EU Sanctions and Investment Arbitration: An Attempt at Moving the Goalposts through Increased Securitisation?
Author: Alexandros Bakos ((Postdoctoral researcher, Hamad Bin Khalifa University, College of Law)
Introduction
After the Achmea and Komstroy sagas, marking the end of intra-European Union (EU) investor-state arbitration, the Union finds itself again at the centre of some investment arbitration drama. Sanctioned Russian investors are increasingly bringing arbitral claims against the EU and its Member States in the hope that this might offer some relief against unilateral restrictive measures. Truth be told, anyone would be forgiven for taking a step back and asking – what sort of relief? Does an arbitral tribunal have the power to order anything else than compensation? Against which measures, more specifically? And what is the extent to which arbitrators might even second guess a host state’s foreign (sanctions) policy, of all things? I’m not surprised at all that academics, researchers, and think-tanks are having a field day with these developments. For instance, see this special issue in the Legal Issues of Economic Integration. As far as I’m aware, this is the first journal to comprehensively and exclusively dedicate an entire issue to how sanctions shape investment arbitration (I’m talking strictly about sanctions and investment arbitration since there are a few examples of journals dedicating their attention to sanctions and arbitration more broadly).
It wasn’t long before the EU decided to attempt some radical feats of legal engineering to prevent the enforcement of arbitral awards in favour of sanctioned Russian and Belarusian investors. Back in July, when the Union adopted its 18th Sanctions Package against Russia, it inserted a prohibition on the recognition and enforcement of arbitral awards in favour of investors sanctioned in response to Russia’s destabilising acts in Ukraine (Council Regulation (EU) 2025/1494). For the prohibition to apply, the award must be rendered by a tribunal seated outside the Union and underlying claims must be connected to the imposition of sanctions on Russian or Belarusian investors pursuant Russia’s destabilising acts in Ukraine (Regulations 833/2014 and 269/2014). Otherwise, specifics such as the violation of fundamental due process principles or the existence of other procedural defects do not matter. It does not even matter whether arbitrators overstep their mandate and read sweeping limitations in the applicable standards of protection on the EU’s power to sanction. The simple enforcement of such awards would be against the Union’s public policy (see Recital 22 of Council Regulation 2025/1494). Toni Marzal has quite rightfully qualified this as the ‘undoing of international investment arbitration.’
The extent to which this limitation may have any impact on arbitral proceedings, however, is unclear. As Marzal explained, public policy exceptions to the enforcement of awards rendered under the International Centre for Settlement of Investment Disputes (ICSID) Convention (most investment arbitration awards) are not available. Non-ICSID awards, however, are governed by the 1958 New York Convention, which allows for a public policy exception to the duty to recognise or enforce. Nonetheless, even in the presence of risks to the eventual enforcement of the award, arbitral tribunals would still hear the claim and render the award, especially when such risks exist only in specific jurisdictions. The ban only refers to recognition and enforcement proceedings in the EU. Tribunals may have a duty to render enforceable awards, but in this scenario the ban does not – and could not – extend to recognition and enforcement proceedings outside the EU.
Nonetheless, the Union finds itself at best on shaky grounds when it comes to the legality of the measure. It is seriously doubtful whether the measure, when an award is rendered by an ICSID tribunal (which is a foreign seated tribunal) complies with the duty that the Member States have under ICSID Convention to enforce such an award. But Marzal has already analysed this more extensively, so I’ll stop here. In fact, what I want to show is that the EU has made a conscious decision to forego aspects of legality, and even to act as if its values selectively apply to international legal regimes depending on what are ultimately extra-legal considerations. To be clear, this is not a criticism of the EU’s foreign policy as reflected in its sanctions regime against Russia for the latter’s destabilising acts and invasion of Ukraine. The criticism is directed at how the Union pursues its goal of shielding that sanctions regime from the reach of arbitral tribunals irrespective of the substantive quality of awards, procedural defects, or other defects in the process that leads to a resolution of the underlying dispute. Whatever the underlying concern with ISDS tribunals reviewing sanctions regimes is (and there are plenty, to be fair, from the adequacy of arbitrators analysing the merits of foreign policy measures that, for their most part, seek to address security interests by design to the risk of turning ISDS into a lawfare instrument), a blanket ban is not the way to address them. But there is a strategic reason behind the EU’s approach, to which I will now turn.
