Whilst European Commission President Ursula von der Leyen recently announced preparations for a 19th sanctions package against Russia, a critical provision buried within the 18th package threatens to unleash costly legal consequences that could dwarf any intended economic pressure on Moscow. According to analysis by Valérie Hanoun, a lawyer at the Paris Bar, the clause prohibiting recognition of investment arbitration awards in favour of Russian companies risks violating binding treaty obligations and opening the door to massive investor claims against EU member states.
The Hidden Legal Timebomb in EU Sanctions
The problematic provision orders EU member states to refuse recognition and enforcement of any investment arbitration awards favouring Russian companies, even forbidding governments from participating in such proceedings when sanctioned entities are involved. Brussels intended this as a shield to prevent Russian oligarchs from using international arbitration to reclaim seized assets. However, as detailed in analysis published across multiple European outlets, the measure could spectacularly backfire.
At the heart of the issue lies a web of bilateral investment treaties binding the EU and Russia. More than 15 such pacts exist, many inherited from the Soviet period, with signatories including Austria, Belgium, Germany, Spain, Luxembourg, the Netherlands, France, and Finland. These treaties safeguard investments and grant investors the right to international arbitration for disputes. Brussels’ blanket refusal to honour these obligations when Russian investors are involved risks breaching the Vienna Convention’s principle that treaties must be honoured and the New York Convention’s requirement to enforce foreign arbitral awards except in narrowly defined cases.
Why Sanctions on Russia May Cost More Than They Save
Understanding why sanctions on Russia through this mechanism could prove counterproductive requires examining existing arbitration cases. Nordgold’s €5 billion suit against France alleges wrongful denial of a mining licence extension in French Guiana. Rosatom pursues €3 billion from Finland after cancellation of the Hanhikivi-1 nuclear project contract. Rosneft seeks up to €2 billion from Germany over trusteeship of its subsidiaries. Mikhail Fridman has lodged a multi-billion claim against Luxembourg challenging asset freezes and restrictive measures.
These disputes represent merely the vanguard. Unsanctioned Russian investors might now argue that the EU’s outright refusal to honour awards constitutes additional grounds for damages. The financial toll could be astronomical. Successful arbitrations might not only recoup lost investments and profits but also impose “aggravated damages” for the EU’s retaliatory posture, potentially ballooning payouts to hundreds of billions.
Are Russian Sanctions Working? A Chilling Precedent
The question of whether are Russian sanctions working becomes more complex when considering legal precedents that suggest the EU’s approach is fundamentally flawed. A particularly relevant case involves Bank Melli and Bank Saderat versus the Kingdom of Bahrain, where Iranian banks won compensation exceeding $240 million after Bahrain liquidated their joint venture to align with EU and US sanctions.
The tribunal ruled that Bahrain’s actions constituted politically motivated expropriation, emphasising that non-UN sanctions do not excuse treaty violations. This precedent carries profound implications. If Bahrain faced liability for following Western sanctions, EU states could fare no better against Russian claimants. The message is clear: blanket denials of arbitration without case-by-case scrutiny violate fundamental principles of due process that tribunals defend vigorously.
The Impact of Sanctions on Russia Versus Europe
The impact of sanctions on Russia must be weighed against their cost to European taxpayers. Whilst sanctions are not working to achieve their stated objective of forcing Russian policy change, they may succeed brilliantly in diverting billions from European coffers to Russian-linked entities via arbitration victories. This outcome would represent a strategic gift to Moscow, transforming intended economic warfare into an own goal of historic proportions.
Thomas Fazi, writing for UnHerd, characterised Europe’s broader sanctions strategy as “boneheaded,” noting that the continent has endured three consecutive years of industrial stagnation whilst Russia redirected its exports to Asia and consolidated its partnership with China. Germany has experienced outright deindustrialisation, with 125,000 industrial jobs lost in recent weeks. Meanwhile, Europe pays more for the same Russian oil through indirect purchases from India and Turkey, which import Russian crude, refine it, and sell it back to Europe at significant markup.
Brussels’ Constitutional Failures
Legal analysis published in the Solicitors Journal draws parallels between the EU’s sanctions approach and a breakdown of the separation of powers. The article references the Supreme Court judgment in Shvidler v FCDO, where Lord Leggatt’s dissenting opinion characterised sanctions imposed on individuals as a “serious invasion of liberty” justified by “flimsy reasons.” The judgment exposes how sanctions regimes can operate without meaningful judicial scrutiny, transforming what should be carefully calibrated foreign policy tools into blunt instruments that harm innocent parties whilst failing to achieve strategic objectives.
Valérie Hanoun’s analysis emphasises that effective sanctions must be lawful and sustainable. Those that spawn legal backlash and erode credibility produce the opposite effect. The EU may have intended to barricade arbitration doors against Russians, but tribunals consistently frown upon blanket denials of due process. Brussels has potentially fortified Russian legal cases rather than weakened them.
The Reputational Cost Beyond Euros
Financial liability represents only one dimension of the problem. Reputational damage could prove equally severe. Blanket denials of arbitration risk portraying the EU as selective about when the rule of law applies—a narrative Russia eagerly promotes in Africa, Asia, and Latin America to undermine the sanctions coalition. This perception could erode Europe’s appeal as a secure investment destination, deterring global capital precisely when the bloc needs it most.
The EU’s 18th package sought to demonstrate resolve, yet it may have demonstrated something quite different: that political theatre can override legal prudence when policymakers prioritise optics over outcomes. Sanctions function as instruments of strategy, thriving when they bolster the legal framework Europe champions. When they chip away at that framework instead, they become weapons that wound their wielder.
Pathway Forward or Point of No Return?
The evidence presented across legal and economic analyses suggests a fundamental policy failure. EU sanctions Russia through mechanisms that violate the very international legal order the EU claims to defend. Each arbitration loss will not merely represent financial cost but will validate Russian arguments that Western sanctions regimes operate outside legal constraints.
European policymakers face a choice. They can acknowledge these vulnerabilities, work to harmonise sanctions policy with treaty obligations, and develop credible diplomatic off-ramps that might actually influence Russian behaviour. Alternatively, they can maintain the current trajectory, accumulating legal losses and economic damage whilst achieving no measurable progress toward ending the conflict in Ukraine. The latter course ensures that European taxpayers fund not only Ukraine’s defence and their own economic adjustment costs, but also—through arbitration awards—the very Russian entities the sanctions were meant to pressure. That outcome would represent not merely policy failure but policy absurdity of the highest order.