“Unfriendly States”: Seeking Protection Against Russia’s Attempt to Assert Exclusive Jurisdiction Over Foreign Disputes

“Unfriendly States”: Seeking Protection Against Russia’s Attempt to Assert Exclusive Jurisdiction Over Foreign Disputes

May 13, 2024, Covington Alert

On Tuesday, April 23, 2024, the UK Supreme Court (UKSC) announced its decision in UniCredit Bank GmbH v RusChemAlliance LLC (RCA) — a significant decision relating to the Russian Federation’s attempts to force disputes with firms from “unfriendly countries” out of neutral forums and into Russia’s own courts. The UKSC dismissed RCA’s appeal and upheld an anti-suit injunction directed at RCA issued by the Court of Appeal. The injunction seeks to restrain proceedings RCA brought against UniCredit before the Arbitrazh Court of St. Petersburg and the Leningrad Region, in breach of an arbitration agreement between the parties.

The proceedings related to several on-demand bonds UniCredit issued in favor of RCA to guarantee performance and secure an advance payment under a series of contracts between RCA and third-party German contractors for the construction of liquefied natural gas and gas processing plants in the Russian Federation. The total value of these bonds was approximately EUR 420 million.  Each bond contained a governing law clause in favor of English law and an arbitration agreement providing for ICC arbitration seated in Paris. The bonds were silent on the law governing the arbitration agreements. Following Russia’s invasion of Ukraine and the imposition of EU sanctions, the contractors halted performance under the contracts. RCA consequently terminated the contracts and made demands on UniCredit for payment. 

Despite the presence of the arbitration agreement, RCA commenced Russian court proceedings against UniCredit. This was done pursuant to Article 248.1 of Russia’s Arbitrazh Procedure Code, which purports to allow Russian courts to disregard foreign arbitration agreements and foreign exclusive forum clauses and to exercise exclusive jurisdiction over disputes arising out of the imposition of sanctions on Russian individuals or entities. In response, UniCredit sought anti-suit injunctive relief before the English courts to restrain the pursuit of the Russian court proceedings. Other banks and foreign companies have pursued similar strategies, including before the English, US, German, and Hong Kong courts.

The UKSC has not yet handed down its full judgment accompanying this decision. But the decision announced on April 23 highlights a jurisdictional conflict between the Russian courts and the legal orders of major European, US, and Asian financial centers, which parallels the broader political, financial, and military stand-off triggered by Russia’s invasion of Ukraine. The Russian courts’ attempts to assert exclusive jurisdiction are part of Russia’s response to international sanctions. As an immediate consequence, Russian entities may attempt to seek protection within Russia against foreign lawsuits, whilst foreign entities with assets within Russia face an increased risk of expropriation and interference by the state. Anti-suit injunction cases and other forms of litigation in non-Russian courts provide an opportunity to push back, and to lay a claim to assets of Russian defendants (even if those assets may be frozen, for now). The implications of these developments are likely to be significant as Russia continues in its efforts to undermine the efficacy of international sanctions.

Russian Courts Asserting Exclusive Jurisdiction

In 2020, at a time when Russia was already laboring under sanctions imposed in the wake of its occupation of Crimea and intervention in Donbas, President Putin signed into law an amendment introducing a new provision (Article 248) to the Russian Arbitrazh Procedural Code.[1] This created the purported legislative basis for the jurisdictional conflict playing out in the dispute between UniCredit and RCA.

Article 248 purports to grant Russian commercial (i.e., ‘Arbitrazh’) courts exclusive jurisdiction over disputes where the proceedings involve a sanctioned person and/or where the dispute itself arises from sanctions imposed on Russian entities or individuals. If at least one of the parties is affected by “restrictive measures” (i.e., sanctions) imposed by a foreign state, Article 248 allows Russian courts to deem “unenforceable” prior agreements that disputes should be resolved in a forum outside of Russia.[2] Russian courts have rejected considerations of how the degree to which an entity may be “affected by” sanctions could vary in different circumstances.[3] In this regard, Russian courts confirmed that restrictive measures by a foreign state will be deemed to inherently create access-to-justice obstacles for the affected Russian party.[4] When Article 248 applies, therefore, Russian courts will automatically find unenforceable any dispute resolution clause conferring jurisdiction to any other institution. Finally, the exclusive jurisdiction under Article 248 applies irrespective of the governing law of the underlying contract or of the arbitration agreement.

In practice, Russian courts have noted that the explanatory notes to the draft law, which became Article 248, show a legislative intent to protect the “rights and legitimate interests” of Russian citizens and legal entities that are the target of restrictive measures by “unfriendly foreign states”.[5] As we covered in a previous Covington Alert: responding to the imposition of sanctions on Russia due to its invasion of Ukraine, the Kremlin adopted a series of retaliatory measures affecting investors from countries Russia designated as “unfriendly”. The targeted states include the US, the members of the G7, the EU, and others.[6]

Article 248 has been invoked to override exclusive provisions stipulating that disputes should be resolved by arbitration or litigation proceedings outside of the Russian Federation in two scenarios. First, where a Russian party considers that it has a claim against a counterparty from an “unfriendly” country. Second, where a Russian party faces a claim brought by a counterparty outside of Russia in accordance with the parties’ agreed dispute resolution procedure.

