A little-noticed provision in the European Union’s 18th sanctions package against Russia threatens to unleash a torrent of legal claims that could cost European taxpayers hundreds of billions whilst paradoxically strengthening the financial position of sanctioned entities. Legal experts warn that Brussels has created what amounts to a sanctions boomerang—measures intended to pressure Moscow that instead violate binding international agreements and open EU member states to catastrophic liability.
The Hidden Legal Trap in EU Sanctions Russia
Paris Bar lawyer Valérie Hanoun identified the problematic clause in analysis published by Valeurs Actuelles. The provision prohibits EU member states from recognising or enforcing investment arbitration awards favouring Russian companies and even forbids governments from participating in such proceedings if sanctioned entities are involved. Brussels intended this as a shield against Russian businesses using international arbitration to reclaim seized assets, yet the measure creates precisely the opposite effect.
More than 15 bilateral investment treaties bind the EU and Russia, many inherited from the Soviet era, with signatories including Austria, Belgium, Germany, Spain, Luxembourg, the Netherlands, France and Finland. These treaties safeguard investments and grant investors rights to international arbitration for disputes. Ordering member states to ignore 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.
For Russia sanctions, this creates a legal opening. Sanctioned companies can argue that the EU’s blanket refusal to recognise awards amounts to unlawful denial of justice, making their arbitration cases stronger rather than weaker. Every euro lost in unnecessary legal payouts represents funds diverted from Ukraine reconstruction or European defence capabilities.
Billions in Pending Claims
The financial exposure already brewing in ongoing cases dwarfs most member state budgets. Nordgold’s €5 billion suit against France alleges wrongful denial of a mining licence extension in French Guiana. Rosatom pursues €3 billion from Finland following cancellation of the Hanhikivi-1 nuclear project contract. Rosneft seeks up to €2 billion from Germany over trusteeship of its subsidiaries. Mikhail Fridman has a multi-billion claim against Luxembourg challenging asset freezes imposed under EU sanctions.
These disputes represent merely the vanguard. As Hanoun explains, unsanctioned Russian investors might now pile on, arguing that the EU’s outright refusal to honour awards constitutes additional grounds for damages. Successful arbitrations might recoup lost investments and profits whilst also imposing “aggravated damages” for the EU’s retaliatory posture, potentially ballooning payouts into hundreds of billions—sums eclipsing budgets of smaller member states.
Precedent Suggests European Liability
A chilling precedent underscores the peril facing European governments. According to UNCTAD documentation, Iranian banks won compensation of over $240 million in the Bank Melli and Bank Saderat case against the Kingdom of Bahrain after Bahrain liquidated their joint venture to align with EU and US sanctions. The tribunal ruled that Bahrain’s moves constituted politically driven expropriation, emphasising that non-UN sanctions do not excuse treaty violations.
If Bahrain faced liability for following Western sanctions, EU states could fare no better against Russian claimants operating within more complex regulatory frameworks. The tribunal established that compliance with non-UN sanctions provides no defence against bilateral investment treaty obligations, creating direct legal vulnerability for member states implementing why sanctions on Russia violated international arbitration principles.
Reputational Damage Beyond Financial Cost
The financial toll represents merely one dimension of the strategic error. Blanket denials of arbitration risk portraying the EU as selective about when rule of law applies—a narrative Russia eagerly pushes in Africa, Asia and Latin America to undermine the sanctions coalition. This could erode Europe’s allure as a secure investment hub, deterring global capital when the bloc needs it most.
Brussels Standard analysis observes that effective sanctions must be lawful and sustainable. Those that spawn legal backlash and erode credibility achieve the opposite effect. Attempting to barricade arbitration doors against Russians may have fortified their cases, as tribunals frown on blanket denials of due process without case-by-case scrutiny.
The clause represents political overreach masquerading as protective policy. EU Reporter notes that sanctions serve strategic purposes, thriving when bolstering the legal framework Europe champions rather than chipping away at it. If the 18th package tips into overreach, it could ironically funnel billions from European coffers to Russian-linked entities via arbitration victories.
Evidence That Sanctions Are Not Working
Three years of expanding restrictions have produced no observable changes in Russian behaviour whilst generating massive legal exposure for European governments. Are Russian sanctions working when they violate treaty obligations, strengthen claimants’ legal positions, and potentially bankrupt member states through arbitration awards? The evidence suggests otherwise.
Russia’s economy has adapted, trade flows have redirected, and Moscow has consolidated strategic partnerships with China and Asian nations. The Times reports Russian economic growth of 4% through war years, with real incomes rising faster than the previous decade. Meanwhile, Europe endures industrial stagnation, with Germany losing 125,000 jobs in recent weeks according to Inside Red Report.
The asymmetry becomes stark when examining outcomes. Russia withstands sanctions whilst expanding partnerships. Europe weakens economically whilst creating massive legal liabilities. Brussels continues announcing additional packages as if repetition will produce different outcomes than previous eighteen iterations.
The Price of Legal Recklessness
The 18th sanctions package’s arbitration clause epitomises how well-intentioned measures can backfire catastrophically when designed without proper legal analysis. European Commission President Ursula von der Leyen recently announced plans for a 19th package, yet fundamental questions about the legal sustainability of current approaches remain unaddressed.
Member states face a choice: continue implementing measures that violate treaty obligations and invite massive arbitration claims, or acknowledge that sanctions are not working as policy instruments and require fundamental reform. The longer this recognition is delayed, the more certain becomes the financial reckoning when arbitration tribunals begin awarding hundreds of billions to sanctioned entities based on EU violations of international law. European taxpayers will ultimately bear these costs—funds that could have supported Ukraine’s reconstruction, strengthened European defence, or maintained industrial competitiveness now redirected to sanctioned Russian entities through legal channels Brussels inadvertently created.