Changing the Zeitgeist
The Union, through its restriction on the enforcement of awards, engages in patterns of securitisation that ultimately seek to influence perceptions as to the adequacy of investment arbitral tribunals potentially ordering relief against sanctioning jurisdictions. This is not a legal move (although it has legal implications) but is more of a speech act by a policy entrepreneur seeking to convince its audience that arbitral tribunals should not play any role in debates about the merits of sanctioning Russian and Belarusian investors for Russia’s destabilising acts in Ukraine. This audience is formed of a broad array of stakeholders, which includes arbitral tribunals and other actors that may be involved in the process (such as domestic courts before which enforcement of the eventual award would be sought). Ultimately, the goal is to convince the audience that sanctions against Russia are so deeply tied to the Union’s security interests that arbitral tribunals should not sit in judgment of them.
That this attempt to influence perceptions is possible results from two structural features of investment arbitration. Firstly, there is the uncertain nature of investment arbitration regarding both its adequacy and legitimacy to settle disputes that arise from the imposition of sanctions (the political element). Legitimacy concerns have arisen from arbitral tribunals generally reviewing public policy measures – the review of foreign and security policy measures is even less likely to boost an already low degree of legitimacy. Secondly, disputes that arise from the sanctioning of foreign investors are very much in their infancy. It is still unclear how investment protection standards limit the power of states to sanction. Such disputes also raise challenging questions about the geopolitical implications of awards that order compensation against such measures or direct the state to delist the investor (at least theoretically possible despite the potential backlash against such awards). This means that legally it is not clear what patterns of engagement will arbitral tribunals hearing such claims display. The multitude of possibilities leave room for extra-legal attempts to delegitimise investment arbitration as a forum for reviewing the legality of sanctions imposed on foreign investors.
What the EU is doing, at least when it comes to the claims arising from the imposition of sanctions by the Union or its Member States, is an attempt at radically redrawing the rules of the game. It entails moving beyond a dichotomous approach to the legality of the act. The ultimate goal is changing the zeitgeist so that a general perception is formed – a conviction if possible – that investment arbitration is not the place to challenge economic sanctions. What better way to do this than to render a category of disputes in breach of the Union’s public policy, of its fundamental security interests? This is the EU acting not as an actor constrained by rule of law considerations or even adhering to its values (for instance, strict observance of international law and contribution to its development). This is a policy entrepreneur that seeks to insulate foreign and security policy measures from the ‘prying’ eyes of investment arbitrators – and, perhaps more broadly, any other international court and tribunal.
So, why is the EU going to such lengths to prevent arbitral tribunals from reviewing its sanctions regime against Russia and to contribute to a perception that arbitral tribunals should be removed from any discussion? In my opinion, this has to do with the nature of the measures and what their potential assessment on the merits in an investment dispute might entail. As shown elsewhere, it should be quite easy to make the case that freezing an investor’s assets, for instance, entails a deprivation of property and engages the expropriation standard (even if the measure is not permanent) found in (potentially) applicable investment treaties. Similarly, it is not too difficult to imagine due process shortcomings in the adoption and application of such measures, raising questions of compliance with applicable fair and equitable treatment provisions. Then there are precedents in investment arbitration where the invocation of the police powers doctrine failed in the presence of politically motivated measures (which sanctions, for their most part, are). This was the case, for instance, in Bank Melli v. Bahrain dispute, which arose from measures taken against the claimant for allegedly failing to comply with applicable sanctions regulations. It should be clear, thus, why any respondent in an investment arbitration dispute that arises from the imposition of sanctions would have a high interest in not reaching the merits of the proceedings. This leaves a couple of avenues for the state to still steer the outcome in its favour, especially when it already acts against a background in which arbitral tribunals are seen as illegitimate fora for the resolution of disputes arising from the imposition of economic sanctions. I’ll start with the least likely one and end with the most likely one.
