As part of the 14th package of sanctions against Russia adopted on 24 June 2024 as Regulation 2024/1745, the EU has introduced three protective measures to safeguard EU parties from lawsuits and expropriations in Russia:
- Transaction ban. Russian parties that start legal proceedings in Russia in breach of arbitration agreements with EU counterparts will be subject to a transaction ban.
- Compensation for Russian proceedings. EU companies will be able to claim compensation in Member State courts for losses arising from claims brought by Russian parties outside the EU over contracts and transactions affected by EU sanctions.
- Compensation for Russian expropriations. If their assets are placed under temporary management or otherwise expropriated by the Russian Government, EU companies will also be entitled to recover damages in Member State courts from any Russian party who benefits from the expropriation.
Background: A Complicated Landscape for Russia-related Disputes
In 2020, Russia amended Article 248 of its Arbitrazh (Commercial) Procedure Code to grant Russian courts exclusive jurisdiction over disputes involving parties “denied access to justice” in a contractually-agreed forum by sanctions. At the time, observers paid little notice – sanctions related to the occupation of Crimea had been imposed on some Russian businesses in 2014, but the scope and intensity of the measures was limited. Article 248 remained quietly on the books, almost never used, until the massive wave of Western sanctions after Russia’s full-scale invasion in February 2022. Article 248 quickly became a routine tool for Russian parties to extract value from Western counterparties by bringing claims before the Russian courts under the disguise of the alleged effects of anti-Russia sanctions. Vitally, the Russian Supreme Court held in 2021 that a Russian party invoking Article 248 need not prove that sanctions block its access to justice – this is a presumption that has become unrebuttable in practice.
Article 248 also allows Russian parties to obtain anti-suit injunctions from Russian courts to prevent or halt foreign arbitral or court proceedings, with draconian fines (awarded by the courts as a matter of course) in case of breach. In March 2024, for instance, a Russian court issued an anti-suit injunction against Uniper’s affiliates to stop a pending arbitration against Gazprom, coupled with a penalty of €14.3 billion – the value of Uniper’s claim.
Courts in Europe have responded with the tools available to them. In particular, English courts have readily issued anti-suit orders enjoining litigation in Russia, even (according to a March 2024 UK Supreme Court judgment) in support of arbitration seated abroad. And in Germany, courts have granted declaratory relief against Russian parties condemning the breach of an agreement to arbitrate.
Following the international sanctions adopted in response to its invasion of Ukraine, Russia adopted a range of additional measures targeting investors from a long list of “unfriendly” jurisdictions, limiting their freedom to transfer, divest, and exercise control over local subsidiaries. In particular, by means of Presidential Decree No 302/2023, Russia introduced a mechanism that allows the President to introduce external management over assets of “unfriendly States” in response to any threat or actual deprivation or restriction of property rights of the Russian State or Russian legal entities. This tool has been used by Russian authorities to deprive several European companies of control over their assets in Russia. Some investors affected by such measures have brought claims against Russia under investment treaties. But any claims arising from Russian countermeasures face unique challenges, including the apparent partiality of Russian courts, the narrow scope of arbitration clauses in many Russian BITs, and difficulties enforcing awards and judgments against the Russian State.
The New EU Protective Measures
Through Regulation 2024/1745, the EU has introduced three provisions into Regulation 833/2014 (the original Russian sanctions instrument) aiming to protect EU operators from litigation and expropriation in Russia.
1) Transaction ban
The new Article 5ab prohibits all transactions with Russian companies who have invoked Article 248 to litigate in Russia in relation to contracts or transactions affected by EU sanctions.
This “transaction ban” is subject to a few exceptions. It does not apply, for instance, to transactions “strictly necessary” to ensure the recognition and enforcement of judgments and awards rendered in the EU. This would allow, for example, EU companies who have brought arbitration claims against Russian counterparts, such as Gazprom, to enforce eventual awards in the EU.
The goal of the provision is to induce Russian parties to comply with dispute resolution agreements they have signed with EU parties. But for companies already subject to EU sanctions, it is unclear whether this will be a sufficient deterrent.
