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A New Law Protecting Russian Companies under Sanctions
June 6, 2020 12:40


The Federation Council approved a bill that allows Russian sub-sanctioned persons transfering any disputes to a Russian court and punishing opponents who disagree with this maneuver.  The lawyer Olga Kokoz analyzes the consequences of the new mechanism. 

On June 1, the Federation Council approved a bill allowing citizens and organizations that were subject to anti-Russian sanctions, as well as foreign companies associated with them, to ignore the rules of competence and transfer the consideration of disputes to Russian courts. Moreover, an opponent who disagrees with this can be   fined, up to the amount of the disputed claims. 

When are the new rules applicable?

The new rules apply to two categories of situations.

The first category: the parties did not agree on where disputes between them would be considered, and Russia does not have an international treaty that answers this question.

In this case, under the new rules, persons affected by sanctions against Russia can start a trial in a Russian court at their location bypassing the usual rules on international jurisdiction of disputes.

For example, if a Russian company decided to recover non-contractual losses from its American counterparty, but suddenly got on the sanctions list, it would not have to spend money on expensive American justice - it would be enough to file a lawsuit in a Russian court.

If, on the contrary, the opponent started a dispute abroad against a sub-sanctioned person, then such a person may appeal to a Russian court with a request to prohibit the foreigner from continuing the proceedings. Such a statement can also be submitted if the dispute abroad has not begun yet, but there are already suspicions that it will begin soon (for example, after receiving a pre-trial claim). If the Russian court agrees with the applicant, and the foreigner disobeys and continues the foreign proceedings, the Russian court may fine the foreigner for the full amount of his claims, plus the legal costs of the subordinate person.

In addition, when a sub-sanction party raises objections based on the new law, and the trial or arbitration nevertheless continues, the subsequently issued decision will be impossible to enforce in Russia.

The second category: the parties stipulated in the contract a procedure for resolving a dispute between them, but their agreement became unfeasible due to sanctions against Russia. For example, this will happen if the parties agreed to the consideration of disputes by the American arbitration court and appointed an American arbitrator, and the Russian person subsequently came under American sanctions.

In this case, the rule is the same, but the sub-sanction applicant, in addition, will have to prove the impossibility of fulfilling the originally agreed method of resolving disputes.

Moreover, the law does not affect cases where there is no bilateral agreement between the parties, but there is an international agreement defining jurisdiction.

What are the implications of the new mechanism?

The prospects of this mechanism can be considered from two points of view. First, consider cases where a sub-sanctioned person acts as a defendant in a foreign dispute. On the one hand, since the bill does not contain provisions to limit its application in time, it can become an unpleasant surprise for foreign counterparties. If used in foreign proceedings that have already begun, decisions on them will become unenforceable in Russia.

On the other hand, the rules on exclusive jurisdiction are procedural in nature and do not have mandatory extraterritorial application. At the same time, many sub-sanction companies have assets abroad, where the new law will not become an insurmountable obstacle to obtaining enforcement. In addition, the issue of prohibition of foreign proceedings is subject to consideration in a regular court session. This means that in order for such a meeting to have a “move”, it is necessary to notify all foreign persons. Despite numerous international treaties in this regard, the notification of foreigners still causes difficulties for the courts and takes at least six months. During this period of time, the foreign proceedings have a chance to overtake the Russian one.

Obtaining a Russian court’s fine for refusing to comply with the ban to continue proceedings for foreign companies that do not have assets in Russia will also not be a terrible punishment. Such a fine will be quite difficult to execute abroad, since it can hardly be considered a final court decision. And even if it is counted as such, a foreign court may well conclude that a fine is contrary to public policy and deprives a foreigner of the right to a court.

Secondly, we will analyze the situation when a sub-sanctioned person acts as a plaintiff.  Foreign partners may, of course, be unpleasantly surprised to receive a lawsuit from a Russian court. However, receiving such a claim may not be too scary for those respondents who do not have assets in Russia. The reason is the complexity of the implementation of such a decision. Russia does not have many bilateral agreements providing for the recognition and enforcement of decisions of Russian state courts. Even if it is considered that this factor is not decisive, a foreign state court may come to the conclusion that the Russian court decision made on the basis of the new law is contrary to public policy.

One way or another, experts already note that the adoption of the new law will worsen the investment climate, since it will be dangerous for foreign persons to preserve assets in Russia in the event of a potential dispute with a sub-sanctioned person.


Author: Anna Dorozhkina

Tags: Russian laws Russian companies sanctions Russian business  

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