Leigh and Zuhair's article was published in Solicitor's Journal, 13 September 2023, and can be found here.
Russia’s Sanctions Countermeasures and International Commercial Arbitration
The proliferation of economic sanctions against Russia, arising from the conflict in Ukraine, has led to several legal and practical issues. Thes present unprecedented challenges for practitioners and commercial parties involved in international arbitration.
While navigating the procedural and substantive implications of economic sanctions imposed by the UK, EU and the US has been of concern to arbitrators, less attention has been paid to the 2020 Russian countermeasures, or so-called countersanctions.
This article discusses, from an English practitioner’s perspective, the key elements of Russian countermeasures, how they may affect arbitral proceedings, the immediate and long-term implications of these measures, and the options available to Western practitioners and parties.
Russia has continuously updated its countersanctions regime against “unfriendly countries” in response to the imposition of sanctions against the Russian state, individuals and entities.
In June 2020, an amendment to the Arbitrazh Procedural Code of Russia (“APC”) introduced provisions intended to blunt the application of sanctions against designated individuals and entities, and confer exclusive jurisdiction on Russian commercial courts over disputes that would otherwise contractually be referred to litigation or arbitration outside of Russia. This is supplemented by mechanisms that enable any sanctioned person or entity subject to current or potential proceedings outside of Russia to request the Arbitrazh court to prohibit or discontinue those proceedings.
These measures have a two-fold effect: they create a new conflict rule attributing exclusive jurisdiction to the Arbitrazh court in cases involving Russian sanctioned parties or application of Western sanctions; and a procedure akin to an anti-suit injunction. It appears that any award or judgment rendered in proceedings conducted without regard to provisions of Russian law will not be enforceable in Russia, presumably on public policy grounds.
These measures appear to permit sanctioned individuals and entities, otherwise subject to the jurisdiction of overseas courts or tribunals, to opt unilaterally for the Russian Arbitrazh court, obtaining immunity against enforcement in Russia of foreign orders. The explanatory note to the draft of the amendment to the APC states that these measures were introduced because sanctions imposed against designated individuals “actually deprive them of the possibility to protect their rights in courts of foreign states, international organizations or arbitration outside of Russia.” Although open to debate, it does clearly explain the intent behind these measures.
Concerns have been expressed regarding intrusions into private law relationships, by permitting parties to circumvent their arbitration or forum selection agreement. The apparently low threshold for Russian Courts to assert exclusive jurisdiction, despite an express agreement, poses a real risk to the integrity and legitimacy of international arbitration.
Jurisprudence emerging from the Russian courts suggests that these measures will be followed within Russia. In Ultransmash v PESA in 2021, the Russian Supreme Court held that where international sanctions apply against an individual or entity, that party is necessarily precluded from accessing a fair trial overseas. The sanctioned party need not prove any risk of denial of justice in arbitral proceedings seated outside Russia - the mere fact of its designation is enough to presume injustice. Strikingly, the court in Ultransmash received amicus curiae submissions from the Vienna International Arbitration Centre (“VIAC”) and the Russian Arbitration Association, both of which had argued in favour of a more restrictive approach to the interpretation of the APC countermeasure.
Although Supreme Court decisions in Russia are not typically binding, the Court’s expansive interpretation in Ultransmash has been applied in Russia’s lower courts. In 2022, an EU sanctioned Russian business obtained an anti-suit injunction. Although the Moscow Arbitrazh court initially refused relief and dismissed the claim, in September 2022, the Moscow Arbitrazh Court of Cassation overruled that decision and held that, in line with Ultransmash, the Russian business was significantly harmed and deprived of access to justice because of the imposition of sanctions.
In 2023, the Moscow Commercial Court found that Siemens Mobility was bound to fulfil its contractual obligations owed to state-owned (and sanctioned) Russian Railways (RZD). In assuming jurisdiction a year earlier, the Court disregarded the arbitration agreement that designated Austria as the arbitral seat. The Court held that a significant risk existed that the dispute would not be resolved in a fair and just manner in VIAC arbitration proceedings.
Options for Western parties
The countermeasures pose something of a dilemma for Western parties. A straightforward solution might be to initiate proceedings in Russia. However, there are myriad political, legal and practical reasons why a foreign claimant would not consider that an effective solution. The likelihood of injustice and detriment is manifest.
Litigating in another forum where there are no sanctions concerns seems equally impractical. The number of “arbitration friendly” venues untouched by sanctions is ever-dwindling. Further, a defendant party may refuse to consent to such a change of venue for tactical reasons, such that this might only offer a solution for future disputes under new agreements.
A more pragmatic solution may be to ignore the countermeasures altogether. As it is, the new conflict rule may be expected to be ignored by foreign courts. An English court, for example, applies its own private international law rules and arbitral tribunals, seated outside Russia, determining their own jurisdiction will likely look to parties’ agreements rather than rules of a foreign court. The rule runs counter to well-established English law rules that uphold parties’ contractual choices of jurisdiction. In certain circumstances that result may be mandated by, for example, the Hague Convention of 30 June 2005 on Choice of Court Agreements.
Disregarding the Russian countermeasures may jeopardise enforcement. Russian courts will likely refuse to recognise arbitral awards or foreign court judgments that are made notwithstanding these measures and/or a specific “anti-suit” order. This risk may not be significant. A party dealing with a Russian counterparty would likely be pessimistic about the prospects of enforcement in Russia, especially against state or para-public entities, and seek out assets situated abroad. The question then becomes whether enforcement may successfully be resisted before a foreign court by relying on Russian public policy. For the reasons discussed above, this seems unlikely, but uncertainty can add to the cost, complexity and time it takes for enforcement.
For prospective agreements, parties should consider including terms dealing with the effect of parties becoming designated. Such terms are already increasingly common in international commercial agreements, usually including a right to terminate when a party becomes subject to sanctions. This may limit the possibility for future disputes, but the termination of an existing commercial contract does not typically entail a termination of the arbitration agreement which international arbitration practice (and many national laws) treat as being a separate agreement that can survive post-termination.
Finally, an interesting question may arise where an award made in Russia, but governed by a foreign law which imposes sanctions, such as England, is set aside by a Russian Court on grounds of public policy. There are precedents in well-known cases such as Hilmarton (1994) before French Courts and Yukos before Dutch Courts, where arbitral awards that have been set aside by national courts at the seat may still be enforced in other jurisdictions.
In conclusion, there is serious scope to doubt that the Russian countermeasures will have much bite outside of Russia, where they are likely to be perceived as unjustified intrusions into party autonomy and the sanctity of arbitration. However, commercial parties will need to be alive to risks around enforcement in Russia, and possible complications in enforcing against Russian-owned assets in jurisdictions that have imposed sanctions. This requires sufficient due diligence to identify the existence of feasible assets in jurisdictions unlikely to give effect to public policy arguments based on the countermeasures.
Regardless, arbitration practitioners and users need to understand the framework of these measures. This is to identify and, where possible, anticipate and avoid tactics that may destabilise and delay arbitration and/or enforcement proceedings.