Russia’s annexation of Crimea, the occupation of the Donbas region, the full-scale invasion of Ukraine and the subsequent sanctions imposed by the EU and other states against Russia have led to growing tensions between the EU and Russia and to a battle over jurisdiction and enforcement with no end in sight.
1. Starting Point: The annexation of Crimea and the EU sanctions
After Russia’s annexation of Crimea and the invasion of the Donbas region in 2014, the EU imposed economic sanctions on the Russian Federation and on certain Russian persons and entities.[1]
Subsequently, a very broad interpretation of Russian public policy made it increasingly difficult to enforce foreign arbitration awards in Russia. For example, in 2015, the Supreme Court of the Russian Federation held that an award, which leads to the bankruptcy of a Russian company violates Russian public policy and is not enforceable because of the adversarial effect the enforcement would have on the Russian economy.[2] In 2018, the Russian Supreme Court decided that a foreign arbitral award which allowed the enforcement of an agreement between a foreign claimant and a Russian entity beneficially owned by the Russian Federation violated Russian public policy because the execution upon the property of such a state-owned entity could cause damage to the Russian Federation.[3]
2. Russian Federal Law 171-FZ
In 2020, the Russian Parliament adopted Federal Law 171-FZ “to protect the right to access to justice of sanctioned parties” in response to an allegedly unfair treatment of Russian parties in arbitration proceedings and in litigation outside the Russian Federation caused by the sanctions. Law 171-FZ added Articles 248.1 and 248.2 to the Russian Arbitrazh Procedure Code (“APC”) and the new provisions entered into force on June 8, 2020.[4]
- Article 248.1 APC provides for the exclusive jurisdiction of the Russian state commercial courts (“arbitrazh courts”) over disputes involving sanctioned persons or disputes relating to sanctions imposed by foreign states, state associations and/or unions, and institutions of foreign states. If, from the Russian perspective, the Russian party will be discriminated in the foreign proceedings, the exclusive jurisdiction even applies to disputes for which the parties had agreed on the jurisdiction of a foreign court or for which an arbitration agreement was concluded.[5]
- Article 248.2 APC prohibits to initiate or continue foreign proceedings against persons on whom restrictive measures have been imposed. Article 248.2(1) APC entitles such persons to apply with the arbitrazh courts for an injunction prohibiting the initiation or continuation of court or arbitral proceedings outside Russia. Upon application, the arbitrazh court may award the applicant the amount sought by the other party in the foreign proceedings as a penalty for failure to comply with the injunction.[6]
- The law does not per se prohibit the recognition and enforcement of foreign court decisions or arbitral awards against Russian parties in Russia. However, Article 248.1(5) APC allows such recognition and enforcement only if the sanctioned party had either initiated the foreign proceedings or had failed to object to the jurisdiction of the foreign court or tribunal by applying for an injunction with the arbitrazh court to prohibit the other party from bringing proceedings outside Russia or from continuing such proceedings. [7]
3. Introduction of broad public policy exception to the enforcement of foreign judgments and arbitral awards in Russia
Although the enforcement of foreign arbitral awards in Russia was already difficult due to the broad public policy exception, the Russian Federal Constitutional Law authorized the Russian Constitutional Court in July 2020 to prohibit the enforcement of foreign or international court judgments and arbitral awards that would be enforceable in Russia under the existing statutory rules if
- the enforcement contradicts Russian public policy,
- the foreign decision imposes obligations on the Russian Federation either directly or indirectly via federal state authorities or state-owned organizations, or
- the foreign decision is based on a deviation from the usual meaning of the terms used in an international treaty, trade usage or foreign law on which the foreign decision relies or from the context or the purpose or content of such terms.[8]
4. Broad interpretation of the exclusive jurisdiction of the arbitrazh courts by the Russian Supreme Court
Early decisions of Russian courts applying Article 248.1 and 248.2 APC had held that the applicant who considered a jurisdiction or arbitration clause to be invalid had to prove circumstances which showed that the sanctions did in fact create obstacles to access to justice. The lower courts did not consider the imposition of sanctions alone to be enough to subject a dispute to the exclusive jurisdiction of the Russian arbitrazh courts and to render a jurisdiction or arbitration clause unenforceable.
