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    Updating the Energy Charter Treaty

Summary

The ECT is a unique instrument and its updating needs precise drafting to protect investors' interests, argues Professor Andrei Belyi in an interview with NGW.

by: William Powell

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Updating the Energy Charter Treaty

 The MPs who last month attacked the Energy Charter Treaty (ECT) are doing so on the grounds that it is to protect and perpetuate fossil fuels. Are they right in this respect? 

To be accurate, the Roadmap for modernising the Energy Charter Treaty was initiated in 2011 in response to Russia’s text proposed as an alternative to the ECT – the Energy Security Convention. Moscow proposed a draft with some new, controversial provisions reflecting Russia’s position on the ECT and it attempted to use the document to initiate the amendment process. In the past, even before the Roadmap, the European Union (EU) was the party that was most reluctant to modify the text and this explains why the Roadmap will result in a new document, leaving untouched the core of the legally-binding text that was adopted in 1994. Similarly, additional documents to the ECT had been either adopted (eg the Trade Amendment of 2010) or proposed (Supplementary Investment Agreement, which has not moved forward since 1998). As Russia and the EU could not agree the terms of the proposed ESC, initiated in 2011, and it then faced the Yukos case (2014) which led to a demand for $50bn  compensation owed by Rosneft to Yukos shareholders, Russia withdrew from the ECT.

With last year’s new climate agenda and the EU Green Deal in progress, the European Commission (EC) is co-ordinating a new modernisation process, which started in May this year. It is a paradox that the EU should now consider amending the text itself, having resisted the idea when Russia asked for amendments. Clearly, amending the ECT will be difficult as it will require both intra-EU coordination and agreement with remaining non-EU contracting parties to the Treaty.

Once the topic had attracted the attention of thepublic at large, about 150 MEPs signed a joint letter stating that if the ECT amendments failed to happen, then the EU should withdraw from the ECT. I would say this not really the position of the European Parliament, nor would it enjoy the backing of EU member states and the EC. But the letter raises the pressure from some politically-motivated non-govenmental organisations

Despite numerous claims to the contrary, the ECT does not aim at perpetuating fossil fuels: it aims at creating a stable legal regime for investors to operate within. Since investments in cleaner technologies are now rivalling investment in fossil fuels, the majority of investment arbitration cases under the ECT are about protecting renewable energy projects. This is why the political requirement to abandon the ECT sounds absurd to anyone who knows the text and the related case-law.

What will be the process of its modernisation and will the ECT be valid while the text/principles are updated?

It depends on what the contracting parties agree. The ECT will be valid unless all contracting parties decide to abandon it. If it’s amended, it will be valid in an amended form. If instead of an amendment, a new additional document is to be adopted, the text of 1994 will remain the core legal text of the process. During our webinar organised by Volterra Fietta, an EC representative clearly explained that the investment protection regime needs an update, and the EC is working on the update.

What examples are there of renewable or nuclear energy projects that have been protected by the ECT? What common threads run through the successful cases?

There are numerous ‘Solar cases’, when a state first introduces feed-in tariffs and other preferences to attract investors into photovoltaics, and then withdraws the support mechanisms to the detriment of the investor. Most of these cases are in the EU (Bulgaria, Italy, Spain), but there might also be cases in Ukraine following its recent cancellation of feed-in tariffs for renewables.

Could the ECT could have been applied in the transit disputes between Russia and Ukraine of 2009, for example?

Back in 2009, when I was still based in Moscow, I argued for the application of the ECT in transit disputes, even though Russia had been applying the ECT provisionally. It means the ECT applies, as long as it doesn’t contradict the constitution or national law. But a transit dispute in a third country cannot threaten either Russian constitutional or domestic law. The ECT contains transit provisions with a specific mediation process detailed. However, it also contains security provisions which allow certain exemptions, such as ‘at time of war, armed conflict or other emergency in international relations’. Hence, the situation of 2014 would have been more complicated. Would one define the situation in eastern Ukraine as a situation of an ‘armed conflict’ allowing exemption from the ECT? Neither Russia or Ukraine wanted to test the ECT in those circumstances. Instead, a mediation was conducted by the EC without any reference to the ECT transit provisions.. So we don’t have a transit case under the ECT

Russia is applying the ECT to bring pressure not on one government but on the EU in re Nord Stream 2. Is there a legal precedent for this? Is it envisaged in the ECT?

Indeed, a paradoxical situation: Russia initiated a withdrawal from the ECT in the aftermath of the Yukos case, but its investors understand very well that the Treaty can be used to protect their investments in the EU. But Nordstream AG is officially a Swiss company, and so the case is between a Swiss company and the EU, which the investors initiated following last year’s amendments to the EU Gas Directive.

Now, if Germany decides to cancel the pipeline because of the poisoning of Navalnyi, a famous Russian political opponent of the Kremlin, then it might further engender legal liability towards investors. A get-out clause for the EU might be to argue that this is an “emergency in international relations.” But is that valid? It remains unclear from the ECT. One could define it as a Russian domestic affair and so beyond the scope of ECT arbitration, or as a latent threat to the dissemination of dangerous chemical substances, in which case could fall within it.

Russia did not ratify, or it has de-ratified, the ECT. Does this weaken its case?

No, since is a Swiss investor. But Russian companies cannot claim their protection since Russia’s official withdrawal in 2018. At the same time, Russia remains liable for investment provisions of the ECT until 2038 under the so-called ‘sun-set’ clause. This gives a hint to those who now propose that the EU should withdraw.