Russian arbitration: are international sanctions impacting party choice?

Ever since the introduction and then expansion of international sanctions on Russia (in particular by the US and the EU), arbitration practitioners have questioned whether this will prompt a change in the party selection of international arbitration in Russia-related commercial agreements.  Specifically, whether historically popular arbitral venues outside Russia (London, Stockholm and others in Europe) will see a decline in favour of venues in Asia (e.g. Singapore, Hong Kong and others). Anecdotal evidence suggested that several Russian parties were indeed looking East (see our prior blog post here).  Now however a survey conducted by the Russian Arbitration Association (“RAA”) suggests that despite the introduction of sanctions, the arbitration landscape has remained relatively stable with fewer changes than might have been anticipated. 

The RAA Survey published earlier this year indicates that arbitration is still the preferred method of dispute resolution and that the historically prevalent venues of London and Stockholm remain for now the most preferred seats outside of Russia, with Geneva and Paris also remaining (slightly) preferred to Singapore and Hong Kong.  The ICC, SCC and LCIA remain heavily favoured as overseas arbitral institutions, while English law remains the most common choice of parties alongside Russian law. 

The survey nevertheless indicates that choices of Russian law and a Moscow seat of Arbitration are on the increase and that Asian arbitration seats (as well as Dubai and New York) are being considered and used by parties to Russia-related commercial contracts.

Background

Events in Ukraine in 2014 prompted several governments to introduce economic sanctions, affecting Russian individuals, businesses and officials. States that have imposed such sanctions include the USA, Canada, various member states of the EU, Switzerland, Japan and Australia.

Previously, a 2013 study (also by the RAA) had found that arbitration involving Russian individuals and companies was being conducted in predominantly four major arbitration centres, three of which were located in the EU, namely the ICC in Paris, the LCIA in London and the SCC in Stockholm.  

In revisiting the situation in its 2016 survey, the RAA sought to analyse: (i) the effect of the sanctions, particularly on commercial arbitration, and (ii) the impact of the sanctions on the attitudes of arbitrators who frequently received nominations in Russia-related cases.

The 2016 survey’s research base comprised over 160 respondents from various jurisdictions.  The results were published in January 2017 and are available at the RAA’s website here. 

The RAA 2016 survey analysis

General observations on the effect of sanctions

When asked generally about the impact of the sanctions on arbitration, responses indicated that the sanctions had little impact and did not change the legal landscape dramatically. Notable findings included:

• 55% of survey respondents noted that the sanctions did not affect their choice of the dispute resolution mechanism.
• 60% indicated that the sanctions had no impact on their choice of applicable law governing the contract.
• 75% would prefer a well-known arbitral institution regardless of location.
• 85% indicated that where the seat of arbitration was in a sanctioning state, this has no impact their perception of the neutrality of the arbitrators.
• 47.5% indicated that the sanctions had no impact on their choice of contract currency.

Choice of Arbitration Rules

The 2016 survey shows that relevant users still view the ICC, SCC, LCIA and ICAC CCI RF as their top choice arbitral institutions for contracts drafted in 2014/2015.  While the European institutions appear likely to continue to dominate in the near future, the survey also indicates that Russian users view Asian centres such as the SIAC, HKIAC, CIETAC as viable alternatives.  

Choice of Seat

London, Stockholm and Moscow remained the preferred seats among survey respondents followed by Geneva, Paris, Vienna, Singapore, Hong Kong, Zurich, Dubai and New York.  The survey suggests that a Moscow seat is becoming increasingly popular which is likely to continue given the recent changes to Russian arbitration legislation (see our prior blog post here).

Choice of Law

Whilst 60% of survey respondents said that the sanctions did not play a role in their considerations when drafting an arbitration agreement, 40% did consider them. Russian and English law were favourite choices among respondents, each over twice as popular as the third choice of Swedish law.  After Swiss and German law, Singapore and Hong Kong law were the 6^th and 7^th most popular choices among survey respondents, again indicating the growing awareness of Asian options for Russia-related agreements (plus also potentially an increase in Russian – Asian investment).

Conclusion

Taken together, the 2013 and 2016 RAA surveys are a helpful indicator of the prevailing attitudes and approaches among parties to Russia–related commercial contracts.  For now, they indicate a continued preference for the historically popular European arbitral seats and institutions, alongside a growth in the use of Russian seats and law, and an increasing awareness and consideration of Asian seats. It will be interesting to see how the situation develops, especially in light of the Russian arbitration law reforms, in the years ahead.

For more information, please contact Alexei Panich, Partner, Nicholas Peacock, Partner, or your usual Herbert Smith Freehills contact.