In December 2021, this interpretation was rejected by the Supreme Court of the Russian Federation. The court held that the imposition of sanctions is enough to render a jurisdiction or arbitration agreement unenforceable. For the court, the sanctions adversely affect the position of Russian individuals and legal entities in foreign proceedings as the sanctions have a negative effect on the reputation of sanctioned individuals and entities. Allegedly, the sanctions thus prevent Russian parties from enjoying the same level of protection as their opponents in the foreign proceedings.
Consequently, the mere possibility that sanctions can play a role in the foreign proceedings is sufficient to render a foreign jurisdiction or arbitration clause unenforceable in Russia.[9]
5. The fourth sanctions package of the EU
The invasion of Ukraine on February 24, 2022, and the annexation of the Donetsk, Luhansk, Zaporizhzhia and Kherson regions of Ukraine led to several expansions of the sanctions (sanctions packages) against Russia by the European Union.
The fourth sanctions package, established by Regulation 2022/428, inserted Article 5aa (1) into Regulation No 833/2014. It prohibited to engage directly or indirectly in “any transaction” with a legal person, entity, or body in or outside of Russia owned or controlled by the Russian Government or the Russian Central Bank. This broad wording raised concern that the administration of arbitral proceedings could be considered a “transaction” in the meaning of Article 5aa (1) of the Regulation.[10]
6. The seventh sanctions package of the EU
In response, the EU clarified the scope of the prohibition to engage in transactions with sanctioned entities in the context of arbitral proceedings in the seventh package of sanctions against Russia on July 21, 2022. The new Article 5aa (3)(g) states that
- transactions strictly necessary to ensure access to judicial, administrative, or arbitral proceedings in a Member State, and
- transactions for the recognition or enforcement of a judgment or an arbitral award rendered in a Member State
are exempt from the sanctions regime and do not constitute a direct or indirect engagement in a prohibited transaction if such transactions are consistent with the objectives of Regulations 833/2014 and 269/2014. [11]
7. Consequences for EU parties
The clarifications did not resolve the underlying conflict. They guarantee that sanctioned parties have access to justice and are treated fairly and equitable in litigation or arbitration proceedings in the EU. However, courts or arbitral tribunals in the EU must apply the mandatory sanctions provisions. Thus, sanctioned Russian parties try to avoid dispute resolution in the EU. The practical consequences for the EU party can be severe.
- If a sanctioned Russian claimant initiates proceedings in Russia based on Article 248.1 APC against a respondent from the EU, the foreign respondent cannot successfully challenge the jurisdiction of the arbitrazh court in the Russian proceedings because for the Russian courts, the mere possibility that the sanctions could adversely affect the position of the Russian claimant in foreign proceedings renders a foreign jurisdiction or arbitration clause unenforceable in Russia and leads to the exclusive jurisdiction of the arbitrazh courts.
The fact that a decision in favor of the Russian claimant will not be enforceable in the EU and many other (western) countries is of little comfort for many respondents. Not only is an unfavorable decision of the arbitrazh court enforceable in Russia against Russian assets of the respondent. It may also be enforceable in other countries which recognize and enforce Russian judgments and in which the respondent has assets. Consequently, many respondents may have to participate in the Russian proceedings to try to minimize the risk of an unfavorable outcome even though the arbitrazh courts lack jurisdiction, do not apply the sanctions provisions, and are biased vis-à-vis parties from “enemy states”.
- Judicial protection against the excessive usurpation of jurisdiction by the Russian courts is not available from the courts in the Member States of the EU. Unlike UK courts[12], EU courts cannot issue anti-suit injunctions to prevent Russian claimants to ignore valid jurisdiction or arbitration agreements and bring claims in Russia. A German court cannot order a Russian plaintiff under threat of a fine or liability for damages to comply with a valid jurisdiction or arbitration agreement and abstain from filing a suit against a German defendant with a Russian arbitrazh court.
