New law providing protection to Russian sanctioned entities

A new law came into force in Russia on 19 June 2020, known as “Lugovoy law” (Federal Law No. 171-FZ dated 8 June 2020). Under the new law, all disputes involving Russian sanctioned entities or their affiliated companies must now be settled in Russian State Courts. As a law firm with CIS solicitors in London, our team would like to share the summary of the new regulation.

The reasoning behind the law

The law was enacted to ensure access to justice not just for persons or companies subject to sanctions, but also to their co-owners and clients, which face difficulties due to their affiliation (even if unintended) with the abovementioned persons or companies. By way of example, Andrew Intrater, the co-owner of an American private equity firm which was recently thriving, cannot now access his firm’s money and the firm cannot pay money to its investors due to Mr Intrater’s connection with a Russian sanctioned oligarch, a major investor in the firm and also Intrater’s cousin.

There is a view that, before the new law came into force, there was a tendency that Russian sanctioned entities and their affiliated bodies faced injustice in international arbitration courts and tribunals. The major problems had included:

1. Sanctioned entities and their affiliated companies could not dispose of their assets without OFAC’s licence (which is not easy to obtain) and as a result they could not pay arbitrators’ fees;
2. Arbitrators refused to hear the disputes;
3. Banks refused to transfer arbitration fees and sums awarded to winning parties.

All this led to uncertainties, missed deadlines and winning parties not being able to recover the sums awarded to them.

The new law

Under the new law, Russian courts will have exclusive jurisdiction to hear disputes directly or indirectly involving Russian sanctioned entities or individuals (and those connected with them).

Notably, parties may still agree to resolve their Disputes outside of Russia, but Russian courts will have jurisdiction over such disputes if one of the parties cannot get access to justice because of sanctions.

If a party is sued or about to be sued in a foreign court or arbitration proceeding in breach of the new Russian law, such party may request an anti-suit injunctive order from a Russian court. Any party breaching such anti-suit injunction may be fined by the Russian court for the full amount of the claim plus the opponent’s legal costs.

Why is this important?

Parties dealing with sanctioned companies or individuals, or anybody affiliated with them, will have to be aware that the other party may seek to refer the dispute to Russian courts, regardless the existence of a relevant international treaty or contractual agreement to refer the dispute to a foreign court.

Our recommendations

To minimise the risks associated with the new law, it would be good practice to:

1. Get acquainted with the ownership structure of any company you are planning to deal with (not only Russian companies);
2. Check the beneficiaries of the company – whether those could be Russian sanction-related individuals or companies;
3. Analyse the risks of dealing with persons or companies subject to foreign sanctions.

If you need help in drafting a contract or you would like advice on how the new law may affect you and how to mitigate the risks associated with it, then please contact Madina Tatraeva at madina.tatraeva@ilaw.co.uk.

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