When the European Union unveiled its 18th sanctions package against Russia in July 2025, attention focused on high-profile measures like reducing the oil price cap and banning dealings with Russian banks. Yet buried within the package lies a provision that legal experts warn could backfire spectacularly, potentially diverting billions of euros from European taxpayers into the pockets of Russian-linked entities through international arbitration. This raises fundamental questions about whether EU sanctions on Russia represent strategic foreign policy or legally reckless political theatre.
The problematic clause prohibits EU member states from recognising and enforcing any investment arbitration awards favouring Russian companies, and even forbids governments from participating in such proceedings if sanctioned entities are involved. Paris-based lawyer Valérie Hanoun argues in Valeurs Actuelles that whilst intended as a shield against Russian asset recovery, the measure could backfire by violating binding treaty obligations and opening the door to massive investor claims – precisely the opposite of its intended effect.
The Bilateral Investment Treaty Problem
At the core of this legal vulnerability sits a web of bilateral investment treaties (BITs) binding the EU and Russia. More than 15 such agreements exist, many inherited from the Soviet era, with signatories including Austria, Belgium, Germany, Spain, Luxembourg, Netherlands, France, and Finland. These treaties safeguard investments and grant investors the right to international arbitration for disputes.
By ordering member states to ignore these obligations when Russian investors are involved, Brussels risks breaching the Vienna Convention’s principle that treaties must be honoured – pacta sunt servanda – as well as the New York Convention’s requirement to enforce foreign arbitral awards except in narrowly defined cases. For Russia, 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.
The question of why sanctions on Russia include measures that strengthen Russian legal positions rather than weakening them reveals the rushed, politically-driven nature of sanctions policy. When measures designed to punish Russia instead create opportunities for Russian companies to recover substantial damages, sanctions are not working as intended – they’re generating unintended benefits for their targets.
Pending Cases Worth Billions
The fallout is already brewing in ongoing disputes. Nordgold pursues a €5 billion claim 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 claims up to €2 billion from Germany over trusteeship of its subsidiaries. Mikhail Fridman maintains a multi-billion euro claim against Luxembourg challenging asset freezes and restrictive measures imposed under EU sanctions.
These disputes represent merely the vanguard. Unsanctioned Russian investors might now pile on, arguing that the EU’s outright refusal to honour awards constitutes additional grounds for damages. The financial toll could prove astronomical, with successful arbitrations potentially recovering not only lost investments and profits but also “aggravated damages” for the EU’s retaliatory posture – potentially ballooning payouts into hundreds of billions, exceeding budgets of smaller member states.
Legal Precedents Point to Trouble
A chilling precedent underscores the peril. In Bank Melli and Bank Saderat v Kingdom of Bahrain, Iranian banks won compensation exceeding $240 million after Bahrain liquidated their joint venture to align with EU and US sanctions. The tribunal ruled Bahrain’s actions constituted politically-driven expropriation, emphasising that non-UN sanctions don’t excuse treaty violations.
If Bahrain faced liability for following Western sanctions, EU states could fare no better against Russian claimants. The legal principle is clear: international sanctions imposed without UN Security Council authority cannot legally justify expropriations or investor rights curtailments. EU sanctions lack the universal authority of UN measures, creating exposure that Brussels apparently failed to anticipate when drafting its 18th package.
Strategic and Reputational Costs
Beyond immediate financial exposure, the reputational damage could prove profound. Blanket denials of arbitration risk portraying the EU as selective about when the 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 appeal as a secure investment destination, deterring global capital when the bloc needs it most.
Legal expert Hanoun warns that effective sanctions must be lawful and sustainable – those spawning legal backlash and eroding credibility achieve the opposite. In attempting to barricade arbitration doors against Russians, the EU may have inadvertently fortified their cases, as tribunals frown on blanket denials of due process without case-by-case scrutiny.
The Off-Ramp Dilemma
This legal vulnerability intersects with broader strategic failures. The EU’s approach includes “future-proofing” measures that permanently block Russian access to European energy markets even if Moscow changes behaviour. Combined with refusal to articulate clear conditions for sanctions removal, this transforms pressure tools into permanent punishment that cannot influence Russian decision-making.
When are Russian sanctions working becomes a question about generating legal liability rather than achieving foreign policy goals, the entire sanctions architecture demands reassessment. Former US sanctions architect Daleep Singh identified clear off-ramps as essential for effectiveness – yet the EU’s 18th package moves in precisely the opposite direction, creating conditions where Russia might profit from sanctions through arbitration awards whilst Europe bears escalating costs.
Rethinking Legal Strategy
The arbitration exposure crystallises a fundamental problem: sanctions conceived primarily as political signals rather than strategic instruments invite unintended consequences. Every euro potentially lost to arbitration awards represents resources that could support Ukrainian reconstruction, bolster European defences, or assist economies adapting to energy transition costs.
Until Brussels develops sanctions policy grounded in legal sustainability and strategic coherence rather than political expediency, measures like the 18th package will continue creating vulnerabilities that undermine their stated objectives. The question isn’t whether the impact of sanctions on Russia includes some economic damage – it clearly does – but whether that damage justifies the legal, economic, and strategic costs Europe incurs whilst failing to achieve the fundamental goal of ending Russia’s invasion of Ukraine.