Although it is possible to apply for a ruling by a German court that a dispute is (or is) not subject to arbitration in accordance with section 1032(2) German Code of Civil Procedure (ZPO),[13] such a ruling has only declaratory effect and is not enforceable like an anti-suit injunction. It may help to dispel doubts on part of potential arbitrators that arbitration proceedings are admissible, and it may avoid that a potential Russian judgment against the applicant is recognized in Germany, but apart from that a section 1032(2) ZPO ruling is a rather blunt sword.
- In the event a sanctioned Russian party applies for an anti-suit injunction in Russia against a claimant intending to initiate litigation or arbitration proceedings against the Russian party outside Russia, the situation is similarly unsatisfactory. In the Russian proceedings, legal remedies against such an injunction are futile. If the foreign proceedings continue, the fine for failure to comply with the anti-suit injunction (which equals the amount sought in the foreign proceedings) could deprive a successful foreign claimant owning assets in Russia of the fruits of the foreign litigation or arbitration.
- An “anti-anti-suit injunction” by a court of a Member State is not available. The Court of Appeal Duesseldorf recently held that the right to access to justice does not include the protection of (in the case at hand Stockholm arbitration) proceedings from an anti-suit injunction issued or threatened by a Russian arbitrazh court. The court of appeal held that the issuance of an anti-anti-suit injunction is precluded by the principle of territoriality and essential elements of state sovereignty of the third country concerned.[14]
8. Presidential Decree No. 302
On April 25, 2023, Presidential Decree No. 302 authorized the Russian Government to take control of Russian assets owned or managed by persons and entities from “unfriendly” foreign States. The Decree allows a “temporary administration” in case of threats to the national security of the Russian Federation, or when the Russian Federation or Russian individuals are deprived of their ownership rights to assets abroad. According to the Decree, only the Russian President can terminate the administration regime.[15]
9. The fourteenth sanctions package of the EU
It took the EU some time to react to the Russian attempts to protect sanctioned parties from the effects of the sanctions at the expense of EU parties. Council Regulation (EU) 2024/1745 of June 24, 2024 introduced the fourteenth sanctions package which, inter alia, includes provisions aiming to avoid the negative consequences of Russian countermeasures against the sanctions regime for non-Russian parties:
- In response to the excessive usurpation of jurisdiction by Article 248.1 and Article 248.2 APC, a new Article 5ab was added to Regulation (EU) No 833/2014. The new provision allows to impose a transaction ban on Russian parties “meddling with arbitration and court competence rules”.[16] It prohibits “to directly or indirectly engage in any transaction” with a sanctioned party, entity or body
“that lodged a claim before a Russian court against a natural or a legal person, entity or body … to obtain an injunction, order, relief, judgment or other Court decision pursuant to Article 248 of the Arbitration Procedure Code of the Russian Federation or equivalent Russian legislation, in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation or under Regulation (EU) No 269/2014, as listed in Annex XLIII.”
Only transactions which serve humanitarian purposes, or which are “strictly necessary to ensure access to judicial, administrative or arbitral proceedings in a Member State, as well as for the recognition or enforcement of a judgment or an arbitration award rendered in a Member State” or which are necessary to recover damages pursuant to Article 11a or 11b of Regulation (EU) No 833/2014 or Article 11a of Regulation (EU) No. 269/2014 are excluded from the ban.
So far, no sanctioned persons or entities have been added to the list in Annex XLIII which is surprising given the number of disputes in which Russian parties have “meddled with arbitration and court competence rules”.
- In addition to the transactional ban, EU persons and companies which comply with the sanctions provisions, and which are then sued in Russia and have their Russian assets seized, may claim damages from the Russian counterparty in the EU. According to Article 11a of Regulation (EU) No 833/2014, they can
“recover, in judicial proceedings before the competent courts of the Member State, any damages, including legal costs, incurred … as a consequence of claims lodged with courts in third countries by persons, entities and bodies … in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, provided that the person concerned does not have effective access to the remedies under the relevant jurisdiction.”
