Germany’s Trusteeship over Gazprom Germania: A Brewing Expropriation Claim?

Background

If it were not so serious, it would be funny: In March 2022, the part-time DJ and fledgling YouTuber Dmitry Tseplyaev (purportedly) became the ultimate controller of Gazprom’s gas-distribution network and gas-storage facilities in Germany. The German authorities did not see any humour in this situation. On 4 April 2022, they imposed a trusteeship over Gazprom Germania GmbH (‘Gazprom Germania’) until 30 September 2022. Germany now controls all of Gazprom Germania’s Germany-located assets. How did it come to this?

When the ownership structure behind Gazprom Germania changed, Germany was not formally notified of this change, although it later became aware of it. It did not like what it discovered. The shares in Gazprom Germania had been sold to Gazprom Export Business Services LLC (‘Gazprom Export’). It owned 99.9% of itself, while the remaining 0.1% was owned by Joint-Stock Company Palmary (‘Palmary’), which was owned by Tseplyaev. As Palmary was effectively the only shareholder in Gazprom Export, it controlled it, and, through it, Gazprom Germania.

As it was unclear who (actually) controlled Gazprom Germania, and the sale was not formally notified to German authorities, Germany imposed the trusteeship. The legal basis was the Foreign Trade and Payments Act, which requires that changes in ownership over critical national infrastructure be properly notified to the German authorities. As of now, the sale of the shares in Gazprom Germania is not valid under German law, so ownership still resides with the (original) Russian owners of Gazprom Germania (‘Gazprom Russia’). They have no control over Gazprom Germania, however. Is an expropriation claim brewing?

The Legal Framework: Energy Charter Treaty and the Germany-Russia Bilateral Investment Treaty

There are two investment treaties that Gazprom Russia might bring a claim under: The Energy Charter Treaty (‘ECT’) and the Germany-Russia bilateral investment treaty (‘BIT’). As Russia has terminated its provisional application of the ECT, there is a question whether Russian investors still have standing to claim under it. The relevant provision, Article 45(3)(b), specifies that the ECT remains in effect for 20 years after a state terminates its provisional application of the treaty, while leaving the question open whether investments belonging to a state’s investors enjoy protection for another 20 years. As the sunset clause in respect of withdrawals from the ECT stipulates that investors from withdrawing states still enjoy investor status for 20 years, Article 45(3)(b) might be interpreted to make it consistent with the subset clause, with the result that Gazprom Russia could bring a claim under the ECT. The clause on expropriation in the ECT reads as follows:

Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalised, expropriated or subjected to a measure or measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as “Expropriation”) except where such Expropriation is:

(a) for a purpose which is in the public interest;

(b) not discriminatory;

(c) carried out under due process of law; and

(d) accompanied by the payment of prompt, adequate and effective compensation.

In the BIT, which Gazprom Russia certainly has investor status under, the clause on expropriation provides:

Dispossession measures, including nationalization or other measures having similar consequences, may be applied in the territory of one Contracting Party to investments of investors of the other Contracting Party only in cases where these dispossession measures are carried out for reasons of public necessity, in accordance with the procedure established under the legislation of that Contracting Party and with the payment of compensation. Such measures must not be discriminatory in nature.

Although these two clauses are worded differently, their cores are the same: States must not directly or indirectly expropriate investments, unless they do so for a good public purpose, act with due process, do not discriminate, and pay compensation. 

Direct Expropriation or Indirect Expropriation?

Could Germany’s conduct amount to either a direct expropriation or an indirect expropriation? According to UNCTAD, direct expropriation “means a mandatory legal transfer of the title to the property or its outright physical seizure” (emphasis added). Under this definition, despite the fact that Germany has not taken title over Gazprom Germania, its action might qualify as a direct expropriation. Most other definitions of direct expropriation, however, require both title acquisition and factual control. Given the prevalence of this definition, it is likely that an arbitral tribunal hearing Gazprom Germania’s claim would be likely to apply it. 

But an adventurous arbitral tribunal could legitimately apply the UNCTAD definition, specifically by insisting that mere ‘physical seizure’ can constitute a direct expropriation. If physical seizure involves taking control over the assets making up the investment and stopping dividend payments from the investment to the investor, how is this situation any different from taking an investor’s title? If it is accepted that there is no difference, then it is interesting to consider whether Germany’s trusteeship includes control over dividend payments. The administrative act that effected the trusteeship is not clear on this question. It notes that the transfer of Gazprom Germania’s assets is subject to Germany’s approval. If ‘assets’ includes dividend payments, then an adventurous arbitral tribunal could view the trusteeship as a direct taking.

