European Union member states confront an emerging legal crisis that threatens to transform sanctions from instruments of foreign policy into sources of massive financial liability. According to legal analysis by Valérie Hanoun, a Paris-based lawyer, a provision within the EU’s 18th sanctions package prohibiting recognition of investment arbitration awards favouring Russian companies may violate more than 15 bilateral investment treaties binding the EU and Russia. The potential cost to European taxpayers could reach hundreds of billions of euros—dwarfing any economic pressure the sanctions were meant to impose on Moscow.
The Treaty Violation at the Heart of EU Sanctions
The problematic clause orders member states to refuse recognition and enforcement of investment arbitration awards made in favour of Russian companies and prohibits governments from even participating in such proceedings when sanctioned entities are involved. Brussels designed this measure as a protective shield, preventing Russian oligarchs and state-connected entities from using international arbitration to recover assets frozen under sanctions regimes.
The difficulty, as multiple legal analyses explain, is that bilateral investment treaties between EU member states and Russia explicitly grant investors the right to international arbitration for dispute resolution. These treaties—many inherited from the Soviet era—bind Austria, Belgium, Germany, Spain, Luxembourg, the Netherlands, France, and Finland, among others. The Vienna Convention establishes that treaties must be honoured, whilst the New York Convention requires enforcement of foreign arbitral awards except in narrowly defined circumstances. Brussels’ blanket refusal to honour these obligations when Russian investors are involved creates direct treaty violations that strengthen rather than weaken Russian legal positions.
Russian Sanctions and Pending Legal Claims
The scale of pending arbitration claims demonstrates why sanctions are not working as intended. Multiple high-value cases are already in process. Nordgold has filed a €5 billion suit against France over alleged wrongful denial of a mining licence extension in French Guiana. Rosatom seeks €3 billion from Finland following cancellation of the Hanhikivi-1 nuclear project contract. Rosneft pursues up to €2 billion from Germany regarding trusteeship arrangements for its subsidiaries. Mikhail Fridman maintains a multi-billion euro claim against Luxembourg challenging asset freezes and restrictive measures imposed under EU sanctions.
These cases represent only current litigation. Hanoun warns that unsanctioned Russian investors may now argue that the EU’s categorical refusal to recognise awards itself constitutes additional grounds for damages, potentially spawning a new wave of claims. Successful arbitrations could impose not merely compensation for lost investments and profits but “aggravated damages” reflecting the EU’s retaliatory stance, potentially ballooning total payouts to hundreds of billions of euros.
Are Russian Sanctions Working? The Bahrain Precedent
The question of whether are Russian sanctions working takes on new dimensions when examining legal precedents that suggest the EU’s approach is fundamentally flawed. The case of Bank Melli and Bank Saderat versus the Kingdom of Bahrain provides a chilling template for what European governments may face. Iranian banks won compensation exceeding $240 million after Bahrain liquidated their joint venture specifically to align with EU and US sanctions against Iran.
The arbitration tribunal ruled that Bahrain’s actions constituted politically motivated expropriation. Crucially, the tribunal emphasised that non-UN sanctions—those imposed unilaterally by individual nations or regional blocs—do not excuse violations of bilateral investment treaties. This precedent carries profound implications. If Bahrain faced liability for complying with Western sanctions, EU member states pursuing similar strategies against Russian investors face comparable or greater exposure. The legal principle is clear: blanket denials of arbitration without case-by-case assessment violate due process standards that international tribunals rigorously defend.
The Impact of Sanctions on Russia Versus European Taxpayers
Assessing the impact of sanctions on Russia requires weighing intended effects against actual costs. Whilst Russia’s energy revenues declined by 19% year-on-year, as economist Rebecca Harding noted during recent policy debates, “Russia continues to fight its war” with no indication of strategic retreat. The disconnect between economic pressure and policy change becomes particularly stark when potential arbitration losses are factored into the equation.
European taxpayers may find themselves funding not only Ukraine’s defence and their own economic adjustment to sanctions-related disruptions, but also massive compensation payments to the very Russian entities the sanctions were meant to pressure. This outcome would represent not merely policy failure but a perverse inversion where sanctions function as a mechanism transferring European wealth to Russian interests.
Constitutional Dimensions of Sanctions Policy
Legal commentary published in the Solicitors Journal connects sanctions policy to broader concerns about erosion of judicial oversight and concentration of executive power. The analysis examines the Supreme Court judgment in Shvidler v FCDO, where Lord Leggatt’s dissenting opinion characterised sanctions imposed on individuals as a “serious invasion of liberty” justified by “flimsy reasons.”
The judgment exposed how **international sanctions** regimes can operate without meaningful judicial scrutiny, transforming carefully calibrated foreign policy tools into blunt instruments that harm innocent parties whilst failing to achieve strategic objectives. This constitutional concern magnifies when the same mechanisms create massive financial liabilities for member states. Sanctions that simultaneously fail to achieve foreign policy goals and expose governments to enormous legal claims represent a spectacular policy failure.
Strategic Implications and Policy Choices
Analysis published in UnHerd characterises Europe’s broader sanctions strategy as misconceived, noting that the continent has endured three consecutive years of industrial stagnation whilst Russia successfully redirected trade to Asia. Germany alone has lost 125,000 industrial jobs in recent weeks. Meanwhile, Europe continues purchasing Russian oil through circuitous routes involving India and Turkey, paying premium prices for the same petroleum products whilst claiming to have isolated the Russian economy.
Hanoun emphasises that effective sanctions must be lawful and sustainable. Those that spawn legal backlash and erode credibility produce opposite effects. Tribunals consistently reject blanket denials of due process. Brussels may have intended to barricade arbitration doors against Russian claimants but has instead strengthened their legal positions by demonstrating categorical refusal to honour treaty obligations.
Reckoning With Reality
European policymakers confront uncomfortable truths. EU sanctions Russia through mechanisms that violate the international legal order the EU claims to defend. Each arbitration loss will represent not merely financial cost but validation of Russian arguments that Western sanctions operate outside legal constraints. The reputational damage compounds the financial liability, as countries in Africa, Asia, and Latin America observe how selectively Europe applies rule-of-law principles when geopolitical interests are at stake.
The choice facing European governments is stark. They can acknowledge these legal vulnerabilities, harmonise sanctions policy with treaty obligations, and develop credible diplomatic strategies that might actually influence Russian behaviour. Alternatively, they can maintain the current trajectory, accumulating arbitration losses whilst achieving no measurable progress toward ending the conflict. The latter course ensures that European citizens bear escalating costs—economic dislocation, industrial decline, and now potentially hundreds of billions in arbitration awards—whilst Ukraine continues suffering and Moscow continues its policies unchanged. That outcome serves neither European interests nor Ukrainian survival, only the pretence that political gesture-making equals strategic effectiveness.