Whether the damage is caused by a Russian arbitrazh court having jurisdiction under the applicable rules or agreements of the parties or by an arbitrazh court being seized by a sanctioned party based on Article 248(1) and (2) APZ is irrelevant. The courts of the EU will award damages if
- a sanctioned Russian party has lodged a claim with an arbitrazh court,
- the claim was in connection with a contract or transaction affected by sanctions imposed by the EU,
- the arbitrazh court ignored the sanctions and granted the claim, thereby causing damage to the non-Russian party, and
- Russian law does not provide effective legal protection against such a decision by an arbitrazh court.
- If the Russian Government takes control of Russian assets owned or managed by persons and entities from “unfriendly” foreign States in accordance with Presidential Decree No. 302 or similar measures, EU persons or entities can recover damages from those persons, entities or bodies who benefit from the illegitimate temporary management imposed by the Russian Government. Council Regulation (EU) 2024/1745 introduced Article 11b (1) to Regulation (EU) No 833/2014. According to the new provision, nationals of a Member State, legal persons, entities or bodies, inside or outside the territory of the European Union, incorporated or constituted under the law of a Member State can
“recover, in judicial proceedings before the competent courts of the Member State, any damages, including legal costs, caused to that person by any persons, entities and bodies referred to in point (a), (b) or (c) of Article 11(1) that benefited from a decision pursuant to the Decree of the President of the Russian Federation No. 302 of 25 April 2023 as subsequently amended, or Russian legislation related or equivalent to it, provided that such decision is illegal under international customary law or under a bilateral investment treaty entered between a Member State and Russia, and that the person concerned does not have effective access to the remedies under the relevant jurisdiction.”
10. Open questions
Despite the fact that an EU party can claim damages if it suffers damage as a consequence of claims lodged by a sanctioned Russian party with a competent Russian court which refused to apply the sanctions regime, the question remains whether a party from an EU country must first participate in proceedings before a competent Russian court and can claim damages after the – expectedly – negative outcome of the Russian litigation or whether it can avoid to participate in the Russian proceedings without risk.
The fourteenth sanctions package does not deal with this issue. There is no provision like Article 248.1 APC providing for the exclusive jurisdiction of the courts of a Member State for sanctions-related disputes. However, an EU party could argue that due to the war, an agreement providing for the jurisdiction of a Russian court has become inoperative or that it can at least be terminated for cause.
In the past, courts have taken this path in comparable situations. In 1992, the district court Kassel held that an arbitration clause providing for arbitration before the Foreign Trade Arbitration Court at the Economic Chamber of the Socialist Federal Republic of Yugoslavia in Belgrade could be terminated for cause by a party resident in Slovenia because of the state of war prevailing between Slovenia and Serbia at the time. The court believed that in circumstances under which effective legal protection can no longer be expected, a dissolution of an arbitration agreement must be permissible. For the court, the war between Slovenia and Serbia in 1991 had led to far-reaching changes, so that, from the perspective of the Slovenian party, the arbitration agreement assigned the dispute resolution now to a hostile, foreign power. This made it unbearable for the Slovenian party to adhere to the arbitration agreement which had been concluded under completely different circumstances.
Although the EU Member States are no parties to the war on Ukraine, the situation of a party from a Member State of the EU in litigation or arbitration in Russia is comparable, given the fact that Russia considers the EU Member States as “enemy states” and relations between the EU and Russia are very tense and hostile since the beginning of the war on Ukraine. It thus appears possible to successfully terminate an agreement providing for the jurisdiction of a Russian court or to consider such a jurisdiction agreement to be inoperative.
Finally, it is unclear which remedies are available for an EU party which has lost sanctions-related arbitration proceedings in Russia if the award is enforced in Russia. Article 11a of Regulation (EU) No 833/2014 gives the right to claim damages only to EU parties who suffered damage due to a Russian court decision. However, since the situation is similar to the court cases – in particular, Russia will not set aside an award which ignores the sanctions provisions -, one could argue that Article 11a has to be applied by way of analogy to arbitral awards as well.
