Russia vs international sanctions. Act 1.

On June 08, 2020, the Russian President signed a new law amending the Russian Arbitrage (Commercial) Procedure Code in effect[1]  to secure protection of rights of legal entities and individuals subject to international sanctions (hereinafter – the “Law”).

According to the Law:

  1. the Russian state arbitration (commercial) courts (Russian courts) will have the exclusive competence to resolve disputes:
    1. involving Russian and foreign legal entities and individuals subject to foreign restrictive measures (including EU and US sanctions, hereinafter – “SDNs”); and
    1. arising out of sanctions effected against Russian citizen or Russian legal entity,

              unless otherwise stated in

  • an international treaty signed by the Russian Federation, or
  • by agreement between the parties, whereby the consideration of such disputes is assigned to the competence of foreign courts or international commercial arbitration based outside the territory of the Russian Federation;
  • SDNs, whose cases are considered by a foreign court or international commercial arbitration outside of Russia, or providing proof that such proceedings will be initiated, are entitled to apply to Russian courts for a veto on initiating or continuing such proceedings;
  • Subject to the SDN claim the Russian court has the right to award them compensation to be charged from the individual whom the court banned to initiate or continue proceedings in a foreign court or international commercial arbitration outside of Russia,  if that individual fails to respect the court order.

The Law came into effect on June 19, 2020.

What’s wrong:

  1. Due to the vagueness of the language, the Law has several broad concepts left at discretion of the Russian state judges, which are much likely to be construed in favor of national champions.

For example:

  • it has no definition of the “restrictive measures” the potential claimant must be subject to in order to seek exclusive competence of the Russian courts;
  • it expands to any disputes involving SDNs, irrespective of the subject of the claims;
  • it allows to recognize the competence of the Russian courts despite the valid arbitration or foreign jurisdiction clause in contracts with an SDN — in case such clause “cannot be performed” due to the restrictions in effect.  Should such non-enforceability be recognized by the Russian state court, the SDN will be entitled to i) commence litigation in a Russian court and ii) apply to a Russian court to restrain the counterparty from commencing/pursuing proceedings before a foreign court or arbitral tribunal.
  • it has no regulation on the content and requirements to proof of “intent” to commence proceedings in an international commercial arbitration outside Russia or in a foreign court, which can be construed broadly.
  1. The possibility to properly state the case and challenge the Russian court “veto” (on  initiating or continuing international arbitration or foreign proceedings involving an SDN) is limited and subject to Russian Arbitrage (Commercial) Procedure Code regulation (with respective standards of proof of due acknowledgement of the party to the process, one month period of appeal).
  1. Russian court can now deny enforcement of a foreign court judgment or arbitral award on the disputes involving SDN, should the latter object to such foreign proceedings (i.e. by filing the “veto” claim under the Law).

What to do:

To closely monitor the development of court practice following the implementation of the Law in order to adjust the risks stated and to recommend further measures to address them.

[1] Russian Federal Law dd.  June 08, 2020 No 171-FZ “On Amendments to the Arbitration Procedure Code of the Russian Federation in Order to Protect the Rights of Individuals and Legal Entities in Connection with Restrictive Measures Introduced by a Foreign State, a State Association and/or Alliance and/or State (Interstate) Institution of a Foreign State or State Association and/or Alliance”

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