The EU takes action: New Sanctions to Counter Russian Measures

Introduction

The European Union ("EU") has introduced EU Regulation 2024/1745 which imposes  the 14^th Sanctions Package against Russia. The new  sanctions are noteworthy because they allow for the possibility of seeking compensation against Russia or Russian entities before EU domestic courts.

Background: Russia's Measures against Foreign Companies

1. Amendments to Russia’s Arbitration Procedure Code

As explained by the Commission in its Q&A 14^thPackage, EU companies are worried that they "can be sued in Russia… and have their assets there seized" for complying with sanctions. This concern stems from a 2020 amendment to Russia's Arbitration Procedure Code which introduced Articles 248.1 and 248.2, purporting to grant Russian courts exclusive jurisdiction over disputes involving sanctioned parties ("Article 248"). This legislative change allowed Russian courts to override existing arbitration agreements or jurisdiction clauses. This, in turn, has led to the Russian courts granting a series of anti-suit injunctions prohibiting non-Russian parties from continuing legal actions outside Russia. Notably, such injunctions have been granted where the Russian parties involved in such actions are not formally sanctioned.

2. Presidential Decree No. 302 of 25 April 2023

More recently, Russia issued Presidential Decree No. 302 "On Temporary Management of Certain Property" ("Decree 302") targeting the property of foreign investors in Russia. EU Regulation 2024/1745 explicitly refers to Decree 302 and the potential loss caused to EU companies by the decree.

The EU's Response: EU Regulation 2024/1745

On 24 June 2024, the EU Council adopted Regulation 2024/1745 which includes the 14th set of sanctions against Russia. This Regulation adopts two new features into the regime: (i) a ban on certain transactions, and (ii) the option for EU companies to seek legal remedies within the EU before EU domestic courts.

1. Ban on Transactions (Article 5ab)

The new regulation bans transactions with Russian parties that disrupt arbitration or court proceedings by invoking Article 248 of Russia's Arbitration Procedure Code. The ban covers any direct or indirect transactions with individuals or entities that are under sanctions and are initiating claims in Russian courts. However, there are exceptions for essential activities like trading in pharmaceuticals, medical supplies, food, and agricultural products. There are also exceptions for transactions needed for legal processes in EU member states, including enforcement actions.

To ensure that the ban works, the EU Council plans to make a list of companies that are subject to it. This will help enforce the prohibition on doing business with entities that have used Article 248 or similar legislation.

2. Remedies before EU domestic courts (Article 11b)

The new regulation introduces a mechanism ("Article 11b") to claim damages from Russia or Russian entities that have benefited from Decree 302 or similar Russian legislation, "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".

EU companies affected by Decree 302 or similar legislation may now, in principle, seek compensation from Russia or Russian entities in EU domestic courts. To do this they must show:

1. Loss or damage caused by Decree 302 or "Russian legislation related or equivalent to it"

Decree 302 allows Russian authorities to target foreign investors and deprive them of the management of their investments in Russia. Given the broad wording of Article 11b, it would appear that any harm or loss caused by the Decree or similar laws would fall within its scope.

2. The respondent must have benefited from the application of Decree 302 or "Russian legislation related or equivalent to it"

Article 11b is designed to allow claims against those who have gained from Decree 302 or similar laws. Claimants must demonstrate that Russia or a Russian entity benefited from the legislation. In some instances, this may be challenging since not all losses to one party necessarily result in a benefit to another. This can be seen in investment treaty cases where tribunals usually refrain from looking for a correlation between the loss to one party and the benefit to another in expropriation claims.

3. There is a breach of international customary law or a bilateral investment treaty

EU companies will need to show a breach of public international law in order to rely on Article 11b. However, it is unclear how domestic courts in the EU will assess the international law violations of another sovereign state, in this case Russia. Additionally, it is uncertain why the regulation refers only to "bilateral" treaties, excluding multilateral ones.

4. There is no effective access to remedies in the relevant jurisdiction

Finally, EU companies must demonstrate that they cannot effectively access remedies in the relevant legal system in order to rely on Article 11b. Essentially, this will require an EU company to demonstrate that it is unable to assert its claim or is deprived of protection in another "relevant" forum (which could include investment arbitration under a bilateral investment treaty). The definition of "effective" remedies will no doubt prompt debate:  how effective or ineffective remedies need to be in order to satisfy the requirement under Article 11b? Finally, the term "relevant jurisdiction" may also prompt questions, with parties arguing that an EU Member State's court is the proper place for such cases and is, thus, the "relevant jurisdiction", despite the potential availability of remedies elsewhere.

Comment

The ban on transactions seeks to directly address the increasing "activism" of Russian entities and Russian courts interfering with legal proceedings outside Russia.

Article 11b seeks to reassure EU companies that they can utilise the EU domestic courts to claim damages against Russia or Russian entities if such need arises. It offers, in principle, a new route for recourse, ensuring that EU companies are not left without remedy. However, the terminology used in Article 11b does remain open to question, and it remains to be seen how it will be interpreted and applied in future.