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The Butterfly Effect in Investment Arbitration: How Russia’s and Norway’s Actions Concerning Snow Crab Fishing May Open an Avenue for Foreign Investors to Bring an Action Against Spain

By Danilo Ruggero Di Bella* (Bottega Di Bella)


Introduction

This piece traces the possible ramifications of third-party states’ actions in the context of investment arbitration. It explains how a third state’s action may have a “butterfly effect”: the third state’s action can prompt foreign investors to initiate investment arbitrations against host states different from the third-party state that carried out the action in the first place. Although to a certain degree, this is not a new phenomenon (multiple investment arbitrations have been triggered by the E.U. Commission urging the repeal of various state aids), it is certainly a rarer occurrence outside of an international organization. Within an international organization, it is relatively easier for the institutional governing body to direct its member states to commit a breach of their international obligations. For example, in Micula v. Romania, the host state breached its obligations towards foreign investors by repealing incentives that could have constituted illegal state aid in the eyes of the E.U. Commission.



Indeed, sometimes, third-party states’ or international organizations’ actions may prompt foreign investors to initiate arbitrations against their host state for a measure that the host state took in response to the initial third-party’s action. At times, unfortunately for the host state, this measure translates into a breach of an obligation the host state owed towards its foreign investors. Hence, a sort of butterfly effect takes shape.


The critical actions that will be discussed are Russia’s characterization of snow crabs as a sedentary species and Norway’s conflicting interpretation of a multilateral treaty, the 1920 Svalbard Treaty (originally known as ‘Spitsbergen Treaty’ after the name given by the Dutch explorer Willem Barentsz to the archipelago). These actions may have triggered a chain reaction of events bearing legal implications for Spain, due to Spain’s violations of its international obligations towards its foreign investors catching snow crabs around the Svalbard archipelago based on Spanish fishing permits.


First, this piece will provide a brief overview of the snow crab industry and its origins. Second, it will discuss Russia and Norway’s controversial stance on the snow crabs. Third, it will explain the inconsistency of Norway’s isolated view of the 1920 treaty regulating the status of Svalbard. Finally, it will illustrate the potential investment arbitrations that can be filed against Spain for revoking the snow crab-catching permits for Svalbard from its foreign investors.


I. The E.U. Snow Crab Fleet

In 2012, E.U. trawlers began harvesting snow crabs, a relatively new species in Europe’s waters. This novel activity is a highly profitable business (reportedly, each snow-crab trawler yields one million euros per month on average), and arguably an environmentally friendly practice. Indeed, snow crabs are infesting Europe’s waters, since they are a non-indigenous species (p.6) migrating from the Russian coast where they were artificially introduced in the 1960s. Being an alien species prone to overbreeding, they end up harming the ecosystem if they are not regularly caught.


The European Commission has been authorizing a few member states—specifically, Spain (ANNEX IB p. 99), Estonia, Lithuania, Latvia, and Poland (ANNEX III p. 149)—to issue permits to catch snow crabs. A trawler flying the Spanish flag—the Adexe Primero—pioneered the catch of snow crabs in Europe in 2012. The Spanish vessel focused its activities in the “Loophole” area, a small portion of international waters between Norway and Russia in the Barents Sea, and the waters surrounding the Svalbard archipelago. This vessel carried out its activities on the ground of the fishing permits issued by Spain, specifically, a Northeast Atlantic Fisheries Commission (“NEAFC”) zone permit for the Loophole area and a Svalbard Zone permit for Svalbard waters.


Vessels of the contracting parties to the NEAFC can get a permit from their flag state to freely catch unregulated stocks—such as snow crabs—in international waters (like in the Loophole area). Similarly, vessels of the signatories to the 1920 Svalbard Treaty can get a permit from their respective flag States to fish around Svalbard on the same footing as Norwegians. Both of Adexe Primero’s fishing grounds proved to be so profitable that other E.U. and Norwegian vessels followed suit.


II. Crimea Sanctions and Russia’s View on Snow Crabs

Following EU sanctions on Russia for the 2014 annexation of Crimea, Russia retaliated by obstructing E.U. vessels fishing in the Barents Sea. For instance, on 16 July 2015, the Adexe Primero was seized by a Russian patrol boat while fishing in international waters in the Barents Sea (as proved by the satellite-based vessel monitoring system onboard). The seizure was prompted by the detection of fishing pots with foreign signs in Russia’s Exclusive Economic Zone (“EEZ”). The pots belonged to the Adexe Primero and to a Norwegian vessel (the Northeastern H-27-AV). It turned out that the pots had drifted on the current into Russia’s EEZ. The Spanish vessel was then released after posting a bond.


