Article 16 June 2016

Arbitrating in the time of sanctions – Russian parties looking East?

More than two years have passed since the imposition of the sanctions against Russia due to the crisis in Crimea and Eastern Ukraine. Ever since the early days of their application, the impact of the sanctions on East-West arbitration has been a hot topic among legal practitioners.

Sanctions against Russia – a brief overview

The first sanctions by the European Union (EU) in connection with the Ukraine crisis were imposed in March 2014. Ever since, a wide range of sanctions have been put in place including asset freezes, export and import bans, travel bans, sanctions regarding economic co-operation with certain individuals and entities as well as several sectoral sanctions. Countries that have adopted sanctions against Russia also include Australia, Canada, Japan, Switzerland and the United States.

Although the sanctions apply to a rather small number of Russian and Ukrainian individuals and entities, one should not be misled by the mere numbers: the targeted entities and sectors are extremely vital including, for instance, some of the major Russian companies in the financial, energy and defence sectors.

Possible impediments associated with sanctions-related arbitration

The actual impact of sanctions on East-West arbitration remains a controversial question. Many Russian companies and Russian legal practitioners seem to regard the impact as remarkably significant.

On the other hand, for instance, certain significant EU-based arbitration institutes such as the ICC International Court of Arbitration, London Court of International Arbitration (LCIA) and the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), emphasised in a joint statement in June 2015 that the sanctions do not affect the institutes' impartiality and neutrality with regard to administering sanctions-related disputes.

Those who consider the sanctions to form a significant impediment to East-West arbitration have justified their viewpoint by alleging, inter alia, that the relations between a natural person or a legal entity and an arbitrator or an arbitration institute can be considered as "technical assistance" prohibited by the sanctions legislation of the EU. This could lead to arbitrators refusing to accept assignments in the fear of personal criminal liability.

Furthermore, there are potential impediments with respect to sanctions-related disputes and their arbitrability under the applicable EU legislation. While administering sanctions-related disputes is not prohibited per se, there may be reluctance on the part of national authorities to grant the required permission to the arbitration institutes to administer such disputes. Another frequent argument is that the unwillingness of banks to carry out payments related to arbitrations involving sanctioned parties or arbitrators from a sanctioned country may construe further problems and in any case cause significant delays. Considerable uncertainty remains as to the sanctions' reach on arbitration.

Shift to Asian arbitration venues – resolving the problems or merely transporting them?

One of the recent trends in sanctions-related arbitration is the alleged interest of Russian companies towards arbitration venues located in countries in which there are no sanctions regimes in place or where the sanctions regime is less stringent. Whether this crossover to arbitration in certain Asian venues, Singapore International Arbitration Centre (SIAC) and Hong Kong International Arbitration Centre (HKIAC), in particular, would actually benefit Russian parties and resolve the issues connected to sanctions-related arbitration, remains unanswered.

One could question, for instance, whether transferring the arbitration forum to Hong Kong or Singapore will actually resolve the threats and issues connected to sanctions-related arbitration.

For example, will the arbitrators appointed to a case under Asian institutes' rules escape the same issues arbitrators are facing, for instance, in Europe, such as the difficulties with respect to the interpretation of the abovementioned term "technical assistance" or a risk of personal criminal liability? A vast number of arbitrators appointed in Singapore and Hong Kong cases are citizens of countries that have adopted the sanctions regime.

Another major factor relates to the enforcement of Asian arbitral awards in the EU or any country that has adopted sanctions. Moreover, the unwillingness of banks to handle payments in connection with sanctions-related arbitrations remains the same despite the location of the arbitration forum, adding to the practical impediments also present in Asia.

Thus far, the choice of an Asian arbitration venue appears to have merely transported the impediments connected to sanctions-related arbitration rather than fully resolving them.

Future will tell

It is a worn-out phrase but particularly true in the case of sanctions: the future will tell what the effect of sanctions on East-West arbitration will be.

As there are no clear signs of the sanctions against Russia being reversed in the near future, the extent to which, among others, the sanctions affect the enforcement of arbitral awards and challenges regarding the legal competence of arbitrators, remains to be seen.

The future will also highlight the extent to which the sanctions actually impact the caseload of the ICC, LCIA and SCC, if at all. In the meanwhile, the discussion will undoubtedly continue as vivid as ever.

Kirsi Kannaste, senior associate at Krogerus and Young Arbitration Club Finland's Chairman, spoke at YACF's and ICC YAF's joint event organised in Helsinki on 7 April about the effect of sanctions on East-West arbitration.

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