The first scenario occurred in UniCredit v RCA. In reliance on Article 248, the St. Petersburg Commercial Court allowed RCA to bring a claim against UniCredit in that court notwithstanding an arbitration agreement between the parties excluding such an action.

In the second scenario, Russian courts have issued injunctions of their own to restrain the foreign proceedings.[7] The consequence for breaching such an injunction is usually a penalty set at an amount equivalent to the value of the claim that is being restrained. This has resulted in penalties equivalent to hundreds of millions[8] and tens of billions of dollars.[9] Perhaps unsurprisingly, there has been a notable uptick in Russian courts issuing such injunctions since early 2022, with the bulk of such orders being issued in 2023 and early 2024.[10] 

As a practical matter, in both scenarios, the Russian courts’ ability to enforce an order for payment (whether it relates to a damages claim brought directly by a Russian party or the payment of a sizeable penalty due to disobeying an injunction) will generally be limited to assets located within Russia. Therefore, companies that remain invested in Russia face the greatest risk of being affected by Article 248.

In limited circumstances, companies that already face adverse actions before the Russian courts may also seek a countervailing injunction from the English courts as affirmed by the UKSC in UniCredit v RCA. More broadly, corporations whose assets are at risk, may pre-emptively shore up their position by restructuring their Russian holdings with a view to availing themselves of investment protections, or by exiting Russia entirely. 

Anti-Suit Injunctions Issued by English and Other Non-Russian Courts

The UKSC’s decision in UniCredit v RCA may be viewed as a response to the Russian courts’ jurisdictional overreach. However, the English courts’ ability to enjoin a party from pursuing proceedings in Russia in this manner may be curtailed by the requirement of establishing a sufficient connection with England and Wales.

Obtaining an anti-suit injunction from an English court will not be an issue when the parties have expressly agreed to resolve their disputes before the English courts or by arbitration seated in England. The UniCredit v RCA decision now appears to confirm that, even when the parties have agreed to arbitration seated outside England & Wales, English law governing the underlying contract may by itself be sufficient to bring a dispute within the court’s jurisdiction. Where the parties have chosen another non-Russian governing law or dispute resolution forum, anti-suit injunctions may be available there as well — as demonstrated in a recent order by a federal court in New York.[11] 

Where a commercial party is engaging with Russian counterparties, greater certainty as to the future jurisdiction of the English courts (or other non-Russian courts where an anti-suit injunction is available) may however be obtained by specifying the law governing the arbitration agreement or electing the arbitral seat.

The extent to which Russian litigants and courts will comply with an injunction issued by an English or other foreign court remains unclear, however, and may vary depending on the entities involved. In the UniCredit proceedings, the St. Petersburg Commercial Court stayed the Russian litigation pending the UKSC’s decision.[12] The threat of penalties and damages orders in proceedings before the Russian courts may lead parties that have obtained an injunction from the English courts to consider the availability in England of countervailing damages claims against Russian parties violating an English injunction.[13]

Restructuring to Benefit from Favorable Investment Treaty Protections

In our prior Covington Alert, we discussed the substantive protections available to investors under Russia’s network of bilateral investment treaties (BITs). Of these, the limitations placed by BITs on the ability of host governments to expropriate foreign investments may, depending on the facts and the specific language in the applicable treaty, be implicated when financial penalties are enforced against a foreign investor’s assets in Russia for non-compliance with an injunction issued by the Russian courts on the basis of Article 248.

In another Covington Alert we explained that Russia has BITs in force with over 60 countries.[14] However, the scope of Russia’s consent to arbitration varies depending on the specific treaty, with the more recent treaties negotiated in the late 1990s providing access to arbitration for a wider variety of disputes.

If an investor’s home state does not have a BIT with Russia (or the BIT’s terms are less favorable than desired), investors may seek to benefit from more advantageous BITs by restructuring their investments via jurisdictions that have such treaties in place.

Divesting Assets from Russia

Finally, companies looking to eliminate all exposure to Russia may consider divesting their interests within Russia altogether. In a previous publication, we outlined the issues for companies to consider when pursuing this course of action. We note that the current legal and political environment may present further difficulties with respect to divesting. Nonetheless, as we have noted, the need for critical strategic planning with respect to any multinational company’s Russian operations will remain. The inherent risks and uncertainty associated with holding Russian assets do not appear to be abating.

Covington’s international arbitration practitioners have extensive experience counseling companies on restructuring to optimize treaty protection and on navigating the challenges associated with divesting from Russia. If you have any questions concerning the material discussed in this client alert, we encourage you to contact the members of our International Arbitration practice.

Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, and Frankfurt—is well-placed to provide support in connection with the evolving Russia sanctions and export controls, including the sanctions considerations associated with restructuring pre-existing investments in Russia and divesting from Russia. For sanctions-related questions, we encourage you to contact David Lorello and Josh Williams.