Targeting Russia and Belarus Through Investment Arbitration: The EU’s 18th Sanctions Package

[Theodore Hanna is an LL.M. candidate in International and European Law at the National and Kapodistrian University of Athens]

Introduction

On 18 July 2025, the European Union adopted its eighteenth package of sanctions against Russia, one of its most robust to date, tightening measures on Russia’s energy, banking, and defense sectors. Uniquely, this package targets investor–State dispute settlement (ISDS) mechanisms, a system that allows foreign investors to bring claims against states before international arbitration tribunals. The EU’s deep involvement in the conflict between Russia and Ukraine stems from both security considerations, including protecting its eastern borders and undermining Russian influence in Europe, and economic imperatives, as the conflict has reshaped energy dependencies, trade relations, and the stability of Europe’s financial and security architecture.  

The EU first imposed sanctions in 2014 after Russia’s annexation of Crimea, later escalating them significantly following Russia’s full-scale invasion of Ukraine in February 2022. From the EU’s perspective, these sanctions are intended to weaken Russia’s ability to finance the war and pressure Moscow diplomatically and economically. By targeting ISDS claims brought by listed Russian and Belarusian investors, the EU aims to close potential legal loopholes that could otherwise allow sanctioned entities to recover damages or bypass restrictions through arbitration, which Brussels views as undermining the effectiveness of its sanctions regime.

The new measures, enacted via Council Regulation (EU) 2025/1494 for Russia and a parallel Council Regulation (EU) 2025/1472 for Belarus, prohibit designated Russian or Belarusian parties from pursuing or enforcing ISDS arbitral awards or judgments related to EU sanctions. They also empower EU Member States to countersue for damages incurred in defending such claims. These novel “protective restrictions” raise difficult questions under international law: Can the EU legally justify suspending treaty-based arbitration rights and blocking enforcement of arbitral awards? Are these measures proportionate countermeasures to Russian aggression, or do they breach fundamental principles such as pacta sunt servanda and due process?

This article examines the legality and effectiveness of the EU’s ISDS-focused sanctions, situating them in the wider geopolitical context of a grinding war in Ukraine, faltering sanctions deterrence, and possible regime-change objectives that blur the line between lawful countermeasures and unlawful intervention.

Curbing ISDS to Shield Sanctions: Key Measures of the 18th Package

The eighteenth package introduces a blanket prohibition on listed Russian and Belarusian investors, including state-owned enterprises and entities owned or controlled by sanctioned individuals, from enforcing or collecting on any arbitral award, judgment, or injunction against EU Member States in connection with measures taken under EU sanctions regulations. This stems from an amendment to Article 11 of Council Regulation (EU) No 833/2014, as modified by Regulation (EU) 2025/1494, which extends the existing “no-claims” clause (originally preventing Russian entities from seeking compensation in EU courts for losses caused by sanctions) to include international arbitration proceedings, including investment treaty-based ISDS. As a result, Russian and Belarusian investors are prohibited from using ISDS to challenge asset freezes, expropriations, or other restrictive measures imposed under EU sanctions. The measure responds to a spate of multi-billion dollar arbitration claims filed by sanctioned individuals and companies, which the EU characterizes as abuses of treaty rights.

For example, in 2023 Belarus’s state-owned potash firm filed a US$12 billion claim against Lithuania under the 1999 Belarus–Lithuania BIT, alleging breaches of investment protections after sanctions halted a fertilizer transit contract, and in 2024 sanctioned Russian oligarch Mikhail Fridman launched a US$16 billion claim against Luxembourg under the 1989 Belgium–Luxembourg–Soviet Union investment treaty, arguing that asset freezes amounted to unlawful expropriation.

Under the new rules set out in Article 11(2a) and 11(2b) of Council Regulation (EU) 2025/1494, any investor–State claim brought by a listed Russian or Belarusian entity outside the EU is deemed unlawful, and EU Member States shall not recognize or enforce any judgment, injunction, or arbitral award arising from such proceedings.  In practice, if a sanctioned Russian investor obtains an arbitral award abroad, for example through a bilateral investment treaty (BIT) claim under UNCITRAL Arbitration Rules or contract arbitration, as in the case of Mikhail Fridman v. Luxembourg, where Fridman initiated a US$16 billion claim in Hong Kong over asset freezes under the 1989 Belgium–Luxembourg–Soviet Union investment treaty, EU courts must refuse recognition or enforcement of any resulting award. Member States are instructed to raise “public policy” objections under the 1958 New York Convention to block enforcement, arguing that satisfying such a claim would undermine the EU’s sanctions regime and the effectiveness of Council Regulation (EU) 2025/1494.

ICSID awards are covered by the prohibition. Although Russia is not a party to the ICSID Convention, most EU Member States are, meaning they remain bound by obligations to recognize ICSID awards. However, Regulation 2025/1494 compels them to refuse enforcement, effectively overriding these treaty commitments. The EU’s position is that: sanctioned investors cannot recover money or assets through international arbitration when their losses arise from EU sanctions regardless of the content of their claim.

The regulations go further by imposing an affirmative duty on EU governments to actively oppose any attempt by a designated investor to enforce an award. New Article 11f of Regulation 833/2014 obliges Member States to raise any available objection against recognition of such awards. This approach aligns with the view that paying damages to sanctioned persons would violate public order. Member States are also forbidden from assisting in any investigation or proceeding that could help a sanctioned investor enforce an award or obtain relief.

These rules do not bar an EU Member State from defending itself on the merits in arbitration, but even if it participates and loses, EU law requires it to refuse recognition, enforcement, or cooperation with the award. States remain free to appear in the proceedings and argue, for example, that the claims are inadmissible or without merit. However, if the tribunal ultimately rules in favor of the investor, EU law obligates the Member State to refuse recognition, enforcement, or any form of cooperation with the award. This effectively undermines the authority and practical function of the arbitral tribunal, as even a successful investor cannot obtain relief within the EU.

Perhaps most striking is the creation of a novel cause of action for EU Member States (and the EU itself) to sue sanctioned investors for any losses or costs incurred due to an ISDS claim. Article 11e of Regulation 833/2014, as amended, allows a Member State to bring a claim in a national court to recover litigation expenses or damages suffered as a result of such arbitration. This “mirror” claim can be lodged against both the investor and those who control or own it, and jurisdiction is deliberately broad, any Member State court can hear the claim if there is a sufficient connection and no other forum is available.

Through these measures, the EU has significantly curtailed the legal rights of Russian investors. These investors can no longer use BITs, such as the 1989 USSR–Germany BIT still in force, or other dispute forums to challenge sanctions. Awards in their favor are effectively unenforceable across the EU, cutting off one of the major jurisdictions where assets could be seized to satisfy an award. The eighteenth package intends to construct a legal firewall around the EU’s sanctions regime, but prejudging all cases and effectively tearing up BITs unilaterally, The EU risks undermining trust. Such heavy-handedness could backfire and cause investors and trade partners to think twice before committing to future agreements with the EU.

Legal Justifications: Treaty Obligations vs. Countermeasures

The EU’s unprecedented steps potentially place its Member States in conflict with their obligations under existing investment treaties and international conventions. Several sources of law intersect here, including treaty law such as the 1958 New York Convention and relevant bilateral investment treaties, EU law, and the international law of countermeasures and necessity as reflected in the ILC’s Articles on State Responsibility.

Most of the relevant claims have proceeded under UNCITRAL Arbitration Rules or other ad-hoc rules. Under the New York Convention, courts may refuse recognition of an award if doing so would violate the forum state’s public policy (Article V(2)(b)). The EU explicitly invokes this exception, framing compliance with its sanctions regime as a matter of public order and international peace, values sufficient to trigger the public policy exception in EU jurisdictions.

More generally, the EU’s measures conflict with the dispute resolution rights in many still-operative bilateral investment treaties between Russia (or the former USSR) and EU Member States. Such BITs guarantee investors access to arbitration and oblige host states to honor awards. By barring certain investors from initiating arbitration and nullifying awards, EU states are suspending these treaty obligations. Article 26 of the Vienna Convention on the Law of Treaties enshrines pacta sunt servanda—treaties must be observed in good faith—and normally forbids reliance on internal law (such as an EU regulation) to justify non-performance. Without more, the EU’s ISDS restrictions would appear to be prima facie breaches of treaty obligations.

The EU and its Member States present their sanctions as lawful countermeasures taken in response to Russia’s aggression against Ukraine; a grave violation of the United Nations Charter. Under the Articles on State Responsibility adopted by the International Law Commission, an injured state may adopt otherwise unlawful measures against the responsible state to induce compliance with international law (Articles 49–54). Such measures must be directed at the wrongdoing state, proportionate to the injury, and temporary.

While the EU frames the suspension of investment protections as a lawful countermeasure — since BIT rights ultimately derive from Russia’s treaty obligations — this argument is legally fragile. Tribunals are historically skeptical of countermeasures, especially when private investors’ rights are collateralized. Tribunals have historically been skeptical of countermeasures as a defense against private investor claims, and the EU’s attempt to circumvent this by treating investor rights as mere extensions of state obligations risks setting a destabilizing precedent. 

More fundamentally, the EU’s argument hinges on a black-and-white narrative of the war that conveniently ignores complex geopolitical undercurrents. By reducing the conflict solely to ‘Russia’s invasion’ Brussels sidesteps difficult questions about its own involvement in the lead up to war. Proportionality, meanwhile, is assessed through a one-sided lens: the ‘modest’ cost of voiding arbitral awards is weighed only against Ukraine’s suffering, while long term consequences are dismissed as collateral damage. Worse, the EU’s ‘reversible’ rhetoric rings hollow. Once treaty obligations are unilaterally discarded for political expediency, restoring confidence in them becomes far harder. 

Investor states (not just Russia, though because of its location it’s hard to imagine a Europe without it) will rightly question whether Europe’s commitments are worth the paper they’re written on when geopolitics shift. A reasonable interpretation for trade partners could be that agreements with the EU are enforceable only until Brussels decides they are inconvenient. This perception arises because the sanctions package effectively overrides treaty-based obligations by prohibiting recognition or enforcement of arbitral awards when they conflict with EU sanctions policy. From the perspective of external partners, this creates a sense that legal certainty and pacta sunt servanda are conditional within the EU, subject to shifting geopolitical priorities. Such an approach risks undermining the EU’s reputation as a reliable treaty partner: investors and states may fear that commercial and investment protections are politically contingent, enforceable only so long as they align with Brussels’ strategic interests and perspective. In the long run, this could weaken the EU’s credibility in promoting rule-of-law–based economic governance, as partners may view the sanctions regime as setting a precedent that contractual and treaty commitments are subordinate to unilateral political imperatives.

Conclusion

The EU’s eighteenth sanctions package politicizes BIT obligations and normalizes the selective suspension of legal protections, inviting reciprocal measures that could destabilize global investment security. While it closes a sanctions loophole, these restrictions will not alter the Ukraine war’s outcome; that will be decided on battlefields and at negotiation tables, not in arbitration forums. Instead, the measures reveal a broader shift: law is being weaponized as a tool of geopolitical conflict, with the EU leveraging legal frameworks to wage economic warfare. 

The EU may be opening a Pandora’s box with these measures. Hopefully, the sanctions package expires with the conflict, allowing them to be framed as an extraordinary but temporary recalibration of international law in response to unprecedented circumstances. But if sanctions become indefinite, the EU risks shattering trust in their engagement with the global investment regime. By subordinating treaty obligations to unilateral policy, the EU blurs the line between lawful enforcement and misjudged political expediency. Over time, this could undermine investor confidence in the safety of the EU market, signalling to trade partners that commitments with the EU are binding only until they are no longer convenient.