EU Fortifies Russia Sanctions Against Investor Challenges, Sparking Legal Debate

EU Bolsters Sanctions Regime Against Investor Claims

The European Union has taken significant steps to protect its extensive sanctions against the Russian Federation from challenges through investor-state dispute settlement (ISDS) mechanisms. These measures, introduced as part of the EU's 18th package of sanctions adopted on July 18, 2025, aim to prevent sanctioned entities and individuals from using international arbitration to circumvent restrictive measures or claim compensation.

The new provisions, primarily found in Council Regulation (EU) 2025/1494 (amending Regulation 833/2014) and Council Regulation (EU) 2025/1472 (amending Regulation 765/2006), represent a direct response to a growing number of arbitration claims.

Key Measures to Counter ISDS Challenges

The EU's latest regulations introduce several critical provisions designed to shield its sanctions policy:

• A prohibition on the recognition or enforcement of any ISDS award that relates to measures adopted under the EU's Russia sanctions regulations. This applies to decisions from foreign-seated ISDS tribunals or non-EU courts.
• A clear right for EU Member States to seek damages from investors who pursue such ISDS claims. This includes the recovery of legal costs and other expenses incurred in defending against these claims.
• A direct prohibition on designated Russian and Belarusian parties from pursuing or enforcing ISDS arbitral awards or judgments connected to EU sanctions.

These actions underscore the EU's determination to maintain the integrity and effectiveness of its sanctions regime, which was initially imposed in 2014 following Russia's annexation of Crimea and significantly expanded after the full-scale invasion of Ukraine in February 2022.

Understanding Investor-State Dispute Settlement (ISDS)

Investor-State Dispute Settlement (ISDS) is a mechanism embedded in many international investment agreements, such as Bilateral Investment Treaties (BITs). It allows foreign investors to sue host states before international arbitration tribunals for alleged breaches of investment protection standards. The system was originally conceived to provide a neutral forum for resolving disputes and protecting investors from arbitrary state actions, particularly in jurisdictions where domestic legal systems might be perceived as less independent.

However, in the context of the Russia-Ukraine conflict, ISDS has become a contentious point. Sanctioned Russian and Belarusian entities have initiated or threatened numerous ISDS proceedings against EU Member States, alleging that sanctions violate their investment rights and seeking substantial compensation. An analysis indicates that 28 investment arbitration cases, including threats, have been launched by sanctioned oligarchs or companies, claiming a total of USD 62 billion in damages, with over half of these cases emerging in 2025 alone. A prominent example includes Mikhail Fridman's USD 16 billion claim against Luxembourg over frozen assets.

Legal Challenges and Criticisms

The EU's move has not been without controversy, drawing criticism from various quarters. Investors, particularly those from Russia, have challenged the new measures before the Court of Justice of the European Union (CJEU), arguing that they are incompatible with international law.

Critics contend that the EU's actions may weaken the international legal framework for ISDS and violate several international agreements, including the New York Convention, the ICSID Convention, and the principle of good faith under the Vienna Convention on the Law of Treaties. They also argue that the measures could infringe upon EU constitutional principles such as sincere cooperation, legitimate expectations, and legal certainty, as well as rights under the European Convention on Human Rights. The EU's approach is seen by some as a unilateral attempt to remove its sanctions regime from the purview of international investment law, potentially undermining the jurisdiction of investment tribunals and asserting extraterritorial control over the enforcement of arbitral decisions.