Treaties, Fractured World Order, and the Mirage of Protection

by Sakshi Bagdi

Lawyer | Dispute Resolution Enthusiast | Legal Researcher

For a long time, foreign investors have relied on international treaties— whether bilateral or multilateral — that promised to protect them from the political and legal risks of doing business in foreign lands. A key player in this framework is the International Centre for Settlement of Investment Disputes (ICSID), the World Bank’s dedicated tribunal for resolving disputes between investors and host states. With over 165 member States and a vast catalogue of awards, ICSID seemed to offer a trustworthy and predictable way to settle disputes. Its mission was simple yet ambitious: provide investors with an apolitical, enforceable remedy when sovereign conduct turns abusive or arbitrary. However, in today’s fractured global order, the idea that investment protection is a sure thing resembles a mirage.

Geopolitical Cracks in the Legal Edifice

Recent incidents such as Russia’s annexation of Crimea, political upheaval in Myanmar, Lebanon’s financial collapse, and Venezuela’s rejection of arbitral rulings raise questions about how effective these treaties are. These episodes reveal that when states face geopolitical crises, sanctions, or collapse, the enforcement of treaty protections becomes a function of political will rather than legal procedure. In such environments, states often disregard treaty obligations when they conflict with domestic priorities or geopolitical strategies, showing that the effectiveness of investment treaties depends less on their legal intricacies and more on the shifting dynamics of power, politics, and diplomacy. The old assumption that Investor – State Dispute Settlement (ISDS) mechanisms can stand above politics is buckling under the weight of real-world defiance.

The Ukraine-Russia conflict has generated some of the most dramatic examples of this breakdown. After Russia annexed Crimea in 2014, Ukrainian companies like Naftogaz, Oschadbank, and DTEK Krymenergo sought compensation for the loss of their assets through ICSID. Fast forward to 2023, and Naftogaz secured an impressive $5 billion in a ruling against Russia.  But the triumph was largely symbolic as recovery has proven exceptionally difficult due to legal and geopolitical constraints. One major obstacle is sovereign immunity, which protects Russian state assets abroad unless they are used for commercial purposes. This makes it nearly impossible to seize diplomatic or culturally significant assets. In France, for example, Naftogaz received court approval in April 2025 to enforce the award and register mortgages on Russian state-owned properties worth over €120 million—but actual liquidation remains unlikely due to immunity challenges . Additionally, international sanctions aimed at freezing Russian assets have a paradoxical effect: while they help locate the assets, they also legally restrict access to them. Enforcement requires special licenses and cooperation from local governments, further delaying recovery efforts. Even though the UK court recognized the arbitration award, the sanctions regime and immunity laws prevent direct recovery. The result is a patchwork of partial legal victories without actual compensation—a legal win now trapped in a geopolitical and diplomatic deadlock.(see also and also) Now, Consider Myanmar's situation,  the military coup of 2021 rendered its judiciary illegitimate in the eyes of much of the international community. Foreign investors, even those protected by treaties, found themselves with little recourse as the legal landscape crumbled around them.

In Lebanon, de facto capital controls and a paralyzed judiciary during its financial crisis left foreign investors without reliable legal recourse, despite the country’s ICSID membership and investment treaties.

Now even though officials from ICSID often point out that more than 90% of arbitral awards are complied with, this figure doesn't tell the whole story. There are some high-profile exceptions for which Venezuela offers a striking example: although ExxonMobil initially secured a $1.6 billion ICSID award for expropriated assets, most of it was later annulled, and U.S. courts blocked enforcement (see)—showing how even major victories can dissolve in legal and political resistance. Similarly, Pakistan's $5.9 billion award related to Tethyan Copper faced enforcement challenges abroad, including asset freezes in regions like the British Virgin Islands (see also).While most states comply, those that don’t – tend to be involved in high-stakes, geopolitically sensitive cases, rendering legal enforcement an uphill battle.(see)

