When the East meets the Far East: the Impact of Russian Sanctions on Commercial Arbitration in Asia

Over the course of the last year, sanctions imposed on Russia in response to its intervention in Ukraine have been expanded to include restrictions on some of the largest government-owned entities in Russia's financial, energy and defense sectors. Commercial entities must therefore consider their options for resolving current or potential disputes. In this post, we consider the impact of the sanctions against Russia on the future of dispute resolution for Russian entities and individuals considering doing business in Russia.

The US, EU and Canada first imposed sanctions on Russia in March 2014. Further states have followed suit, and both the substance and territorial scope of the sanctions have since been expanded. Restrictions affect both individuals and corporate entities, notable government owned entities. Russia's financial, energy and defense sectors are affected, which in turn impacts Russian parties' ability to trade and invest outside Russia.

Key issues arising out of the sanctions are:

• The sanctions do not allow parties to excuse themselves from the performance of their contractual obligations.
• The sanctions do not entitle the parties to claim compensation where contractual performance is suspended or terminated as a result of the sanctions.

The sanctions do not prohibit a party from seeking judicial review of whether the non-performance of contractual obligations was in accordance with the sanctions.

Impact on arbitration

It has been suggested that, in response to the sanctions, certain Russian companies will now insist on Russian law to govern any foreign-related contract, and will agree to arbitration only in Russia or other countries that have not imposed sanctions against Russia. While it is by no means clear that this is a universal approach, we are aware of anecdotal evidence that certain Russian parties, and their foreign counterparties, are actively seeking alternative places of arbitration.

First, there are concerns that arbitrators residing in, or holding the citizenship of, states that have imposed sanctions might decline to act in disputes involving sanctioned Russian parties or involving issues relating to the sanctions. Such arbitrators may be concerned about the risk that their own country's sanctions might be seen to affect their impartiality or independence or that any award or orders would be in violation of the arbitrator's own national law.

Second, there is a risk that that any ensuing award would not be enforceable either in Russia (on the grounds that such enforcement would violate fundamental principles of Russian law) or elsewhere (on the grounds that enforcement would contravene sanctions regulations).

Third, restrictions imposed on access to funds and travel may cause significant practical difficulties, eg in securing parties' attendance at hearings.

As of May 2015, the states that have imposed sanctions on Russia include the U.S., Canada, member states of the EU, Switzerland, Japan and Australia. As several commentators have noted, the list of alternative places of arbitration is relatively short, and includes mainly Asian jurisdictions. 

Looking towards the Far East

Against this backdrop, Russian entities appear to be looking east to Asia, where the combination of well-established arbitration institutions within arbitration-friendly (sanctions-free) jurisdictions is perceived as an attractive alternative to arbitration in the US or Europe.

Both the Hong Kong International Arbitration Centre (HKIAC) and Singapore International Arbitration Centre (SIAC) have been quick to express their enthusiasm and ability to accommodate Russia-related disputes.

Both Hong Kong and Singapore are Model Law jurisdictions. The Hong Kong and Singapore courts have significant experience in handling arbitration-related matters, both in terms of providing assistance during the course of the proceedings and with respect to post-award applications. Both courts are noted for their pro-arbitration views.

Neither Hong Kong nor Singapore has yet imposed sanctions on Russia, thereby reducing the risk of infringing sanctions regulations.

HKIAC and SIAC have multilingual secretariats, staffed with counsel of common law and civil law backgrounds. HKIAC has issued a version of its Administered Arbitration Rules in Russian. Users of both SIAC and HKIAC have access to emergency and expedited arbitration procedures, a potentially more efficient and cost-effective approach to resolving disputes.

Given current trade restrictions with most Western countries, many Russian entities have increased their interest in securing further business with the Far East. We have seen, for example, Chinese and Russian companies enter into a number of trade, energy and finance agreements back in recent months. It would not be surprising if both Hong Kong and Singapore also eventually see an increase in arbitrations seated in their jurisdictions and / or administered by their respective arbitration institutions, as disputes arise out of these agreements in future years.

For further information, please contact Brenda Horrigan, Partner, Rebecca Soquier, Associate or your usual Herbert Smith Freehills contact.