country preserves this right to regulate the admission of foreign private investments. Nowadays the so called indirect forms of nationalization are more dangerous because the times of direct withdrawal of foreign property are in the past. When expropriation is accomplished by means of a series of such hostile actions, which cumulatively deprive the investor of the value of investment, its often referred to as "indirect" expropriation. Such expropriatory actions of the state deprive the investor of usage and benefits of its assets, thus depriving the investor of effective ownership of the asset, even though the investor may retain nominal ownership.
It is obvious that the state carrying out its internal policy must respect the basic international law principles and legal norms in the absence of some kind of multilateral investment conventions. By the
way, these principles and legal norms have rather prohibitive than authorizing character. In connection to this one can confirm that in principle the state's ability to issue orders is not unlimited because it is based on the power resulting from the territorial principle or the power resulting from the citizenship principle. Consequently, the sovereign state can alter legal norms regulating activities of natural persons or legal entities that operate on its territory if these natural persons have the citizenship of this state and these legal entities are established in accordance with the laws of this state. Moreover the sovereign state can not exercise its right to use coercion with the purpose of implementing its legal norms on the territory of other sovereign state.
The sovereign state has the right to establish legal norms regulating institution and liquidation of foreign investments on its territory; it has the right to establish legal norms that determine institution and liquidation of foreign investments realized by its citizens on the foreign state's territory.
Bibliography
1. See: Bogatyrev A.G. Investment Law. Moscow. 1992. P. 5-12; Boguslavcky M.M. Foreign Investments: legal regulation. Moscow. 1996.
2. Velyaminof E.G. International Economic Law and Process. Academic course. Moscow. Wolters Kluver. 2004. P. 22.
3. See: Farkhutdinov I.Z. Foreign Investments in Russia and International Law. The issue of Bashkir State University. Ufa. 2001.
4. The Arbitration Mechanism of the International Centre for the Settlement of Investment Disputes. By Moshe Hirsh. Martinus Mijhoff Publishers. Dordrecht /Boston / London. 1993. P. 6.
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This article is devoted to consideration of legal aspects of the international investment.
In particular, the attention is paid to common object and different interests of the host state and the foreign investor.
