Will sanctions against Russia impact London’s arbitration market?

01 Dec 2014 | 7 min read

shutterstock_121955446Sanctions: an instrument of a political pressure for decades, but attracting little or no attention in Russia. Until now.

Tatiana Minaeva, Of Counsel in Jones Day’s London office, discusses the impact of economic sanctions against Russia, arising out of its actions in Ukraine, on the global arbitration market for the resolution of Russian commercial disputes.

Rosneft

The range of sanctions against Russian individuals and businesses arising out of the situation in Ukraine has suddenly became the most widely discussed topic in Moscow, and prompted the Kremlin to introduce counter measures, the first being the ban on the import of food products from the EU. Just a few days ago, it was announced that oil giant Rosneft offered Russian President Vladimir Putin an entire series of new measures to support the economy during the sanctions, in the event of a financial crisis.

Among other suggested measures, such as the ban on the final storage of nuclear waste from the US and EU and the possible seizure of these countries’ and their citizens’ property on Russian territory as interim measure for unfulfilled contracts, Rosneft was said to suggest to ban Russian companies from entering into arbitration clauses providing for the arbitration in countries which imposed sanctions against Russia. If Rosneft’s proposal comes to life, Russian companies are expected to cease using many popular arbitration venues such as London, Paris, Stockholm, Geneva, Zurich and New York, which will doubtless affect the global disputes market: it is estimated that Russian disputes now make up as many as three quarters of the world’s commercial disputes.

Why have Russian disputes traditionally been heard outside Russia?

Rosneft’s initiative of banning foreign arbitration with participation of Russian companies is not a new idea in Russia. It is therefore not surprising that this idea comes alive again in the context of the Ukrainian sanctions. Russian corporate laws, which do not easily accommodate joint venture investment schemes, and lack of trust in the national courts, drove Russian parties and foreign investors to rely on agreements governed by foreign law, and to work through offshore companies to arbitrate disputes elsewhere. This resulted in a significant number of Russian disputes being heard before foreign courts and arbitral tribunals seated abroad.In addition to the arbitration under the rules of the Stockholm Chamber of Commerce (SCC), which was traditionally the place of choice for arbitrating energy and commodities disputes with the Soviet entities (and later Russian corporations), and arbitration under the rules of the International Chamber of Commerce (ICC), which is easily the most popular institution worldwide for international disputes, in the last decade or so, Russian companies have been turning more and more towards London as the preferred venue for resolving their multiple commercial disputes over Russian assets.There is no doubt that the International Dispute Resolution Centre in London as well as London based lawyers have benefited hugely from the globalisation of the Russian economy.

 

Perception of the Russian courts

It would be unsurprising if the Russian judiciary were the main source of concern for foreign counter-parties; however, it would be fair to say that Russian courts do not enjoy trust among Russian parties either. In the last decade, Russians moved their business abroad with the main objective to secure it from so called ‘raiderstvo’ (forceful takeover by competitors) which turned into a real cancer for the business environment in Russia in end of last century.The Russian judiciary was often used by the raiders, which encouraged the outflow of Russian cases abroad. With the aid of Anglo-Saxon lawyers, with which Moscow was overflowing in the end of last century, Russian businessmen started to rely on the complicated offshore shareholdings structures almost always involving Cypriot companies as the first layer in a complicated ownership pyramid. It did not take long before they started to feel confident in the turquoise waters of offshore jurisdictions to the great benefit of their services providers and the banks. English law became a natural governing law for the complicated relationships, along with an LCIA arbitration clause which was copied as a ‘midnight clause’ from contract to contract. No surprise that London became the favourite forum for disputes, to the great joy of English lawyers, who have enjoyed the luxury of lucrative Russian disputes for at least 15 years, with no sign of an early end to this prosperity.

What does the future hold?

However, the situation might change drastically now if Rosneft’s initiative takes on. Sanctions have turned into a serious factor to consider in the business strategies of the Russian companies. There is an increased concern among the Russians that arbitrations seated in Western countries, such as England, France and Switzerland, is no longer fair. Arbitrators, who hear disputes, are mainly foreign nationals, and even if awards are taken in favour of a Russian party, they may be set aside by the court of the arbitration seat or denied enforcement through a sanctions mechanism. The recent Permanent Court of Arbitration award against Russia in the Yukos case, which unluckily coincided with the time of Ukrainian sanctions, added to the increasing distrust among Russians in the idea of a fair resolution of their disputes in the west. In addition to lack of trust in their own judiciary, Russians are now becoming increasingly disappointed in the impartiality of what they had assumed to be the traditional places for resolution of their disputes.

It may be expected that Russians will now reconsider their approach, aiming at withdrawing their rows from unfriendly jurisdictions. One of the choices they may consider is to refer disputes to Russian arbitration institutions, such as RAA or ICAC. However, this option could represent a challenge in negotiations with their foreign counterparties. Also it is fair to say that the recent judicial reforms, which have been subject to trenchant criticism, mainly due to its unpredictability for the future development of the court practice, have not enhanced confidence among Russian businesses in their home jurisdiction. Another option is to turn their heads towards Asian venues, such as Hong Kong, Dubai and Singapore, which since recently and increasingly accelerate the pace in providing formidable competition to the Western centres of international disputes resolution. No doubt such arbitration centres as SIAC in Singapore, CIETAC in China, HKIAC in Hong Kong and DIAC in Dubai, will now be more seriously considered by Russian companies when negotiating their contracts with foreign parties. If Russians indeed turn towards these centres, western countries will experience significant outflow of disputes from their arbitration centres, to the benefit of lawyers practising on the other side of the world.

However, because the contracts being now in place contain traditional dispute resolution clauses it would take at least five years for this outflow to take place. It seems that LCIA, being the favourite arbitration venue for the Russian business disputes, will continue enjoying preferential position, because the majority of cases, which are referred to this forum, although relating to Russian assets, concern contracts concluded between offshore parties. It seems that as long as LCIA and English courts maintain its reputation of a fair and independent judiciary, Rosneft’s initiative, even if implemented in Russia, will unlikely effect the choice of this forum in contracts between offshore parents of Russian entities. On the other hand, foreign counter-parties of such entities, registered in Russia, will most likely face new arbitration centres or, if less lucky, would need to refer their disputes to Russia. This would mainly be the case with the state-owned companies, which already now, are forced to insist on Russian dispute resolution venues and Russian law to govern their contracts.

Time will tell how sanctions will affect the evolution of the Russian disputes market. But it is clear now that we are experiencing the turning point for business relationships between Russian companies and their western partners. Sanctions imposed on Russia have already pushed Russian business towards Asia. There is little cause to doubt that Asian countries would miss this opportunity, which puts us on the cusp of a new era of allocation of Russian business interests and capital flows.

This is an amended version of a longer article published on LexisPSL Arbitration on 6 November 2014. For a free trial of LexisPSL Arbitration, please click here.

Filed Under: Arbitration

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