In July 2015, Russia’s retaliations built up to a declaration that defined snow crabs—usually fished by E.U. vessels in the international waters of the Loophole—as a sedentary species living on the continental shelf (p. 339). As such, the exploitation of this valuable resource should be up to the coastal states, i.e., Russia and Norway, the latter of which joined Russia’s declaration.


The Loophole in the Barents Sea is located in international waters, as Russia’s and Norway’s EEZ cannot extend further than 200 nautical miles out to the sea (the Loophole is squeezed between the two EEZs).  However, the continental shelf can extend up to 350 nautical miles as per Article 76 UNCLOS, thus engulfing the seabed underneath the Loophole. Therefore, the continental shelf below the water column in the Loophole can be subject to Russia’s and Norway’s jurisdiction, despite the water column above being on international waters. By defining the snow crab as a resource of the continental shelf (instead of a high-seas fishery resource), the coastal states (Russia and Norway) gain otherwise nonexistent jurisdiction over this precious resource and the right to exploit it exclusively, while simultaneously eroding one of the freedoms of the high seas, the freedom of fishing under Articles 87 and 116 UNCLOS.


Interestingly, the characterization of crabs as a sedentary species is not univocal and is rather arbitrary, often driven by national economic interests. Japan (a traditionally distant-water fishing country) considers crabs as a high seas fishery resource. Arguably, crabs’ ability to migrate defies their sedentary feature. Other states—mostly, coastal states (such as Canada (p.14))—hold that this crustacean is a sedentary species. It remains unclear whether crabs are sedentary or high-seas species. For example, Brazil considers lobsters sedentary, whereas the UK does not (p. 9).  Accordingly, the classification of crustaceans is often a contentious issue.


Following Russia and Norway’s joint declaration, in August 2015, the E.U. recommended that its member states suspend the permits to catch snow crabs in the Loophole. Accordingly, Spain suspended Adexe Primero’s permit to fish in the NEAFC zone. According to the accounts of the E.U. shipowners and captains involved, other E.U. member states instead disregarded the E.U.’s recommendation and allowed their trawlers to keep fishing in the Loophole. Finally, in September 2015, Spain followed the example of the other member states and lifted the suspension of Adexe Primero’s permit for the NEAFC zone. Spain then renewed Adexe Primero’s permit for 2016. However, in March 2016, Spain suspended the permit for the NEAFC zone once again and eventually stopped issuing it altogether, apparently out of deference to Russia’s stance.


III. Norway’s Breaches of International Legal Obligations

The 1920 Svalbard Treaty governs the international status of the Svalbard archipelago. Just a year earlier, in 1919, the geographer and explorer Robert Neal Rudmose-Brown described the archipelago as a no man’s land whose natural resources have been explored and exploited by a variety of states since its discovery. In the aftermath of World War I, the need to establish some sort of local authority to administer the international community living on the archipelago and to avoid the archipelago’s militarization led to the negotiations of the Svalbard Treaty.


The contracting parties to the Svalbard Treaty gave Norway sovereignty over Svalbard but allowed the joint and peaceful exploitation of the archipelago’s natural resources by a variety of nations. The Treaty accords to the nationals of each contracting state the right of economic activity on an entirely equal footing (p. 128) with Norwegian nationals, thus preserving (p.2) the terra nullius status of the region (specifically based on Articles 2, 3, 6, and 7). By virtue of this Treaty, Svalbard became the only land state territory of common use (p.IV) in modern international law.


However, over time, Norway has discriminatorily restricted the commercial access of the other signatories’ citizens based on nationality requirements. Meanwhile, Norway has disavowed the Svalbard Treaty by depriving its provisions of their original meaning: to constrain Norway’s sovereignty over the archipelago in favor of the international community’s acquired rights. Norway has also relied on the Treaty to extend unrestrained sovereignty on the waters surrounding Svalbard up to 200 nautical miles and, accordingly, to expand its maritime boundaries bordering Greenland.


Thus, Norway inconsistently interprets the geographical scope of the Treaty: on the one hand, Norway holds that the Svalbard Treaty applies only up to 12 nautical miles off the archipelago; on the other hand, Norway stretches its maritime boundaries with Greenland up to 200 nautical miles off Svalbard by relying on the same treaty notwithstanding the fact that, according to Norway’s own interpretation of the Treaty, Norway’s sovereignty over Svalbard should be constrained to 12 nautical miles around the archipelago.


