Investment Arbitration and Armenia: Policies, Risks and Opportunities

Part I

International Arbitration and Armenia: Arbitrating Animosity

Following Azerbaijan’s claims under the Bern Convention and the Energy Charter Treaty (ECT)—a case alleging Armenia’s exploitation of energy resources in Karabakh—it becomes evident how arbitration can serve as a strategic tool in broader geopolitics. Yet, interstate arbitration, explored in detail in the first part of this article, is just one piece of the puzzle. Armenia’s experiences also extend into investment arbitration, a field with its own unique features.

Investment arbitration offers a distinct framework that resembles commercial arbitration but operates on a different plane. Unlike disputes between private parties, investment arbitration arises when a foreign investor brings a claim directly against a sovereign state, challenging actions that allegedly breach investment protection treaties. These treaties—commonly Bilateral Investment Treaties (BIT), though sometimes multilateral, like the ECT of the United States-Mexico-Canada Agreement (USMCA)—create obligations for states to promote and protect foreign investments. 

Investment treaties, whether bilateral or multilateral, typically provide for two types of arbitration: interstate and investor-state arbitration. It is essential to distinguish these two forms of arbitration using the ECT as an example. Article 27 of the ECT governs interstate arbitration, addressing disputes between member states over the treaty’s interpretation or application. On the other hand, Article 26 focuses on investment arbitration, allowing private foreign investors to bring claims directly against states for alleged violations of treaty obligations. 

Here is how investment arbitration works under an investment treaty: two countries, say Armenia and Germany, sign a treaty to promote and protect investments made by each other’s investors in each other’s territory—a German investor on Armenian soil and vice versa. This treaty ensures that investors from one country are treated fairly and their investments are safeguarded in the other country. Importantly, it provides that if an investor believes their rights under the treaty have been violated, they can bring a claim against the host state directly to international arbitration rather than relying on the host state’s courts. To make it clear, investment treaties are agreements between states, not between a state and an investor. However, they indirectly cover investors through the commitments made by their home country and the host country in the treaty. While direct contracts, like concession agreements, can exist between a state and an investor, treaties work differently. 

For example, imagine a German company building a manufacturing plant in Armenia under protections provided by the Armenia-Germany BIT. If Armenia suddenly expropriates the plant (takes it without proper compensation) or introduces discriminatory regulations targeting the company, the German investor (natural person or legal entity) could initiate arbitration under the BIT. Both Armenia and Germany have consented to international arbitration under the BIT. This mechanism gives investors a way to seek justice and compensation for treaty breaches while also encouraging states to maintain stable and investor-friendly environments. However, it also highlights the importance of states carefully balancing their domestic policies and international obligations to avoid costly arbitration claims.

What makes investment arbitration unique is that only private foreign investors have the right to bring claims. States cannot file claims against investors under these treaties. The rationale for this structure lies in its origins. Investment arbitration emerged in the mid-20th century when states, particularly those in the developing world, sought to attract foreign capital. To ease investor concerns about political instability and expropriation, states began signing BITs. These treaties included protections like fair treatment, safeguards against expropriation, and the right to freely transfer funds. Investment arbitration became the enforcement tool, providing investors with a neutral forum to hold states accountable and avoiding domestic courts that might be seen as biased or unreliable. After all, suing a sovereign in its own courts as a foreigner is hardly a level playing field, is it?

Investment arbitration can follow different procedural paths, depending on the terms set out in the relevant treaty or agreement. The most common framework is the International Centre for Settlement of Investment Disputes (ICSID) in Washington. Alternatively, disputes can be resolved outside any arbitral institution, often under the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, which provide greater procedural flexibility but lack the institutional support ICSID offers.

Investment arbitration does not operate in a vacuum—it often intersects with broader national issues, reflecting the complex relationship between foreign investors and host states. For example, the Amulsar gold mine dispute in Armenia highlights how investment conflicts can ignite domestic debates. The project, led by Lydian International, faced strong opposition from environmental activists and local communities over ecological concerns. Protests and blockades eventually brought the mine’s operations to a standstill, sparking nationwide discussions about how to balance economic development, foreign investment, and environmental sustainability.

Therefore, what makes investment arbitration particularly significant is its public dimension. While commercial arbitration often unfolds behind closed doors, investment arbitration frequently involves matters of public policy, state resources, and taxpayer money. Awards in these cases can reach staggering amounts, burdening state budgets and ultimately the public. If a state loses an investment arbitration case, the damages awarded to the investor are paid from the public purse.

States cannot easily avoid paying; awards can be enforced globally against state-owned assets. This has led to criticism that investment arbitration prioritizes investor rights over public interest. However, data indicates that states often prevail in these disputes. For instance, in the 2021 fiscal year, among cases decided by tribunals, 34% of awards upheld investors’ claims in part or in full, while 32% rejected all of the investors’ claims on the merits, and 5% declined jurisdiction. At the core of these debates is the challenge of striking a balance: protecting investors to encourage economic development while safeguarding the sovereign right of states to regulate in the public interest. This tension becomes particularly evident when investors challenge laws or policies to address critical issues like environmental protection or public health, with states fearing the possibility of arbitration claims. 

