Legal challenges could pose new problems for EU sanctions on Russia

Arkady Rotenberg and Rosneft CEO Igor Sechin

We’ve discussed the economic and political challenges which the sanctions on Russia have caused for the EU. So far the economic pain has been managed (though Germany has been hit quite hard), despite outbursts from a few countries. The long standing political differences over how to deal with Russia have also been exposed.

However, now a new front has opened – a legal one. Both Rosneft and billionaire Arkady Rotenberg have launched legal challenges against the EU sanctions on Russia at the European Court of Justice (ECJ).

While the details of the challenges have not yet been revealed in full (the cases can be found here, here and here), Rosneft will be challenging the grounds for banning them and others from capital markets access, while Rotenberg will be questioning the decision to freeze his assets in Europe and impose a travel ban.

So, why exactly might this be a problem?

Well, the EU does not actually have a great track record of being able to legally enforce its sanctions despite the assumption that the ECJ would always back the EU. There are numerous recent examples:

• In September this year the EU General Court (a step below the full ECJ) ruled that the EU’s sanctions which froze Iran’s Central Bank assets were unlawful since the evidence behind them was so “vague and lacking in detail”.
• Similarly towards the end of 2013 there were a series of cases which saw the sanctions against numerous Iranian banks and companies overturned due to lack of sufficient evidence.
• In fact, there have been countless examples of this over the past few years since the ruling in the Kadi case, which essentially established the ability for sanctions to be challenged and precedent for them to be overturned on insufficient evidence.

The thrust is that the ECJ and EU system for legally enforcing sanctions is actually quite inadequate for a number of reasons:

• The decision to impose sanctions is essentially a political one. This means the evidence or research which goes into deciding who is sanctioned can often be limited. This makes justifying the sanctions in legal terms quite difficult.
• Where there is evidence it can often be confidential and provided by national government sources. However, there is no system for sharing, submitting or even holding confidential information at the ECJ. All evidence submitted to the court must be shared with the other side and is often made public. This makes many governments and intelligent services very uncomfortable. This combined with the point above means that in some cases the court is forced to overturn sanctions simply because it has not been given enough evidence to make a proper judgement.
• Those being sanctioned are often not the real target. The Russian sanctions are a prime example of this – individuals and firms around the Russian government have been hit to try and inflict pain and force a change of approach by the government. But this means that to legally defend the sanctions the link between the two must be conclusively proven and they must be shown to be involved in the activity which resulted in the sanctions.

(For a more detailed discussion we recommend reading this evidence submitted to the House of Lords on the isse).

It has taken a while for this to filter through. The main reason is that the original sanctions, which were focused on those involved in destabilising Eastern Ukraine and Crimea were easier to defend and legally prove. However, as sanctions have broadened and the objective has become causing general economic pain, the legal base has also become more stretched. Clearly, Rosneft and Rotenberg feel they are now at a point of vulnerability.

It’s hard to fully assess at this point in time just what chances they have of succeeding. The hope might be that the cases will draw attention and encourage those EU countries which do not fully support sanctions to apply more political pressure for an easing of the controls. Just today we have seen Hungary speaking out against them.

Even if Rosneft and Rotenberg were to win, history has shown that this is no guarantee of the sanctions being removed permanently. Previously, the sanctions have simply been reworded and instituted under a different legal base. Sure they can be challenged again but it is a very lengthy legal process. Alternatively, better evidence has been collected in due course and a more solid base for the sanctions provided. Of course, the EU would retain the right to appeal against any judgement.

With that in mind we wouldn’t expect any results for 12 – 18 months and in the meantime the sanctions will stay fully in place. In that sense, given the economic and political fallout from the sanctions so far not to mention the increasingly desperate economic crisis in Ukraine, many will hope the situation has reached some resolution before these cases ever have a chance to be resolved.