11. Outlook
With the fourteenth sanctions package, the saga has not come to an end. The EU is currently preparing the fifteenth sanctions package. Whether this package will include provisions dealing with questions of access to justice, procedural fairness and enforcement is not known yet. However, given the great economic importance of sanctions-related disputes, additional provisions would not come as a surprise.
[1] Council Regulation (EU) No 269/2014 of 17 March 2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine; Council Regulation (EU) No 833/2014 of 31 July 2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine.
[2] Baker McKenzie International Arbitration Yearbook 2016/2017, chapter on Russia, para. B 5.
[3] Baker McKenzie International Arbitration Yearbook 2018/2019, chapter on Russia, para. B 6;
[4] See “Disputes involving sanctions against Russian persons must now be settled in the Russian state courts”, Global Arbitration News, July 9, 2020.
[5] Cp. “The consequences of the sanctions against the Russian Federation and of the Russian countermeasures for international arbitration, Global Arbitration News, July 27, 2022.
[6] Cp. “The consequences of the sanctions against the Russian Federation and of the Russian countermeasures for international arbitration, Global Arbitration News, July 27, 2022.
[7] Cp. “The consequences of the sanctions against the Russian Federation and of the Russian countermeasures for international arbitration, Global Arbitration News, July 27, 2022.
[8] Chapter XIII.2 of the Federal Constitutional Law “On Constitutional Court of the Russian Federation”. For details see Baker McKenzie International Arbitration Yearbook 2020-2021, Chapter on Russia.
[9] Baker McKenzie International Arbitration Yearbook 2021-2022, Chapter on Russia; “The consequences of the sanctions against the Russian Federation and of the Russian countermeasures for international arbitration”, Global Arbitration News, July 27, 2022.
[10] “Sanctions against Russia – How to ensure due process of sanctioned parties in court or arbitral proceedings while at the same time enforce the sanctions regime”, Global Arbitration News, December 14, 2022.
[11] “Sanctions against Russia – How to ensure due process of sanctioned parties in court or arbitral proceedings while at the same time enforce the sanctions regime”, Global Arbitration News, December 14, 2022.
[12] See for example Unicredit Bank GmbH v. Ruschemalliance LLC [2024] UKSC 30; Deutsche Bank AG v. RusChemAlliance LLC [2023] EWCA Civ 1144; Commerzbank AG v. RusChemalliance LLC [2023] EWHC 2510 (Comm); cp. “The English Court of Appeal grants anti-suit injunction to enforce Paris seated arbitration, Global Arbitration News, October 26. 2024.
[13] Cp. Court of Appeal Berlin, order of June 1, 2023, SchiedsVZ 2024, 218, concerning a contractual dispute between a German and a Russian party. The underlying agreement provided for arbitration in Vienna. After the German party had terminated the contract to comply with European sanctions, the Russian party initiated court proceedings in Russia, seeking, inter alia, specific performance of the contract and asking for an anti-suit injunction against arbitration in Vienna. The Court of Appeal Berlin confirmed the validity of the arbitration agreement and declared that the arbitration was admissible and proceedings before state courts were excluded.
[14] Court of Appeal Duesseldorf Zeitschrift für das Recht der Außenwirtschaft, Sanktionen und Auslandsinvestitionen (ZASA) 2024, 549. Whether the decision would have been different if the Russian anti-suit injunction had prohibited litigation or arbitration in Germany is unclear.
[15] https://investmentpolicy.unctad.org/investment-policy-monitor/measures/4321/russian-federation-establishes-a-legal-framework-for-temporary-administration-of-assets-owned-by-certain-investors-associated-with-unfriendly-states.
[16] European Commission, Questions and Answers on the 14th package of restrictive measures against Russia, Catchphrase “Transaction ban to protect arbitration”.