For example, disputes, where investors have challenged renewable energy reforms or anti-smoking regulations, have raised broader questions about the legitimacy of arbitration to contest state decisions made in the public’s interest. For instance, in Philip Morris v. Uruguay, the tobacco giant challenged Uruguay’s anti-smoking regulations under a bilateral investment treaty, claiming they harmed its investments. The tribunal ultimately upheld Uruguay’s measures, emphasizing the state’s right to protect public health. Similarly, Spain has faced a series of arbitration claims under the ECT after altering its renewable energy incentives. While some tribunals sided with investors, others ruled in Spain’s favor, illustrating the ongoing tension between safeguarding investments and allowing states to regulate in the public interest. 

There has been a noticeable shift toward addressing these concerns in recent years. The idea that private investors, as beneficiaries of these treaties, should also bear responsibilities—such as respecting human rights and adhering to environmental standards—has gained momentum. In parallel, states are increasingly exploring counterclaims in arbitration, using the process to defend themselves and hold investors accountable for actions or failures that breach public or contractual obligations. 

Armenia’s engagement with investment arbitration mirrors these global challenges. Among the prominent ongoing cases is the claim by Walnort Finance Limited, filed under the Armenia-Cyprus BIT, seeking compensation for alleged violations related to mining investments. This case stands out as one of the most high-stakes disputes Armenia faces, with the Cyprus-registered company seeking USD 1.2 billion in damages. The claim arises from the controversial 2021 takeover of the Zangezur Copper-Molybdenum Combine (ZCMC), Armenia’s largest mining enterprise. Walnort, a minority shareholder, alleges that its rights were violated during the transaction, which involved 75% of ZCMC’s shares being transferred to entities linked to Russian billionaire Roman Trotsenko, with a quarter gifted to the Armenian government.

The Sanitek S.a.r.l. case, an important ongoing dispute, concerns Armenia’s waste management sector and arises under the Armenia-Lebanon BIT. The arbitration was initiated by Sanitek, along with its representatives Sari Haddad and Elias Doumet, alleging violations of their investment rights. This case has drawn attention due to its implications for public services and the obligations of the state toward foreign investors in critical sectors.

Meanwhile, the case brought by Edmond Khudyan and Arin Capital & Investment Corp. revolved around alleged breaches in the real estate sector. The tribunal dismissed the claims on jurisdictional grounds, finding that Khudyan did not qualify under the treaty’s jurisdiction and that Arin Capital lacked qualifying investments. While this ruling initially saved Armenia from liability, the subsequent annulment proceedings partially annulled the arbitral award, leaving room for further legal challenges.

Another potential claim may be looming from the fallout of Fly Arna, Armenia’s once-ambitious “national carrier” project. Launched in 2022 as a joint venture between Air Arabia and Armenia’s National Interests Fund (ANIF), it ceased operations in early 2024. Reports suggest Air Arabia is preparing an arbitration claim against Armenia, highlighting the risks of ventures without sustainable strategies or proper governmental support. Problems do not stop there. ANIF, created to attract foreign investment, is now being liquidated, with projects like Masdar’s USD 174 million solar power plant on hold, a deal with Abu Dhabi Future Energy Company. 

Meanwhile, former shareholders of Lydian International, disrupted by the government’s handling of the Amulsar gold mine, have filed an arbitration case under UNCITRAL. The dispute stems from government actions, including the suspension of operations due to environmental protests, which shareholders claim caused significant financial losses and breached investment protections. This case reflects the challenges of balancing environmental concerns with investment commitments, underscoring the importance of careful policymaking to avoid costly disputes.

Amid these proceedings, recent news highlighted a significant victory for Armenia in the investment arbitration arena. On November 5, 2024, the Annulment Committee at ICSID reaffirmed the Republic of Armenia’s triumph in the case of Rasia FZE and Joseph K. Borkowski v. Armenia, solidifying its position in a long-standing USD 331 million dispute. The case revolved around concession agreements for the construction of a southern railway and express roadway, with the claimants alleging treaty breaches under the Armenia-U.S. bilateral investment treaty. In early 2023, the ICSID Tribunal dismissed the investor’s claim, ruling in favor of Armenia and awarding the state USD 2.8 million in legal fees. While the claimants sought annulment, arguing procedural errors, including the alleged misapplication of Armenia’s statute of limitations, the ad hoc committee saw no reason to overturn the ruling, standing firm on the tribunal’s interpretation. It is important to note that annulment is not an appeal—it does not question the Tribunal’s decision on facts or law. For instance, the claimants’ argument about the misapplication of Armenia’s statute of limitations could not be re-litigated as an error of judgment. Annulment only addresses procedural flaws, like whether the Tribunal acted beyond its authority or failed to provide sufficient reasoning, ensuring the integrity of the process rather than revisiting the case itself.