Russia and the EU object to Norway’s interpretation of the Treaty (as every other contracting party does), since if it was not for the Svalbard Treaty, Norway could not set its border at 200 nautical miles off Svalbard. Hence, either the Svalbard Treaty applies up to 200 nautical miles off Svalbard and Norway retains its current maritime border with Greenland, or the Treaty applies up to 12 nautical miles and Norway’s maritime borders (as well as its territorial jurisdiction) should be downsized accordingly.


Should the territorial scope of application of the Treaty be up to 12 nautical miles off Svalbard’s baseline, the portion of water between its outer edge and Greenland’s EEZ would be considered high seas. Should Svalbard’s continental shelf stretch further than 12 nautical miles into the high seas, the Svalbard Treaty would apply to that zone anyway, since the continental shelf is a prolongation of Svalbard’s land territory.


Therefore, regardless of the geographical scope of the Svalbard Treaty (either up to 12 or 200 nautical miles), this instrument should apply to the activity of snow crab fishing around Svalbard, because such activities occur on its continental shelf. Norway indeed considered snow crabs as a resource of the continental shelf in its 2015 joint declaration with Russia. Accordingly, the nationals of all contracting parties to the Svalbard Treaty should be allowed to catch snow crabs on Svalbard’s continental shelf just as Norwegians do.


Norway’s 2015 joint declaration with Russia concerning the sedentary nature of snow crabs might have seemed beneficial at the time to gain jurisdiction over this natural resource on the continental shelf underneath the Loophole. However, the same declaration backfires with respect to Norway’s interests in Svalbard. Indeed, the declaration indirectly obligates Norway to accord equal commercial rights to foreign snow crab trawlers on Svalbard’s continental shelf which, being a prolongation of Svalbard’s land territory, is covered by the application of the Svalbard Treaty. In other words, under Norway’s own interpretation of the Svalbard Treaty, E.U. trawlers should be able to harvest snow crabs on Svalbard’s continental shelf for the same reason they cannot catch them in the Loophole area. Of course, this is an unintended consequence of Norway’s policies on the two bodies of water (the Loophole and the Svalbard waters). The common denominator of the two policies is that they are both driven by national interest: both seek to let only Norwegians exploit snow crabs.


In June 2013, the Adexe Primero began fishing in Svalbard waters thanks to a permit granted by Spain based on the Svalbard Treaty. However, following Norway’s arrest of a couple of E.U. trawlers, in January 2017, Spain suspended the permit indefinitely, despite the EU’s recommendation to disregard Norway’s prohibition to catch snow crabs around Svalbard. Spain was indeed the only E.U. member state to adopt such a suspension (unlike Estonia, Lithuania, Latvia, and Poland). Initially, Span’s suspension was meant to be only temporally. However, it became a de facto revocation of the permit, as the suspension was never lifted.


Norway’s discriminatory actions have already led to investment arbitrations concerning the catching of snow crabs in Svalbard waters. Could Norway’s flawed interpretation of the Svalbard Treaty lead to similar repercussions for other states?


IV. Are Investment Arbitrations Drifting Towards Spain?

As noted, the E.U. member states who were granted snow crab catching permits by the E.U. reacted in different ways to Russia and Norway. On one hand, Estonia, Lithuania, Latvia, and Poland stood firm on their position and kept allowing their vessels to catch snow crabs in the Loophole and around Svalbard. On the other hand, Spain had repeatedly suspended Adexe Primero’s permits and, eventually, stopped issuing them altogether out of fear of Russia and Norway. Thus, Russia’s erosion of the freedom of fishing in the high seas (by defining snow crabs as a resource of the continental shelf) and Norway’s violation of the Svalbard Treaty may have led Spain to breach in turn its international obligations towards its foreign investors.


Spain’s repeated suspensions of the snow crab catching permits and their ultimate revocation have disrupted the activity of the Adexe Primero and its shipowner, Mariscos Polar SL, a company registered in Spain for the purpose of fishing snow crabs in arctic waters and whose shareholders hold Moldovan and Russian nationalities.[1] These Russian and Moldavian investors may invoke respectively the Spain-Russia Bilateral Investment Treaty (“BIT”) and the Spain-Moldova BIT to bring an expropriation claim against Spain. Spain directly expropriated the snow crab-catching permits and indirectly expropriated the foreign investors’ company operating thanks to those permits. Furthermore, the cumulative effects of the continual suspensions of the permits—culminating with their revocation—may well amount to a creeping expropriation.


Spain’s consequential expropriation of Mariscos Polar is worsened by the fact that the actions leading to this taking were not proportional. First, there was a lack of proportionality since Spain did not provide alternative fishing grounds to avoid the total disruption of Mariscos Polar’s business.[2] Second, the absence of proportionality is highlighted by the fact that Spain was the only E.U. member state to adopt such a harsh measure. Hence, even if Spain’s drastic actions may have been taken because of Russia and Norway, their lack of proportionality and compensation does not exempt Spain from its international obligations towards its foreign investors. Importantly, Article 6 of the Spain-Russia BIT and Article 5 of the Spain-Moldova BIT cover not only direct expropriations but also any other measures with similar effects.” Hence, the applicable BITs allow for indirect and creeping expropriation claims.


Since fisheries are governed by an E.U. Common Policy, the treatment Spain accorded to Mariscos Polar should be contrasted against the treatment that other E.U. member states in the same position as Spain accorded to enterprises operating in the same sector as Mariscos Polar. If such treatment is more favorable than the one accorded by Spain, then Spain failed to accord Mariscos Polar the most favorable treatment it could have possibly accorded. Since the other E.U. Member-States did not suspend their snow crab permits, Spain breached the most favored nation (“MFN”) clause in Article 5(2) of the Spain-Russia BIT and Article 4 of the Spain-Moldova BIT.


Further, a Russian investor bringing a claim under the Spain-Russia BIT could also rely on the MFN clause to broaden the scope of the dispute resolution clause. This way, the investor may bring fair and equitable treatment (“FET”) and full protection and security (“FPS”) claims. For example, the investor may import the more favorable treatment accorded by the Spain-Lebanon BIT, whose dispute resolution clause extends also to violations other than unlawful expropriations. Whereas the Moldovan investor would not need to invoke the MFN clause for this purpose, since the dispute resolution provision of the Spain-Moldova BIT is not limited to expropriation claims.


Spain breached the FET standard towards its foreign investors insofar as it failed to protect their legitimate expectations concerning their investment, by generating an uncertain legal framework for catching snow crabs. Notably, the investors’ legitimate expectations were also backed up by the E.U.’s recommendation to ignore Norway’s prohibition of fishing in Svalbard.


Moreover, Spain failed to accord adequate legal protection against Norway’s subsequent claims to the fishing rights that Spain granted to its investors in the first place. Spain could have protected such rights by resorting to an international arbitration against Norway based on the 1929 Spain-Norway Treaty on Conciliation, Judicial Settlement and Arbitration. Not only did Spain fail to accord appropriate legal protection to her foreign investors to ensure the normal ability of their business to function, but it also deprived the investors of the title (viz. the fishing permit) to advance a possible investment claim against Norway (by invoking the Russia-Norway BIT).


Accordingly, the foreign investors may claim from Spain compensation for the damages suffered, the restitutio in integrum of the revoked permits, and their adequate legal protection through an international legal proceeding between Spain and Norway.


Conclusion

The snow crab affair illustrates how third-state actions may have a butterfly effect on the host state in international investment law. This is especially likely where the initial actions were ill-grounded and driven purely by national interests and the host state’s response did not take into proper consideration its international obligations towards its foreign investors. Crucially, should Spain disregard the interests of its foreign investors concerning the fishing of snow crabs in Svalbard waters, Spain would implicitly waive its international rights stemming from the 1920 Svalbard Treaty. Those rights include all maritime, industrial, mining, and commercial rights over the natural resources of the Svalbard archipelago. Thus, in the future, Norway may validly rely on Spain’s acquiescence to relinquish such rights—as per article 31(3)(b) of the VCLT—to prevent Spain from benefitting of Svalbard natural resources on an equal footing.


*Danilo Ruggero Di Bella is an attorney-at-law – member of the Madrid Bar and the Canadian Institute for International Law Expertise (CIFILE) – leading the law firm Bottega DI BELLA (www.bottegadibella.com). He holds a Master in Lawyering from Alicante University and an LLM in Investment Treaty Arbitration from Uppsala University. Danilo graduated in Law from Florence University with a specialization in public international law from Radboud University Nijmegen. He can be reached at: danilo.dibella@bottegadibella.com.


 [1] Author interview with owners of Mariscos Polar SL.

 [2] Author interview with owners of Mariscos Polar SL.

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