Overview of the application by Russian arbitration courts of counter-sanctions laws with respect to transactions with ‘unfriendly’ non-residents and parties under their control

Russia’s Supreme Court specifically stated that invalidity risks extend not only to transactions and payments directly violating the established procedures but also to actions intended to bypass counter-sanctions restrictions. Such actions may include the following:

Even though the structure of a transaction appears compliant with general civil law requirements, it may still be challenged if its actual purpose is found to be circumvention of counter-sanctions restrictions.

Counter-sanctions legislation provides for certain conditions and exemptions whereby transactions and payments are not subject to blocking mechanisms (Type C and Type O accounts). Russia’s Supreme Court highlighted the following key principles:

In such cases, compulsory licensing is treated as an exceptional measure to counter the abuse of intellectual property rights by “unfriendly” persons.

Non-compliance with counter-sanctions requirements carries significant legal risks, including the risk of a transaction or activities to perform it declared void, the enforcement of restitution of everything exchanged, denial of legal remedy and, in cases stipulated by laws, forfeiture of assets to the Russian Federation.

The Supreme Court reaffirmed that procedural mechanisms may also be employed to control and enforce compliance with special economic measures. In particular, courts are empowered to independently evaluate the potential invalidity of a transaction if it appears designed to circumvent counter sanctions, regardless of whether any relevant arguments were provided by the parties.

Key procedural takeaways:

• The court may, on its own motion, assess whether a transaction, an assignment of claims, a settlement agreement or any other mechanism is void if its performance could result in bypassing special economic measures.
• A prosecutor may join arbitration proceedings to protect the public interest if there are indications that the judicial remedy is being used for circumventing counter-sanctions restrictions.
• Discovery of facts indicating a violation of special economic measures may constitute grounds for a review of court rulings based on newly discovered evidence.
• The court may, on its own motion, deem an attempt to replace a foreign claimant with a Russian successor in a lawsuit to facilitate debt recovery as a void assignment and disallow the replacement of a party.
• The court will deny approval of a settlement agreement if it is effectively designed to circumvent the special procedure for the performance of obligations, such as by making payments to a representative, an assignee or any other intermediary.
• When making decisions to recognize and enforce foreign arbitral awards, courts must assess whether their enforcement would conflict with the public policy of the Russian Federation or breach existing special economic measures.

The Supreme Court’s stance on arbitration clauses is of particular significance. According to the review, the mere existence of an arbitration clause in an agreement does not preclude the jurisdiction of Russian arbitration courts over a dispute if it is related to sanctions restrictions or if one of the parties encounters impediments to accessing justice. Such cases are governed by the special rules set out in Articles 248.1 and 248.2 of the Russian Arbitration Procedure Code, which are aimed at protecting Russian persons under foreign restrictions.

In particular:

• A claim for an injunction to initiate or continue proceedings in a foreign court or arbitration may not be dismissed without prejudice solely because an agreement contains an arbitration clause.
• If a dispute arises in connection with the imposition of restrictions by foreign states, the Russian court may assert its jurisdiction over the case despite the agreement between the parties to submit to foreign arbitration.
• Impediments to accessing justice may include not only an absolute impossibility to conduct proceedings abroad, but also as a significant increase in financial, time-related, organizational or reputational costs.
• When resolving disputes involving a foreign element, courts may take into account the close connection between the legal relationship and the territory of the Russian Federation, including the place of performance of obligations, the location of evidence and the actual nexus of the dispute with the Russian market.
• The Russian court may issue an injunction to prohibit a party from initiating or continuing foreign proceedings and impose a judicial penalty for the breach of such injunction.

Consequently, procedural risks for businesses are escalating significantly. Parties can no longer expect the court to limit its scrutiny of claims or contractual terms to a mere formal compliance assessment. In cases involving a foreign element, courts will take into account public policy, the actual purpose of the disputed arrangement, the impact of sanction restrictions, and the risk of circumvention of special economic measures.

The review covers several additional provisions that carry significant implications for business.

1) The Supreme Court reaffirmed that compulsory licensing is an exceptional measure of last resort, which can be implemented to prevent the underutilization of patented items in situations where the actions of patent rightsholders result in a product shortage in the Russian market or prevent equitable access to essential goods. It is especially relevant for products essential to safeguarding the lives and health of citizens.

2) The Supreme Court confirmed that transactions involving strategic companies would be subject to greater scrutiny. Courts will assess not only the formal parameters of a transaction but also whether a foreign investor obtains influence over the activities of a strategic company, including indirect control and the powers to veto the decisions of management bodies.

3) The review that attempts to circumvent special economic measures may result in the invalidation of a transaction and lead to more significant consequences, such as restitution, denial of legal remedy for the selected arrangement, disallowance of procedural succession, and refusal to approve a settlement agreement or to enforce an arbitral award.

4) The Supreme Court acknowledged that, in certain cases, foreign sanctions and restrictions can be viewed as circumstances objectively preventing the performance of obligations. 

5) The review addresses the liability of professional financial market participants. The Supreme Court stated that a broker may be exempt from liability for failure to execute the client’s instructions regarding the disposal of securities of foreign issuers if such failure was caused by sanctions restrictions that the broker objectively could not prevent. To qualify for such exemption, the broker must provide evidence of acting in good faith, taking all reasonable endeavors to execute such instructions and having no objective possibility to execute them by alternative means.

• Review of ownership and control structure (including potential indirect interests of persons from “unfriendly” jurisdictions) to determine the applicability of counter-sanctions restrictions to transactions or operations
• Assessment of the need for a prior approval or authorization from the Government Commission for a transaction or operation
• Assistance in preparing and submitting an application and supporting documents to obtain the authorization for a transaction or operation from the Government Commission
• Assessment of the applicability of the special performance procedure and payment requirements (including the use of special accounts) to the respective liabilities
• Analysis of the transaction structure for potential indicators of circumvention of regulatory restrictions