The Lugovoi Law has allowed Russian companies to move arbitration proceedings from so-called “unfriendly” countries into Russian courts on the premise that they would otherwise not have fair access to justice. The challenge facing international companies is whether their former Russian counterparts will seek to collect awards granted to them by the Russian courts by bringing their claims to courts outside Russia – to Russia-friendly or neutral countries where international companies have assets.
These international companies are concerned that Russia-friendly countries may extradite personnel working there or visiting these countries to Russia if a Russian court or law enforcement agencies demand it.
Russia’s treaties with many countries, sometimes dating back to the Soviet times, allow for such legal cooperation between the countries. The question is whether it will work in real life.
The Lugovoi Law comes into effect
In 2020, the Russian parliament adopted a bill submitted by Andrei Lugovoi, a Russian MP wanted in the UK over the deadly poisoning of ex-KGB officer Alexander Litvinenko on British soil. The initiative, dubbed the Lugovoi Law, has become the bane of many international companies that withdrew from work in Russia following Russia’s full-scale invasion of Ukraine two years later.
When major European companies backed by major international banks broke up with their Russian partners in 2022, these Russian companies sought compensation for damages and brought their lawsuits to the Russian courts. Many of these Russian partners were state corporations or companies controlled by people from President Vladimir Putin's close circle.
It is no wonder that the most powerful of them, such as Gazprom and its affiliates, have already won multiple awards amounting to hundreds of millions of dollars and are likely to win more in the ongoing proceedings. Russia-based assets of Western companies and banks that had provided guarantees for their joint projects with Russian firms are being seized, and the awards are often larger than the value of these assets.
Breaking the problem down
The best way to approach the above concerns is by breaking the problem into three questions.
The first question: Will a Russian company seek to claim the award abroad?
This is the most difficult from the research perspective that needs to be considered on multiple levels:
- State interest level: Is there government pressure – formal or informal – on the company to pursue claims against former Western partners abroad?
- Organisational logic level: what are the incentives and barriers to pursuing such claims within the Russian company?
- Personal level: what is the personality of the key decision-maker in the Russian company, and what is their track record in interactions with the Western counterparties and foreign courts? Is this person prioritising the pursuit of the company’s claims abroad?
The second question is: What is the route through which a Russian company pursues a claim and explores the bureaucratic route in a Russia-friendly country? The key point here is whether the decision to accept the claim and enforce it will be escalated from the rather technical level of an individual non-Russian judge who gets the Russian request to the more strategic governmental or political level in a Russia- friendly or neutral country.
The third question is: Will the government of such a country choose to please a major Russian corporation and, by extension, the Russian government over upsetting relations with a European country or the EU generally? This analysis includes current political and diplomatic realities and trends, economic interdependencies, and the personal attitudes of decision-makers.
A reassuring reality
In the client cases we have worked on most recently, we found that it was more likely that Russian companies would choose not to pursue their claims abroad. There were several reasons for this:
- There has been no government or political pressure on Russian companies to collect their awards abroad, at least until now.
- Companies, in general, and their legal departments, in particular, don’t want to risk seeking an award abroad and failing, as that would create a much-publicized precedent, making it easier for foreign courts to throw away Russian claims in the future. No one wants to take on such a responsibility.
- From the internal accounting view, it is preferable to keep the award granted by the Russian court as an asset on the company’s balance than to risk it being drastically reduced or entirely discarded by a foreign court. Again, no one wants to take responsibility for such a risk.
- Key decision-makers within Russian companies realise that going after their ex-partners’ assets or people abroad would make mending ties with these partners in the future – something that most major Russian corporations hope for – increasingly difficult. In their calculus, it is wiser to keep this claim as leverage for future negotiations with Westerners.
- Suppose a claim for hundreds of millions of dollars from a major Russian company still goes to a foreign court. In that case, the decision to accept it (in all the countries we have researched for our clients) will be elevated to the government level, up to the country’s presidential administration.
- Pleasing a Russian company at the risk of upsetting a European government is not something that leaders of Russia-friendly countries are prepared to do, at least for now.
The analysis above might be reassuring for most clients, but we caution against complacency. Last year, a South African court accepted a claim by Russian television channel Spas against Google and ruled to freeze Google’s assets in the country over its refusal to unblock Spas’ YouTube channel. We believe this example is, in fact, a counterfactual that supports our analysis.
Spas, sanctioned in the EU in 2023 for spreading anti-Western propaganda, unlike major Russian corporations, has had a strong internal intent to pursue this claim:
- As a primary channel for Russian propaganda, Spas can show it is pushing back against the West by focusing on a major Western corporation.
- Spas has never had and does not appear intent on forming business relations with Western corporate entities.
- Considerations of bureaucratic risks do not constrain Spas’ managers if they fail. The story itself was the point.
However, the circumstances could change. Russian companies’ intent to pursue claims may change if President Vladimir Putin directs them to do so, likely as part of his propagandistic agenda. Personnel changes inside the companies could elevate decision-makers with greater risk appetite to send the claims to foreign courts. Outside Russia, the cost-benefit calculus of some states could change, and they may grant motions to seize Western companies’ assets on their territories.
An international company at odds with a powerful Russian corporation seeking damages from it must evaluate the abovementioned risks – monitoring and reevaluating if something changes.
This may be costly, but the legal complications in Russia-friendly countries can be much costlier.