Let's welcome Russia to the world economy

It may be an obscure event of interest to only a few. But the significance of the ruling just issued  by an international tribunal on Russia’s status in the European Charter Treaty (ECT) cannot be exaggerated.

The ruling puts an end to the conventional wisdom that Russia is not bound by any meaningful commercial treaty with its big trading and investment partners. It offers Russia a fresh start after its period of gangster capitalism and looting of foreign property.

Many in and outside Russia believe that Russia is a quasi-isolated legal island, operating in a vacuum of rights and obligations that spring from being a signatory of a variety of international agreements and member of different international organizations. The Kremlin has perpetuated a wide-spread belief that Russia cannot be made accountable for any international obligation it had signed up to when its respect would run counter immediate state interests.  

In the commercial field, the fact that Russia is not member of the World Trade Organization (WTO), is a good reason for many a trader, investor, lawyer and diplomat to shrug shoulders in resignation. Russia has so far maintained that, because it had not ratified the ECT and was not intending to, it was not bound by it. Yet it didn’t withdraw from the Treaty either, and kept very active in the Energy Charter Secretariat. In 2008 an audacious group of foreign shareholders in Yukos, the oil company unlawfully expropriated in 2004 by the Putin administration, dared to challenge the received view on Russia in the ECT and launched a case to determine Russia’s real legal standing. The won their case.

Indeed, what both Russia, and other players with an interest in seeing Energy Charter principles applied, have long overlooked is the legal provisions in the ECT contained in the various paragraphs of its Article 45. The article’s provisions state that signatories shall apply the ECT even though they have not yet ratified it. If a signatory wishes not to provisionally apply it, it should explicitly opt out, in written form. But Russia had not opted out. The court ruling has now given clarity. Russia is bound by the ECT and must apply it provisionally. The Russian government had seen this coming: in July this year it decided to discreetly make use of the opt-out provision foreseen in the treaty. But the ruling shows that the opt-out has no retroactive effect.

The Treaty, which was designed after the ice of the Cold War in Europe had melted in the early 1990s, set up strong rules on investment protection and transit in the energy sector in Eurasia. It provides a dispute settlement system that is deemed at least as strong as the WTO’s: it offers not only government to government arbitration, but also investor-state dispute settlement, with binding rulings. The European Community is itself a Party to the treaty and can also use the panoply of legal tools available.

The WTO’s legal bite since its inception in 1995 was tested and reinforced by regular recourse to its dispute settlement mechanism and frequent rulings against the big trading powers. In contrast, no one seriously tested the ECT against the big players. Russia has expropriated foreign assets, and shut off the gas taps in disputes that smack more of the political than of being the result of a partner’s breach of contractual obligations. Russia as well as other CIS countries can be considered abusing their position as transit countries from Central Asia or Siberia to the EU. This behaviour is prohibited in the Energy Charter Treaty and can be challenged. But no one in East and West really wished to use the Treaty, in fear of facing international legal action against its own energy practices such as the still widespread foreclosure of foreign investors from domestic pipeline systems and markets. Furthermore, in the context of an assertive Russia ready to strip assets in its juicy hydrocarbons sector, some did not want to risk jeopardizing delicate relations with the Kremlin. This was in particular the case of the big Western EU member states with their powerful energy oligopolies with (in-)vested interests in Russia. But neither the transit states in Central and Eastern Europe with their unreformed energy sectors, nor, of course, Russia, were eager to apply what they all had signed up to either.

This will change. Energy markets, and in particular the gas market, will for long remain far from perfectly open and competitive. Yet at least they should contain basic rules of fair play. Russia is also likely to gain from letting itself be challenged in the ECT. It will have the right and legitimacy to have its own transit rights upheld against Ukraine or Belarus, which is an objective it is pursuing. It will be a chance for its legitimate commercial claims with these countries to be taken seriously.

The last chance governments and businesses cannot afford to miss seizing has presented itself: to start subjecting Russia’s commercial behaviour to basic international rule-of-law. Too many have lost out on Russia’s backtracking on reform and concomitant rise in recourse to asset-stripping while gas had become a geopolitical weapon. It would also provide an opportunity for President Medvedev to show that all his talk about the rule of law, the absence of which is corroding the entire country, with the plight of foreign investors just the side-show, is more than just cheap talk. The Yukos affair, the sting of which has been felt in the ECT, might well end up becoming the nemesis of a political and economic system in Russia that is now under strain due to low oil prices and an entrenched economic crisis. Time for Russia to choose which way it wants to go.