Discrimination, licence revocation, de facto expropriation
Government intervention can take many forms, and so can its impact on your business:
- Discriminatory taxes or permits > Impact: Increased operating costs, declining margins > Risk level: Medium
- Withdrawal of licences/concessions > Impact: Production stoppage, contractual penalties > Risk level: High
- Indirect expropriation (e.g. external administration, transfer of shares without compensation) > Impact: Loss of control or total loss > Risk level: Very high
Countries signal reliability to investors by signing bilateral investment treaties (BITs) or multilateral agreements such as the Energy Charter. The core standards are:
- National treatment and most-favoured-nation treatment – no discrimination against local or third-country investors
- Fair and equitable treatment (FET) – protection against arbitrary action by public authorities
- Protection against (direct and indirect) expropriation – only against ‘prompt, adequate’ compensation.
- Transferability of capital and profits
Violations can be brought before international arbitration tribunals (ICSID, UNCITRAL, ICC). The judgments are generally enforceable worldwide.
Lessons from Russia
Since 2022, Moscow has been using presidential decrees to transfer the assets of Western companies into ‘foreign administration’ and force them to sell below market value. At the same time, the government refuses to recognise international arbitration awards. In response, courts in other countries no longer recognise the decisions of Russian courts.
This example shows that the enforceability of contractual rights entails risks. Unfortunately, the right to be right does not necessarily mean getting justice also applies here.
Strategic protection – five practical tips
- Treaty shopping: Choose an investment holding company in a third country with robust investment protection for the target country. The structure must be in place before the capital is committed, otherwise the protection will not apply.
- Multi-layered contracts: Supplement the protection provided by government agreements with stable project contracts containing crisis-proof clauses on applicable law and arbitration. This creates a second avenue of recourse against government-affiliated contractual partners.
- Political risk cover: Federal or private guarantees protect equity, shareholder loans and intangible assets against expropriation, war and transfer restrictions.
- Regulatory monitoring: Implement a local early warning system for legislative initiatives, budget crises or sanctions. The earlier a threat of intervention is identified, the greater the scope for action.
- Early defence: If the investment is affected, protective letters should be sent to ministries and reference made to BIT rights immediately. A transparent escalation strategy increases the willingness to settle and prevents the statute of limitations from expiring.
Conclusion
Investment protection is not an aftercare tool, but should begin as soon as a company enters the market. A carefully selected contractual and insurance framework combined with attentive monitoring creates the necessary bargaining power to manage political risks in high-risk countries. Developments in Russia are a warning enough: those who fail to prepare run the risk of seeing a supposed growth market turn into a billion-dollar risk overnight.
Summary of the keyfacts
- Early strategic safeguards – Investment protection must be planned before entering the market, e.g. through BIT-based structures, contractual clauses and insurance.
- High political risks in non-European markets – Countries may initially court investors, but later intervene through discrimination, licence revocation or de facto expropriation.
- Case study: Russia – shows that contractual protection only works if the host country respects it; therefore, risks should be assessed in advance and interventions responded to quickly.