Avenues to Avoid Investment Tribunals Ruling in Sanctions Disputes
Firstly, states might argue that, considering the highly political nature of disputes that arise from the imposition of sanctions, this contradicts the depoliticisation hypothesis in investment arbitration. As a result, the real intention behind the pursuit of the claims is to neutralise the effectiveness of the sanctions regime. This becomes even more problematic in proceedings in which there is a strong connection between the investor and its home state. For instance, when Russian oligarchs challenge measures in investment arbitration (the most relevant example being Mikhail Fridman’s claims against Luxembourg for the implementation of EU sanctions), a favourable award would ultimately benefit the sanctioned government. Distorting ISDS from its purpose of ensuring a politically neutral system of settling disputes and offering a safeguard against political risk would indicate an abuse of process. Such a claim, the argument continues, should be rejected on admissibility grounds. There are multiple obstacles to this line of reasoning. To start with, the depoliticisation narrative operates differently when it comes to the substantive aspects of a dispute as compared to procedural considerations. Just because a dispute entails certain political implications does not mean that a tribunal’s competence to hear it should be affected. Virtually any investor-state dispute entails political implications. Furthermore, where should one draw the line between ‘acceptable’ levels of politicisation and ‘unacceptable’ ones? This is clearly an impossible task.
Secondly, states might try to deny the jurisdiction of arbitral tribunals to review the imposition of sanctions. This is challenging as well. But there might be some merit to this approach when leveraging the potential jurisdictional barriers that security exceptions, when applicable, might raise. While such treaty provisions operate, for the most part, on the merits, some recent developments show that states are experimenting with innovative language to remove measures taken in pursuit of their security interests from the ambit of a tribunal’s powers of review. India is a perfect example in this regard, as it explicitly renders the invocation of security exceptions non-justiciable in some of its bilateral investment treaties, such as the one with Belarus.
At the same time, it is possible to leverage the denial of benefits (DOB) clause for similar goals, as this type of provision can operate to deny a tribunal’s jurisdiction. This has already happened in relation to the Energy Charter Treaty’s DOB clause. Another example can be seen with the European Commission issuing recommendations (although not reflective of the Commission’s official position) for Member States which negotiate treaties with third countries, or renegotiate existing ones, to insert denial of benefits clauses that would operate in relation to sanctioned investors. Unlike typical denial of benefits clauses that can normally be invoked when an investor from a third country reroutes its investment through the home state, the type of clause recommended by the Commission would operate against investors with genuine links to the home state (e.g., substantial economic activity). This radically transforms the nature of denial of benefits clauses – it is not a guarantee against treaty shopping anymore but an attempt at creating a clear separation between sanctioned investors and the rest. It would be sufficient for the operation of the DOB clause for the claimant in an investment arbitration to be targeted by sanctions. It would not even matter if the dispute itself arises from the imposition of economic sanctions. In the presence of such a treaty provision, sanctioned investors would represent an entirely new category, removed from the jurisdiction of arbitral tribunals. The impact of such developments is similar to the EU’s ban: the arbitral tribunal is removed from any discussion that involves a sanctioned investor (although in this case the goal is to limit the tribunal’s jurisdiction and the measure itself is not illegal). The message is clear: this is the domain of state authorities and the foreign policy crowd, not arbitral tribunals sitting outside the confines of such foreign and security policy circles.
Thirdly, states may seek to influence the extent to which a tribunal engages with the imposition of sanctions when disputes reach the merits stage. This follows more general discussions about the extent to which a tribunal should defer to the assessment of domestic authorities in areas of high importance to the state, such as national security. It is expected that the tribunal review would be minimal, and it would only entail an assessment of the good faith invocation of a state’s security interests – at least in the presence of self-judging security exceptions – and the adequacy of the impugned measure to address them. Such a restricted standard of review, however, would not preclude tribunal engagement with the aims of the sanctions regime and the context in which they were adopted. This would allow arbitrators to assess the link between the measures and the sanctioning state’s security interests (as not all sanctions necessarily have a link to the state’s national security imperatives).
Nonetheless, what exactly is an area of high importance to the state and what its scope is does not amount so much to a legal question but is ultimately a contested question and heavily influenced by perceptions, to which policy entrepreneurs contribute. It is in this context that the EU’s restriction must be seen – not in black or white terms pertaining to the legality of the measure, which, at least in my opinion, is quite a straightforward question. But in a geoeconomically charged environment where signals matter – and where the signal sent by the EU is that sanctions regimes should remain outside the scope of arbitral tribunal review. At the very least, the outside perception has likely been influenced already. Anyone looking at the prohibition might ask themselves – is investment arbitration really the forum for foreign investors to challenge the imposition of sanctions when it automatically challenges the Union’s public policy? For the EU, foregoing legality aspects might be a small price to pay for such outcomes.
