EU Sanctions Against Russia: A Battle for the (Sanctioned) Russian Arbitration Users

EU Sanctions

I. Introduction

It may have been an unexpected outcome of the annexation of Crimea and military action taken in Ukraine by Russia but it is definitely an existing one. European Union (the “EU”) sanctions against Russia have a considerable impact on how some companies’ arbitration disputes are administered in Europe. Institutions like the Arbitration Institute of the Stockholm Chamber of Commerce (the “SCC”), the ICC International Court of Arbitration (the “ICC”) or the London Court of International Arbitration (the “LCIA”) ran into serious issues when administering disputes, which involved parties sanctioned by the EU. These institutions have recently (on 17 June 2015) published a joint article explaining that Russian parties should not be hesitant to arbitrate in Europe because the “integrity of the process of [these] respective institutions remains the same, as does the impartiality and independence of the procedure”. This blog post will elaborate on why this common “memorandum” was adopted.

II. EU Sanctions

The EU sanctions were first imposed upon Russia in March 2014 (Council Regulation No 269/2014 and Council Decision 2014/145/CFSP) together with the USA and Canada. These mainly included bans on travel and financial sanctions affecting companies and individuals connected with the events leading to the annexation of Crimea and a military coup in Eastern Ukraine. These bans affected big players such as Sperbank, Rostec, Gazprom, Lukoil or Rosneft. In September 2014, the list of companies and individuals was expanded especially with regard to arms manufacturing and trade companies. Sanctions imposed upon these companies include the freezing of accounts and visa bans, hindering any business in the sanctioning countries. The EU, USA and Canada were joined by Switzerland, Japan and Australia later on during 2014. For a chronological study of all amended EU sanctions, please see this link.

At this point, it is also important to mention that, from the international law perspective, these sanctions remain so-to-say “unilateral” because none have been passed by the Security Council (for obvious reasons, which the readers of this blog understand). The United Nations General Assembly did pass a Resolution on 27 March 2014 (A/RES/68/262) condemning Russia’s actions in Ukraine but it remained up to every UN state to adopt sanctions against Russia. Thus, no “multilateral” united front of the UN was adopted (terms “unilateral” and “multilateral” used by Mercédeh Azeredo da Silveira here).

III. Procedural and Substantive Effects of the Sanctions in Arbitration

Coming back to arbitration and the EU Sanctions specifically, two groups of problems may arise: procedural (a) and substantive (b).

(a) Procedural/Practical Problems

By procedural problems I mean the mentioned bans on visa and freezing of assets. Accordingly, the Russian parties to arbitration will not be able to pay advances on administrative costs of institutions and arbitrator’s fees because their European assets are frozen and/or the institution’s bank declines to provide business transactions with a Russian company on the EU Sanction list. Moreover, if the place of arbitration is located in Europe (be it London, Paris, Geneva or Stockholm), an executive of a Russian company on the EU Sanction list would not be able to attend a hearing because of travel restrictions. Additionally, as Justin D’Agostino, Brenda Horrigan and Rebecca Soquier mention, arbitrators holding the nationality of the sanction imposing states may decline to act as arbitrators because they may feel their impartiality or independence is affected (see a related article on Kluwer).

(b) Substantive Problems

Naturally, arbitrations administered by institutions like the ICC, the SCC or the LCIA are located in the EU and must act in accordance with EU law. The same goes for arbitrators conducting arbitrations with the lex fori being in an EU state. A substantive contract obligation of a Russian party could be affected by art. 2(1) in conjunction with art. 2(5) of the EU Council Decision 2014/145/CFSP:

“1. All funds and economic resources belonging to, owned, held or controlled by natural persons responsible for actions which undermine or threaten the territorial integrity, sovereignty and independence of Ukraine, and natural or legal persons, entities or bodies associated with them […] shall be frozen.

5. Paragraph 1 shall not prevent a [sanctioned entity] from making a payment due under a contract entered into prior to the date on which [a sanctioned entity] was listed [as sanctioned], provided that the Member State concerned has determined that the payment is not, directly or indirectly, received by a [sanctioned entity].” (emphasis added)

Similarly important art. 11(1) of the Council Regulation No. 833/2014 provides that:

“1. No claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the [EU Sanctions], […] shall be satisfied, if they are made by [a sanctioned entity].”

