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How can Russia combat sanctions?

Russia has not pursued all its options yet

The Russian Federation has not remained passive in the face of sanctions imposed on it for its invasion of Ukraine. In retaliation, Russia has imposed its own sanctions on Western countries and has announced the nationalisation of property of companies ceasing or suspending their activities in Russia. However, this has not exhausted its arsenal yet, and it may not be long before there are further actions by the Russian Federation in the international arena challenging the legality of the measures hitting the Russian economy.

What are sanctions?

Sanctions are decisions of a political nature which, by exerting diplomatic or economic pressure, are designed to prevent a breach of security or to bring violations of the international order to an end as soon as possible.

Until the 20th century, unlike in national legal systems, in international law no institution existed for imposing norms binding on all members of the international community, including introduction and enforcement of sanctions. The United Nations was established to fill this gap.

Under Chapter VII of the United Nations Charter, a document binding on all UN members, in the event of recognition of a threat to the peace, breach of the peace, or an act of aggression, the UN Security Council may call on UN members to apply sanctions against the state in question, such as full or partial interruption of economic relations or communications (rail, air, postal, telegraphic, radio and other), as well as severance of diplomatic relations. This is the only case provided for in international law for the introduction of sanctions whose legality cannot be questioned.

Such measures have not been and will not be applied to the Russian Federation. This is because Russia, as heir to the USSR, is one of the five permanent members of the Security Council, and Security Council decisions on sanctions require unanimity of all the permanent members. Therefore, Russia has a veto on this issue.

Are the sanctions imposed on Russia legal?

Within the international system, due to the de facto decision-making paralysis of the UN, the role of bouncer is simply played by the strongest countries. At the moment, that means the United States, and Russia’s aggression against Ukraine constitutes a direct challenge to its status in the region of Central & Eastern European. Russia considers itself an equal entity to the US and claims the right to its own sphere of influence that cannot be violated by the US, in particular by admitting countries within this zone into NATO.

Thus it is not surprising that the United States has been particularly active in imposing sanctions on Russia. The US has also been backed by the European Union. But are their actions legal? It depends.

Subjects of international law (including the US and the EU) are free to shape their diplomatic and economic relations as they see fit, as long as they have not made contrary commitments. Such commitments might be multilateral agreements, such as the World Trade Organization Treaty, the Energy Charter Treaty, or bilateral investment treaties.

What actions can we expect from Russia?

The Russian Federation may argue that some of the sanctions imposed on it violate commitments voluntarily undertaken towards it by the US and the EU. One forum for making this argument is the WTO. Interestingly, the Russian Federation joined the WTO in 2012, four years after its intervention in Georgia and two years before its occupation of Crimea. In 2014, Russia claimed that the sanctions it was subjected to in relation to its annexation of Crimea and its support of the so-called people’s republics of Donetsk and Luhansk were contrary to the WTO rules.

On 15 March 2022, the US, the EU and 12 other countries issued a statement that they were suspending most-favoured-nation treatment of the Russian Federation under WTO rules. This means the beginning of treating Russia in a worse manner than its status as a member of the WTO would imply. As justification for this decision, the authors of the statement cited Art. XXI of the General Agreement on Tariffs and Trade (GATT 1947), under which each country is entitled to take such action as it considers necessary for protection of its essential security interests. However, the Russian Federation may challenge the legitimacy of this exception in the WTO system.

At the same time, there are suggestions that a complete exclusion of Russia from the WTO is possible. Since no procedure has been established for this purpose, it would require amendment to the Agreement Establishing the World Trade Organization in the manner provided for in Art. X of the agreement. Assuming Russian opposition, the support of three-fourths of the WTO’s 164 members would be required to successfully carry out this process.

Moreover, in the case of expropriation of Russian assets, claims may be asserted against individual countries by private persons on the basis of the Energy Charter Treaty or bilateral treaties. The Russian shares in EuRoPol Gaz SA, which owns the Polish section of the Yamal–Europe gas pipeline, may serve as an example. If the Russian shareholder of the company is expropriated, it could initiate arbitration proceedings against Poland under the Energy Charter Treaty, and in the case of other investments belonging to Russian entities concerning sectors other than energy, investors’ claims based on bilateral investment treaties can be expected. The Polish-Russian BIT has never entered into force. Nevertheless, in some cases, Russian entities may control assets in Poland through companies registered in countries with which Poland is bound by such agreements.

Europeans will have claims too

In the event of large-scale nationalisation of American and European assets, new systemic arrangements cannot be ruled out in the international order either, for example creation of a new tribunal to hear these claims, similar to the tribunal that adjudicated cases between US and Iranian investors and those countries.

Ultimately, the number and types of claims, and how they are resolved, will depend on the extent to which economic ties between Russia and Western economies are permanently severed. This in turn depends on the future course of political and military events.

Piotr Golędzinowski, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners