Sanctions: A Legal Chess Play

The European Union (EU) has enforced a comprehensive set of sanctions against Russia. These sanctions are designed to impact multiple sectors, such as finance, energy, and the military, with the goal of exerting economic and political pressure. Significant measures include asset freezes, travel bans on specific individuals, and limitations on Russian access to EU capital markets and technology. On 24 June 2024, the EU introduced its 14th package of restrictive measures (Regulation 2024/1745). Of particular importance in the field of dispute resolution are the measures aimed at EU operators, including those in Cyprus.

Background: Article 248 of Russia’s Arbitrazh Procedure Code

Article 248.1 of Russia’s Arbitrazh Procedure Code seeks to enable Russian courts to override foreign arbitration agreements and exclusive forum clauses, granting them exclusive jurisdiction over disputes related to sanctions on Russian individuals or entities. When a party is subject to sanctions by a foreign state, this article allows Russian courts to deem any prior agreements to resolve disputes outside Russia as “unenforceable.” This provision has been invoked in two key scenarios:

When a Russian entity has a claim against a counterparty from a designated "unfriendly" country.
When a Russian entity is subject to a claim initiated by a counterparty in accordance with an agreed dispute resolution procedure outside of Russia.

Background: Presidential Decree No. 302

Recently, Russia issued Presidential Decree No. 302, titled "On Temporary Management of Certain Property" ("Decree 302"), which targets the assets of foreign investors within Russia. Regulation 2024/1745 specifically addresses Decree 302 and highlights the potential financial impact on EU companies.

UniCredit v RCA

Prior to the 14th package of restrictive measures, the UK Supreme Court (UKSC) rendered its decision in UniCredit Bank GmbH v RusChemAlliance LLC, affirming an anti-suit injunction issued by the Court of Appeal aimed at preventing the defendant from pursuing proceedings in Russia in contravention of an arbitration agreement. While this decision underscores the importance of honouring arbitration agreements, its practical impact hinges on whether Russian courts and litigants choose to respect and enforce the injunction issued by a foreign jurisdiction.

Regulation 2024/1745: Introduction of Articles 5ab, 11a and 11b

Article 5ab provides the following:

"1. It shall be prohibited to directly or indirectly engage in any transaction with a legal person, entity or body referred to in point (a), (b) or (c), of Article 11(1) that lodged a claim before a Russian court against a natural or a legal person, entity or body referred to in point (c) or (d) of Article 13 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.

2. Unless otherwise prohibited, the prohibition in paragraph 1 shall not apply to transactions that are: (a) necessary for the purchase, import or transport of pharmaceutical, medical or agricultural and food products, including wheat and fertilisers, whose purchase, import and transport is allowed under this Regulation; (b) 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, provided that such transactions are consistent with the objectives of this Regulation and Regulation (EU) No 269/2014; (c) without prejudice to point (b) of this paragraph, strictly necessary to recover damages pursuant to: (i) Article 11a or 11b of this Regulation; or (ii) Article 11a of Regulation (EU) No 269/2014."

Article 11 has been amended via the inclusion of article 11(a) and article 11(b), which provide the following:

"Article 11a.

Any person referred to in point (c) or (d) of Article 13 shall be entitled to recover, in judicial proceedings before the competent courts of the Member State, any damages, including legal costs, incurred by that person as a consequence of claims lodged with courts in third countries by persons, entities and bodies referred to in point (a), (b) or (c) of Article 11(1), 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."

"Article 11b

1. Any person referred to in point (c) or (d) of Article 13 shall be entitled to 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.

2. Member States shall not be liable for judicial decisions rendered in accordance with paragraph 1 or for the enforcement of such decisions. Member States shall not comply with judgments, arbitral awards, including investor-State arbitral awards, or other judicial decisions which hold them liable contrary to the first sentence of this paragraph."

Commentary: Cyprus Perspective

Article 5ab of the amended Regulation 833/2014 introduces a prohibition on any direct or indirect transactions with individuals or entities that have filed claims in Russian courts under Article 248 or similar laws. This includes contracts or transactions influenced by EU sanctions, as specified in Regulation 833/2014 and Regulation 269/2014. Consequently, companies resorting to Article 248 will face a ban on transactions. Nevertheless, there are specific exceptions to this ban. These include essential activities such as trading in pharmaceuticals, medical supplies, food, and agricultural products. Additionally, exceptions are made for transactions necessary for legal proceedings in EU member states, such as Cyprus, including enforcement actions. Evidently, it is uncertain whether article 5ab will effectively discourage Russian entities from using Article 248, especially in respect with entities already facing EU sanctions.

Article 11b establishes a process for seeking damages from Russia or Russian entities that have gained from Decree 302 or similar Russian legislation. Under this article, EU companies affected by Decree 302 or equivalent laws can potentially pursue compensation through EU domestic courts. It is important to note that Article 11b applies “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." The language of Article 11b leaves room for interpretation, and its future application and enforcement are still uncertain.

The content of this article is valid as of the publication date mentioned above. It is intended to provide a general guide and does not constitute legal or professional advice, nor should be perceived as such. We strongly recommend that you seek professional advice before acting on any information provided.

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