London could become the European capital of state-owned asset seizure

Charles McKeon is director and co-founder of litigation PR firm Thorndon Partners.

As the war in Ukraine rages on, so does the debate over Western governments taking the extraordinary recent step of seizing $50 billion in frozen Russian assets and using them to fund Ukraine’s reconstruction and its war effort.

Despite the importance of support for Ukraine, some commentators and market participants dismiss the idea as bad politics and — perhaps more importantly — bad law, due to the precedent it might set for future conflicts.

But whatever policymakers in Brussels, Washington or London decide about Russian plunder, arguments over state assets and whether they can legitimately be seized won’t end there.

The fact is, EU nations themselves are among the governments facing legal charges from investors that are using international court mechanisms to target their assets. And in this context, ongoing attempts to enforce an international court judgment in London against the Spanish government — which is claiming sovereign immunity — are likely to be pivotal.

In the 2000s, billions of euros were pumped into clean energy projects in Spain, after the government introduced incentives to stimulate investment in its burgeoning renewable sector. And they worked — one such project in Granada became the largest solar energy plant in the world at the time, with panels covering the equivalent of 70 football pitches.

After a few years, however, Spain’s government dramatically changed tack, retroactively diluting these incentives before ultimately removing them entirely. Having already injected hundreds of millions into projects, investors cried foul and brought a raft of legal claims accusing Spain of breaching its Energy Charter Treaty (ECT) obligations.

Overall, more than 50 investors sued Spain for a total of around €8 billion in damages, and many of them won, with judgments from the World Bank’s arbitration tribunal entitling them to a combined €2 billion and counting from the Spanish government.

But Spain is refusing to pay up. In fact, figures show it has become the worst offender in the world in terms of total number of unpaid arbitration debts — a position it shares with Venezuela.

The world of investor-state disputes has always been controversial. For example, some critics claim the system can be misused by fossil fuel firms to sue governments for preventing projects that will harm the environment. At its core, though, lies the principle that if a government’s actions breach the treaty obligations they signed up to, overseas investors can claw back money they’ve injected into major projects.

And when governments refuse to pay, investors have to get creative. Here, obtaining court permission to seize state-owned assets is a method that’s increasingly favored — although its highest profile targets to date have been well-known sovereign defaulters like Argentina.

The question is, as investors owed significant debts descend on London courts, could Spain — and other EU governments — soon face the same ignominy?

Two educational and cultural institutions in London that belong to the Spanish state — the Instituto Cervantes and the Instituto Español Vicente Cañada Blanch — have already been subject to court orders entitling investors to seize the land underneath them in lieu of unpaid debts.

London’s High Court judgment has a crucial element for other EU nations that become delinquent debtors as well. | Daniel Leal/AFP via Getty Images

At this stage, these court orders are only interim, and Spain is fighting against them tooth and nail. But thus far, its legal challenges have fallen flat.

The key defense deployed by Spain is that, as a state, it qualifies for “sovereign immunity” from its arbitration debts being enforced in the U.K. However, London’s High Court was unconvinced by this and rejected Spain’s efforts. Meanwhile, the country ran a similar defense in the U.S., where the courts gave mixed and fairly ambiguous rulings on whether it can or cannot rely on immunity.

As such, London’s more definitive position is sure to make it the more attractive destination for investors to enforce judgments and, ultimately, seize assets to recover debts. London’s High Court judgment has a crucial element for other EU nations that become delinquent debtors as well: The ruling against Spain confirmed that “intra-EU” arbitration decisions — meaning, judgments secured by investors based in the EU against member countries — can be formally recognized in the U.K.

This is a vital step on the road to ultimately seizing assets to claw back outstanding debt. Without sovereign immunity, governments on the receiving end of these intra-EU awards could be exposed to asset seizures from those they owe. And as Spain’s appeal is heard in London over the next few days, it’s likely to be followed closely by other at-risk EU nations.

This is far from just a Spanish problem. The ECT alone — one of several treaties under which EU countries can potentially be sued by investors — has birthed a huge number of investor-state disputes. Italy, for example, has been stung with 14 claims under the treaty, second only to Spain’s 51, and Romania trails Italy with eight lawsuits filed.

Moreover, when governments lose these cases, significant debts can pile up. The Czech Republic, for example, is embroiled in a long-running and acrimonious dispute with blood plasma company Diag Human. Facing several unfavorable judgments on the matter, which the government is contesting in the London courts, the prospect of continued obstinance has now raised fears of a politically explosive outcome — such as attempts to enforce judgments by confiscating high-profile assets held by the Czech Republic outside its borders.

For each of these EU countries, paying their debt is as much a political decision as it is a legal outcome. Spain’s debts to investors are also being investigated by the European Commission’s competition directorate, examining whether making investors whole constitutes illegal state aid.

Plus, politicians are wary of the flak that could arise from “handing over taxpayer money” or “surrendering” to international investors. So, the electoral temptation is to stall, making it the next government’s problem.

But such delays complicate the EU’s attempts to portray itself as a reliable destination for foreign debt investment. Kicking the can down the road could prove an expensive option, since interest is accruing on outstanding debts every day they remain unpaid.

Spain, at least, with the prospect of losing its immunity in the U.K. looming, may soon run out of road. And Madrid’s appeal looks like it will determine just how vulnerable other EU countries are to their valuable assets being targeted in the U.K.