These cases expose a deeper structural fragility in the investment protection regime (see). The idea that arbitration offers a neutral way to mitigate geopolitical risk is becoming less convincing. Giving the fact that treaties lack self-enforcement, and the power of an award is only as strong as a government's willingness to respect it.  As wars proliferate and states become more willing to challenge international rulings, even favourable awards are reduced to diplomatic bargaining chips, in such context, treaty compliance is no longer treated as a neutral legal duty but as a strategic concession, with states assessing whether compliance aligns with their broader security and foreign policy objectives. This shift means that even favourable arbitral awards risk becoming entangled in realpolitik as seen in above examples, where compliance becomes a function of leverage rather than law. (see and also)

The erosion has accelerated under Donald Trump’s second presidency (see also). He’s brought back the bold nationalism and transactional approach from his first presidency but seems to have fewer limitations this time around. Trump has openly criticized what he terms globalist economic entanglements, pushing for a U.S. retreat from treaties that include investor-state dispute mechanisms (see and also). Even the weakened protections in the United States- Mexico-Canada Agreement (USMCA), which replaced North American Free Trade Agreement (NAFTA), are now under reassessment as Trump signals a desire to limit international arbitration, especially when it involves U.S. regulatory issues (see). Perhaps more damaging is the broader effect of Trump’s foreign policy—his aggressive recognition of contested sovereignties, such as the 2025 U.S. backing of Israeli annexation claims in the West Bank, has normalized legal instability and set dangerous precedents for states considering similar moves elsewhere. In a world where treaties are only honoured if politically convenient, investment protection becomes less about law and more about alignment.

Legal Incoherence and Investor Privilege

At the same time, ICSID and similar tribunals began facing criticism for their inconsistent decisions. Cases with almost identical circumstances sometimes produce significantly different outcomes, largely due to variations in treaty language, tribunal make-up, and procedural norms. The incidents of forum shopping—where investors choose the most favourable legal jurisdiction—are common. Take the Yukos v. Russia case as an example, where shareholders had secured a $50 billion award after years of litigation—but have spent over a decade trying to enforce it across European jurisdictions, often facing reversals or delays.

Additionally, there's a troubling imbalance in how these treaties function. While they are set up to protect investors, they rarely offer effective mechanisms to hold them accountable. For instance, in Myanmar, companies covered by these treaties faced criticism for being involved in human rights abuses after the coup, yet there were no legal paths for addressing this behaviour (see for example). Although there have been rare cases, such as Urbaser v. Argentina, where tribunals accepted that states could counter-sue investors for human rights issues, but these instances are exceptions rather than the rule, lacking clear procedures and consistency.  A one-way model that protects capital but remains blind to corporate misconduct cannot sustain legitimacy in today’s climate.

A Global Pushback

This growing disillusionment with investment treaties is prompting several countries to reconsider their participation. States including Bolivia, Ecuador, Venezuela, and most recently Honduras have formally withdrawn from ICSID, citing issues like bias in the system and challenges to their regulatory authority. In Europe, concerns over climate policy and internal legal coherence have led countries like Italy, France, Germany, and the Netherlands to withdraw from the Energy Charter Treaty. These states argue that the old system is no longer useful in its current form, emphasizing the need for accountability and environmental protection. 

Although there are efforts to reform these systems, progress is sluggish.  ICSID’s 2022 rule revisions introduced transparency measures and curtailed procedural abuse. The world of investment protections is at a crossroads, and finding a new balance that serves investors while ensuring accountability is more important than ever. UNCITRAL’s Working Group III is exploring a standing multilateral investment court with an appellate mechanism, designed to inject consistency and legitimacy into the system (see also), however, resisted not only by the U.S. administration but also developing countries wary of yet another centralizing institutional framework (see). Meanwhile, national courts are reasserting control by invoking public policy exceptions to delay or block award enforcement under the New York Convention. Arbitration is no longer insulated from domestic legal systems—and perhaps never truly was.