In addition, the Regulation’s Preamble (at 15) recognizes that the problem of Article 248 is not just procedural, it is substantive: Russian courts frequently ignore applicable law clauses and apply Russian law to the merits of foreign contract disputes, circumventing the effect of Western sanctions. These include the “no claims” provision of Article 11 of Regulation 833/2014 which prohibits the satisfaction of any claim brought by a Russian party under a contract or transaction affected by EU sanctions. By submitting claims to the Russian courts pursuant to Article 248, Russian parties have been able to bypass sanctions and obtain the satisfaction of claims otherwise precluded by the “no claims” provision. The newly introduced Article 11a aims at providing an additional deterrence to this practice.
2) Compensation for Russian proceedings
Article 11a entitles EU parties to recover losses that arise from claims that Russian parties bring outside the EU in relation to contracts and transactions affected by EU sanctions – the same lawsuits targeted by the “no claims” provision. The provision thus creates a new cause of action aimed at counteracting the effect of Article 248. This would allow EU companies who have been sued in Russia in breach of EU sanctions and have had their assets seized to obtain compensation for the resulting loss. Naturally the effectiveness of the cause of action will depend upon the Russian counterparty having assets within the EU.
A claim must be brought before the competent courts of the Member State in accordance with “the relevant provisions of Union and Member State law regarding jurisdiction and court procedures…”. The Regulation thus relies on the pre-existing EU and national laws to determine which court in the EU will be competent to hear the claims.
The interplay between this new cause of action and other EU and Member State laws remains unclear. The Brussels I-bis Regulation is generally inapplicable to claims against defendants domiciled outside the EU (Recitals 13-14). Conversely, under French law, courts have jurisdiction over claims brought by French parties against foreign defendants (Civil Code, Article 14). In Germany, courts can exercise jurisdiction over foreign debtors if the assets are located in the country and the case has a sufficient territorial connection (§ 23 ZPO). For Member States lacking similar bases for jurisdiction (e.g. Italy) the question will be whether the principle of effectiveness of EU law can fill the gap.
This new remedy is intended to be subsidiary. The final proviso of Article 11a specifies that it is available only if the EU party would otherwise lack “effective access to remedies”. This requirement is likely to be met where the contract refers disputes to the Russian courts. A more common and controversial situation will be where disputes are to be resolved by arbitration and losses incurred in Russian proceedings should already be recoverable as damages for breach of the arbitration agreement. Whether the EU party chooses arbitration or seeks compensation under Article 11a, it runs the risk of an anti-suit injunction from the Russian court, with a massive penalty attached.
3) Compensation for Russian expropriation
Article 11b(1) of the Regulation creates a legal avenue to recover in Member State courts losses arising from Russian government’s decisions placing foreign property under temporary administration (pursuant to the above-mentioned Decree 302 or equivalent legislation).
Compensation is to be claimed against the Russian party who benefitted from the decision, even if the loss was caused by the Russian government. The text of Article 11b(1) and the Regulation’s Preamble suggest that damages cannot be recovered from the Russian State itself. Commentary specifically refers to compensation “from those who benefit from the illegitimate temporary management imposed by the Russian Government”. The advantage of this approach is that such assets will not be subject to sovereign immunity.
Like Article 11a, Article 11b(1) defers to the applicable court procedures and jurisdictional rules of each Member State for hearing such claim, and is available only in the absence of other “effective remedies”. The Regulation’s Preamble states that alternative remedies may be available pursuant to bilateral investment treaties. For investors from those EU Member States (including Poland, Estonia, Latvia, Ireland and Croatia) that do not have a BIT with the Russian Federation in force, the Article 11b(1) mechanism would plainly apply. Where a BIT does exist, the question is whether it provides impacted investors an “effective remedy”, ie one that is not practically impossible or excessively difficult to obtain – which would need to be addressed based on the specific language of the BIT’s arbitration provision and the facts giving rise to Russia’s expropriatory measures.
Article 11b(1) also requires that the expropriatory measure be illegal under customary international law.
In anticipation of a backlash from the Russian government and Russian companies, Article 11b(2) provides that Member States shall not be liable for judgments issued by their courts under Article 11b(1), and shall not comply with decisions (including investment treaty arbitration awards) that impose liability on them. These provisions will no doubt generate debate on the interaction between EU law, national law and international law.
Conclusion
The 14th sanctions package has expanded the toolkit available to EU operators for navigating the complex landscape created by Russia’s invasion of Ukraine. New avenues are now open to EU parties seeking to protect their rights and assets against Russian interests, potentially counteracting to some degree the anti-sanctions measures embodied in Article 248 of the Russian Arbitrazh Procedural Code.