In other words, if a contractual performance is affected by the EU Sanctions, sanctioned Russian parties cannot claim compensation from their counterparts. However, art. 11(3) then goes on to state that this is without prejudice to the right of the [sanctioned entities] to judicial review of the legality of the non-performance of contractual obligations […]” (emphasis added).

Nevertheless, some ask the question whether the arbitrators must be bound by these “unilateral” sanctions. In fact, sanctions are not adopted by the UN Security Council and are, thus, not a part of transnational public policy (see here).

IV. Response of the Arbitral Institutions

Rosneft, as a sanctioned Russian company, was the first to announce on 30 October 2014 that it refuses to arbitrate its disputes in a country, which sanctioned Russia. There was also an attempt to force Russian legislation, which would prohibit choosing a law of any of the sanctioning jurisdictions as governing law of contracts. One can understand Russian companies not willing to arbitrate in the EU because of the procedural and substantive issues mentioned previously. It has been suggested that Hong Kong, specifically the Hong Kong International Arbitration Centre (the “HKIAC”), will benefit from the influx of Russia-related arbitration. Hong Kong offers undeniable benefits to Russian sanctioned companies: individuals get visas on arrival and no accounts are frozen because Hong Kong did not adopt sanctions against Russia. The HKIAC reacted promptly, shortly after the sanctions were introduced, it unveiled its Russian translation of the 2013 Administered Arbitration Rules. Thus, the battle for the (sanctioned) Russian arbitration user has begun.

In light of the above, a common pamphlet by the three strongest European arbitration institutions (ICC, LCIA and SCC), inviting Russian parties to these institutions, comes without any surprise. This article mentions, referencing the Cold War, that:

History teaches us that trade and commercial relations will develop regardless of political system, priorities or even political conflict.” (p. 2)

It also argues, on a more practical point, that the sanctions do not bring a substantial change to the administration of arbitral proceedings. Whereas the three institutions are striving to act in compliance with their regulators and their banks, who handle their deposit money. The article goes on to explain that, because of the sanctions, all three institutions check parties and related entities against a list of sanctioned individuals and entities once a request for arbitration is filed (p. 6). Most importantly, the article states that even if a party is found on the list, it is not per se prevented from filing a request for arbitration with the ICC, LCIA or SCC(p. 6, emphasis added)The relevant Russian party is advised to inform the institution before filing the request. The party is then advised to apply for an exemption from the EU sanctions regulation to the competent authority, which can unfreeze “funds intended exclusively for payment of reasonable professional fees or reimbursement of incurred expenses associated with the provision of legal services” (art. 2(3,b) of the EU Council Decision 2014/145/CFSP).

So from the perspective of a Russian (sanctioned) business owner, who is about to embark upon international arbitration, the question is simple. Does it go with the traditional European seats  and institutions accepting the risk of not getting the mentioned exemption from the EU sanctions regulation or does it go to Hong Kong without the additional hustle.

written by Peter Plachy 

One Comment

  1. A very thought provoking post Peter.

    I can’t help but notice that the situation Russian investors face now mimics to a certain extent the position Iranian investors were facing during the collapse of the Shah of Iran in 1979. With the expropriation of US Corporate oil pipelines by the Ayatollah, exacerbated with the captured US hostages in the Embassy in Iran, the US ploughed through the UN and got all of Iran’s money (both banking and in non-banking entities) frozen.

    The US Courts pronounced various judgments in the lex situs of the US Corporations, but even then the US Foreign Sovereign Immunities Act (which put into question the effectiveness of attachment of any US judgment to the frozen assets) and not to mention the potential loophole of the exact basis for the US courts to have jurisdiction over such disputes rendered the dispute with the US and Iran lingering for over 400 days. It was only when Algeria stepped in as a mediator, with the Algeria Accords being signed, did cooler heads prevail and the assets were unfrozen (to a certain extent to allow Iran to defend claims) in the established subsequent Iran-US Claims Tribunal, thereby paving the way for some normalcy to regain.

    I fear the Russian stalemate will continue given the aggressive stance adopted by the EU and Western countries (no less from Russia), thereby leaving Russian investors hung dry with their arbitrations. As such, the current predicament could only go one of two ways – going to a non-sanctioning country as you suggested e.g. HKIAC or a neutral country acting as a power player to broker peace like Algeria did in the Iran-US dispute for the sake of allowing the arbitrations to continue and as you put it in the article to allow “commercial relations” to develop “regardless of political system, priorities or even political conflict.”

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