The Temporal Element and the Relevance of Gazprom’s Misconduct

But there is more to an expropriation than an act of taking. Whether a taking is direct or indirect, it must be of a certain duration. This is the temporal element of an expropriation. Neither the ECT or the BIT offer any clues on how long is ‘too long’, but there was one case where this question arose, specifically Wena Hotels v Egypt. The investor was deprived of its investment for nearly 12 months. Egypt described this deprivation as ‘ephemeral’, thus excluding an expropriation. The arbitral tribunal disagreed. Accordingly, temporary deprivations can qualify as expropriations, but is an approximate six-month deprivation, as is the case with Gazprom Germania, sufficient? This is outstanding question.

Another outstanding question asks: Did Germany expropriate Gazprom Germania or did Gazprom Russia brought this situation on itself? This is where Gazprom Russia’s misconduct under German law becomes relevant. The relevant background is that Gazprom Russia breached the Foreign Trade and Payments Act by not informing Germany of the change in ownership structure, which, in turn, provided Germany with a legal basis to impose the trusteeship. A similar situation arose in Genin v Estonia. Estonia cancelled the investor’s operating license on the basis of formal illegalities committed by the investor. The investor argued that Estonia had illegally expropriated its investment, but the arbitral tribunal saw it differently: Estonian law gave Estonia a power to cancel and it was entitled to use this power without incurring international responsibility.

But this entitlement only goes so far, as the case of Occidental v Ecuador shows. Ecuador also cancelled the investor’s operating license pursuant to domestic law, but that cancellation amounted to an illegal expropriation. The reason? This reaction was disproportionate. This is a warning for Germany: German law might authorise the imposition of the trusteeship, and that German law–based reaction will be respected by arbitral tribunals, but that respect only extends to reactions that are proportionate. This begs the question: When does Germany’s reaction become disproportionate?  Very briefly, it is considered that the longer it lasts, the more likely it is that the trusteeship will be seen to be disproportionate (and the more likely it is that the temporal element will be satisfied).  Germany will be given a reasonable period of time to resolve the issue with Gazprom Germania, but once that time pasts, then it will begin to look like Germany has imposed the trusteeship for reasons other than clarifying the issue of ownership.

Defences for Germany?

But is not there such a (legitimate) reason, specifically that Germany wants control of key energy-related infrastructure in a time of strained Russo-German relations? Minister Habeck has admitted that this factor is part of his decision calculus. Could it act as a defence if the trusteeship is adjudged to be expropriatory? 

Some seemingly applicable defences can be summarily dismissed. Germany cannot invoke any security-related exception to help itself because, in the ECT, this exception (see Article 24(3)) cannot be pleaded to defend an expropriation (Article 24(1)), while, in the BIT, there is no such exception. Another option for Germany is to plead a defence from general international law, particularly necessity. But any necessity-based plea is likely to fail. Necessity applies only in ‘exceptional cases’, which ultimately means that an arbitral tribunal should be slow to find it. Germany might be convinced that the proper functioning of its gas-storage facilities and gas-distribution network is an ‘essential interest’, but it will be difficult to convince an arbitral tribunal of this.

It would be easier for Germany to argue that this outcome is a ‘legitimate public policy’. With this argument, Germany would be calling on the police powers defence. This defence justifies (expropriatory) conduct that proportionately pursues a legitimate public policy, such as controlling key energy-related infrastructure. Satisfying the proportionality element will always be difficult, but this defence is Germany’s best hope, but there is a catch: It can only be pleaded in respect of indirect expropriations.

Take-Away Message: Germany safe, for now…

Where does this leave Germany? As a preliminary point, the characterisation of the trusteeship as either direct taking or indirect taking will be key, having one eye towards a future plea of the police powers defence. Whether the trusteeship is indeed expropriatory will largely depend on how long it stays in place – the longer, the more likely it is that it will transform from an administrative sanction to an expropriation. As regards possible defences that it might plead, Germany has few options, with the exception of the police powers defence.