The Investor Response: Shift from Protection to Strategy

Investors, in turn, are adjusting. Political risk insurance—once a fallback—is now considered essential. Joint ventures with state-owned enterprises help localize operations and shield projects from legal backlash. Environmental, Social, and Governance (ESG) metrics are being adopted, not just to attract funding, but to pre-empt legal and reputational risks (for example). The calculus is shifting. Legal protection is no longer enough; strategic resilience requires a broader mix of political alignment, public legitimacy, and social responsibility. This shift is directly linked to the weakening reliability of investment treaties. As treaties lose their effectiveness in guaranteeing protection due to enforcement challenges, geopolitical tensions, and states’ increasing willingness to defy awards. Investors can no longer assume that legal frameworks alone will secure their interests. Instead, they are building layered defences.

Reimagining Investment Protection Before It Collapses

Ultimately, the global investment protection regime is at a moment of reckoning. Treaties are political instruments. They can encode rights, but they cannot guarantee results. In an era where wars are fought with impunity, where economic sanctions are wielded like weapons, and where arbitral awards are met with indifference or defiance, the illusion of legal certainty is wearing thin. The credibility of the entire system rests on its ability to adapt to this new reality. (see)

What is needed is a shift from a “protection at all costs” mindset to a “protection with accountability” model. Treaties should include automatic enforcement mechanisms, such as regional hubs or standing courts. At the same time, they should embed clear provisions that tie treaty protections to state conduct, including prohibitions on acts of aggression and gross human rights abuses. This does not mean eroding legal certainty but aligning it with legitimacy: ensuring that states upholding their international obligations are treated differently from those that systematically undermine them, while preserving the baseline protections offered by customary international law.

The U.S. Model Bilateral Investment Treaty (available here) offers a blueprint for this reimagining. By incorporating environmental and labour standards within treaty frameworks, it signals that investment protection need not come at the expense of public interest regulation and sustainable development. This model demonstrates how treaties can move beyond merely shielding capital to actively supporting global public goods and aligning foreign investment with environmental, social, and governance priorities. It also underscores the potential for treaties to embed counterclaim mechanisms, empowering host states to address investor misconduct, environmental degradation, or complicity in human rights violations within the arbitration framework.(see also)

As demonstrated by Ukraine’s strategic use of investment treaties to hold Russia financially accountable for its unlawful invasion and occupation of Crimea, treaties can become tools for enforcing international norms rather than bypassing them. By leveraging bilateral investment treaties, Ukraine transformed the ISDS system from a passive mechanism of protection into an active means of accountability, showing that even in a fractured world order, law can serve as a form of resistance against aggression and lawlessness. This example underscores a vital lesson: treaties should explicitly integrate provisions that require states to uphold international law—including prohibitions on aggression, respect for sovereignty, and protection of human rights—as a condition for enjoying treaty protections themselves. Such reforms would not erode legal certainty but align it with legitimacy, ensuring that treaties support a rules-based order rather than enabling its erosion.

If investment treaties are to survive and remain credible, they must evolve from instruments wielded at states’ convenience into frameworks that hold states to account. In doing so, investment law can reclaim its relevance, shifting from the mirage of protection to a platform that actively defends stability, justice, and the international rule of law in a world that urgently needs it.

A practical pathway to this transformation is to embed explicit clauses within treaties that condition their protections on compliance with core international legal obligations—such as prohibitions on aggression, respect for sovereignty, and adherence to human rights norms. For example, treaties could specify that a state engaging in unlawful use of force or systemic human rights abuses would temporarily forfeit its ability to invoke treaty protections for its investors or access ISDS mechanisms until it restores compliance. This approach aligns legal certainty with legitimacy, ensuring that treaties support a rules-based order while preserving investor confidence in stable, law-abiding environments. By making treaty benefits contingent on good-faith adherence to international norms, investment treaties can evolve into instruments that reinforce, rather than undermine, the global legal standards essential for a just and resilient international system.