Armenia successfully defended its position, and the Annulment Committee, on November 5, 2024, dismissed the claimants’ application in full, ordering them to reimburse Armenia’s additional legal costs of $382,248. But what does it mean for a state to “win” in investment arbitration? States win when they do not pay. More importantly, they do not even risk losing when disputes are handled wisely, where possible, preventing escalation to the arbitration stage in the first place. 

These cases underscore the importance of adopting careful, transparent and consistent investment policies to avoid disputes that can drain public resources and harm a country’s reputation as an investment destination. Governments must thoroughly assess the risks and sustainability of ventures, ensuring that projects are backed by realistic business models and supported by well-defined legal frameworks. Transparency is equally crucial; it fosters trust among investors and prevents perceptions of arbitrary or politically motivated actions. Consistency in policymaking further ensures that sudden shifts or reversals do not jeopardize ongoing investments or deter future ones. Ultimately, a strategic and well-planned approach minimizes the risk of costly arbitration, creating a stable and attractive environment for economic growth.

When it comes to investment arbitration, the stakes could not be higher. Unlike interstate arbitration, which often carries a political undertone, investment arbitration is purely about economics—compensation, business, and, most simply, money. It is a world where billions of dollars are on the line, as seen in the Yukos v. Russia case, where a record-breaking USD 50 billion was awarded, or ConocoPhillips v. Venezuela, which ended with a USD 5.5 billion arbitral award. 

Investment arbitration does not allow room for errors or poorly thought-out policies. States must approach this arena with due diligence, careful planning, and expert guidance. Importantly, there is no conspiracy hidden in the system. Zeroing in on the confidential practices of arbitral tribunals, a 2001 article in The New York Times offered a sharp critique of the system under the North American Free Trade Agreement (NAFTA). It noted: 

“[t]heir meetings are secret. Their members are generally unknown. The decisions they reach need not be fully disclosed. Yet the way a small number of international tribunals handles disputes between investors and foreign governments has led to national laws being revoked, justice systems questioned and environmental regulations challenged.”

This criticism sparked a wave of concern, highlighting the perceived lack of transparency and decisions made “behind closed doors.” However, investment arbitration has been remarkably responsive to such critiques, with notable reforms addressing confidentiality issues in the past two decades. Today, many arbitration frameworks have implemented significant transparency measures. Institutions like ICSID and UNCITRAL have introduced rules that allow for public hearings, the publication of awards, and greater access to documents, particularly in cases involving matters of public interest. Investment treaties increasingly include provisions that mandate transparency, reflecting a shift toward greater accountability. The public can now access detailed records of proceedings, and NGOs or other third parties can even participate as amici curiae, non-disputing parties, in certain cases, providing additional perspectives on disputes.

Of course, arbitration remains a highly specialized and professional field, requiring expert knowledge to navigate its processes and outcomes. Yet, the notion that it is obscure or secretive no longer holds. While confidentiality still serves an important purpose in protecting sensitive business and state information, the system has evolved significantly, demonstrating its ability to adapt to legitimate concerns while maintaining its core objectives. 

While high-profile cases may occasionally brush against politics, the focus remains squarely on the economics of investment protection and promotion. But let’s be clear: foreign investment is not a prize to chase without thought. It should be part of a broader, well-calibrated policy framework that ensures mutual benefit in the long run. Smart policies bring gains—not just in attracting investments but in maintaining a country’s sovereignty, stability, and fiscal health.

This article aimed to shed light on arbitration in the context of recent news, a term that has become a buzzword yet often breeds confusion. It is crucial to understand some differences. Commercial arbitration offers an alternative to domestic courts. Investment and interstate arbitration, however, are virtually the only mechanisms for resolving disputes between sovereigns or involving them because no one can judge a state without its explicit consent. When someone sues you in your courts, no one asks for your consent every time, do they? That is the difference. Even the ICJ, often viewed as the pinnacle of international justice, is a court of consent. And consent is the defining concept here, which lies at the core of arbitration. So, when you hear about Armenia in arbitration, do not get confused. Instead, try to locate the stakes and the context of the proceedings, the principles and types, as well as the challenges that come with these cases. 

Whether interstate or investment, arbitration is not just a tool for resolving disputes—it reflects how states interact in an increasingly interconnected world. It showcases the delicate balance between sovereignty and accountability, between attracting foreign investments and upholding national interests. For Armenia, being part of this system means dealing with its complexities with clarity and purpose, ensuring that every step taken—whether in signing treaties, fostering investments, or defending claims—aligns with long-term national goals. In the end, arbitration is as much about preparation as it is about resolution. The lesson is clear: success lies not in avoiding disputes altogether—that is nearly impossible in today’s world—but in being ready for them. Armed with foresight and expertise, states can turn arbitration from potential risk into a powerful tool for stability and growth.

Finally, whether it involves Azerbaijan or any other state, do not be confused when you read or hear about these kinds of cases. We hope this piece has shed some light on a few key aspects, helping to demystify a subject that often seems distant and convoluted. Understanding the framework of these proceedings is not just important for policymakers or legal experts, it matters to all of us, who ultimately bear the cost of how states navigate their rights, obligations and disputes on the global stage.

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