Sanctions are economic and political measures used to restrict the actions of states, groups, or individuals, imposed either unilaterally or collectively. The UN Security Council, under the UN Charter, has the authority to impose sanctions to maintain international peace. The first such sanctions regime was established in 1968 in response to the power seizure in Southern Rhodesia. Currently, entities like the EU impose various sanctions, including autonomous ones, with Russia being a primary target following its 2022 invasion of Ukraine. Sanctions complicate international arbitration by creating new disputes, limiting physical participation in hearings, and obstructing enforcement. They pose significant challenges in finding legal representation and making international payments, reflecting their intent to pressure sanctioned parties into compliance with international norms.
What Are Sanctions?
Sanctions are economic and political measures restricting the freedom of a state, a group, or individuals imposed through a unilateral decision by a state or a collective decision of several states. Sanctions are intended to be temporary in nature and subject to regular review in light of developments.1
Pursuant to the UN Charter, the UN Security Council can impose sanctions in order to maintain and restore international peace and security.2 The first sanctions regime was established by the Security Council in 1968 in response to the illegitimate seizure of power in Southern Rhodesia. Since then, the Security Council has imposed 31 sanctions regimes in total, against the former Yugoslavia (2), Haiti (2), Angola, Liberia (3), Eritrea/Ethiopia, Rwanda, Sierra Leone, Côte d'Ivoire, Iran, Somalia/Eritrea, ISIL and Al-Qaida, Iraq (2), the Democratic Republic of the Congo, Sudan, Lebanon, North Korea, Libya (2), the Taliban, Guinea-Bissau, the Central African Republic, Yemen, South Sudan and Mali.3
Sanctions Today
Each country or group of countries can apply its own set of sanctions. The European Union explains that:
There are three types of sanctions regimes in place in the EU. First, there are sanctions imposed by the UN which the EU transposes into EU law. Secondly, the EU may reinforce UN sanctions by applying stricter and additional measures (e.g. vis-à-vis DPRK). Finally, the EU may also decide to impose fully autonomous sanctions regimes (e.g. vis-à-vis Syria, Venezuela, Ukraine, Russia).4
Today, although not sanctioned by the UN,5 Russia is the primary target of sanctions following its invasion of Ukraine in 2022. The European Union imposed its sanctions against Russia in February 2022 with the aim of weakening Russia's economic base, depriving it of critical technologies and markets, and curtailing its ability to wage war. The first packages adopted by the EU included several important measures, such as banning the export of dual-use and defence-related goods and blocking public financing for trade or investment with Russia. Additionally, the sanctions involved banning Russia from the SWIFT payment system.6 Several countries, including the UK,7 the US8 and Switzerland,9 imposed similar sanctions on Russia.
Sanctions and Arbitration
Sanctions impeding trade and blocking Russia's access to the worldwide banking platform have given rise to new disputes and caused issues with pending arbitrations. The most common issues caused by sanctions include physical limitations concerning hearings, new issues surrounding enforcement, and problems with international payments.
New Disputes
Sanctions have given rise to new disputes. Companies with longstanding relationships cannot trade with each other anymore, which often breaches their contracts. Parties that are left without the delivery of contracted goods or services, or are left without payment, will try to resolve the newly arisen dispute, often through arbitration.
On the other hand, a party to a contract supplying a sanctioned party risks potential criminal prosecution, which may result in long-term imprisonment.10 Similarly, an attempt to transfer money to a sanctioned person may bear serious criminal consequences.11 Breaching a contract is thus often a rational course of action.
Moreover, sanctions often target the provision of legal services. The European Union decided to include legal advice in the scope of sanctioned services (yet, as with Switzerland, with an exception for representation in arbitration proceedings).12 In other countries, such as the United Kingdom, it is possible for a law firm to obtain a licence, albeit it requires a long and complicated procedure and a positive outcome is not guaranteed.13 The UK licensing scheme foresees issuing licenses not only to law firms but also to arbitral institutions. As such, the London Court of International Arbitration may receive payments from sanctioned parties only for the provision of its services relating to arbitration proceedings.14
Thus, sanctions are creating new disputes. However, it may be difficult for the sanctioned party to seek legal representation in arbitration. Moreover, even if the sanctioned party finds legal representation, it might have problems appointing a tribunal willing to hear its case.
Physical Limitations
The sanctions imposed by the European Union and other countries on Russian companies and individuals include travel bans15 and bans on IT services.16 Therefore, there is a limited number of countries where the sanctioned party can readily appear for a hearing. Although the possibility of holding an online hearing has been on the rise since the Covid-19 pandemic, some sanctions encompass the provision of IT services, thus, in principle, closing this alternative for sanctioned parties. As such, sanctions limit the sanctioned parties' opportunities to hold hearings.
Enforcement
The impact of sanctions on international arbitration does not stop with the hearing. Sanctions often pose an impediment at the enforcement stage. If a sanctioned company wishes to enforce its award in a country where it is sanctioned, it might again stumble upon problems when searching for representation. Likewise, even if such a party secures representation in a jurisdiction where it is sanctioned, it might face additional challenges with receiving the funds due. Similarly, the current sanctions regime may pose serious difficulties for Western parties to enforce their arbitral awards in Russia and other sanctioned countries.
Furthermore, Russia's exclusion from SWIFT further complicates arbitrations with sanctioned parties. SWIFT is the global "financial artery" that allows the smooth and rapid transfer of money across borders.17 Thus, Russia's exclusion from this system poses problems with any payments that a Russian party has to make to either its lawyers, the arbitral institutions, or to pay the resulting award.
Summary
Sanctions impose severe challenges to international arbitrations involving at least one sanctioned party. The issues arise from the source of the dispute, through finding representation, to appointing the tribunal, to making international payments. Navigating through sanctions in international arbitration is challenging. However, this is also a reflection of the goal of sanctions: to exert sufficient pressure to cause the sanctioned country to uphold peace and security.
Footnotes
1. Government Offices of Sweden, What Are Sanctions?
2. United Nations Charter, Articles 39-42.
4. The Diplomatic Service of the European Union, European Union Sanctions.
5. Russia has a permanent seat on the Security Council.
7. Foreign, Commonwealth & Development Office, The Russia Sanctions Regime.
8. Office of Foreign Assets Control, Ukraine/Russia Related Sanctions.
9. The Federal Council, Ukraine: Implementation of Further EU Sanctions.
10. See, e.g., Office of Public Affairs, Press Release, 12 June 2024.
11. See, e.g., Office of Public Affairs, Press Release, 1 May 2024.
12. European Council, EU Sanctions Against Russia Explained.
13. OFSI General License Under The Russia Regulations and The Belarus Regulations INT/2023/3744968.
15. The Diplomatic Service of the European Union, European Union Sanctions.
17. BBC, Ukraine Conflict: What is SWIFT and Why is Banning Russia So Significant?
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