Legality of Extraterritorial Coercive Economic Measures Taken Against Russia from the Lens of International Trade Law

[Ahan Gadkari is a final year BA LLB candidate at Jindal Global Law School. He serves as a Research Assistant under Dr. Aniruddha Rajput, Member, UN International Law Commission.]

Introduction

The conflict between the Russian Federation and Ukraine increases day by day in intensity and, with it, the already heavy toll in terms of victims, missing persons and displaced persons seeking refuge in neighboring countries grows. This piecewill not deal with humanitarian issues or the qualification of the Russian military intervention in the light of international law, so please refer to the contributions of other scholars published (for example, Gadkari, Spagnolo, Favuzza, or Fasciglione), but rather the negative implications of same on financial markets and the world economy. War, geopolitical instability, the risk of a nuclear escalationhave in fact introduced numerous unknowns for global trade, for multinational companies, for capital markets and for national economies themselves.

Economically, the first and perhaps most obvious effect of the Russian-Ukrainian conflict was a general increase in the prices of raw materials and food. The Russian Federation is among the main exporters of hydrocarbons, as well as of numerous metal alloys (such as aluminum, titanium, nickel and palladium) essential for the steel, chemical and petrochemical, pharmaceutical and major engineering sectors. The instability generated by the conflict and the consequent trade restrictions have caused a very strong rise in energy prices, as evidenced by the current price of natural gas, which has practically doubled compared to a year ago. Taken together, moreover, the Russian Federation and Ukraine account for over a quarter of the world trade in wheat: tensions in Eastern Europe threaten to curb grain shipments around the world, increasing the costs of producing bread and pasta. The gravity of the situation was underlined by the Director General of the World Trade Organization (WTO), Ngozi Okonjo-Iweala, in a recent statement.

The effects of the conflict are also having significant impacts on global supply chains: commercial companies are struggling to find easy merchant routes, with the closure of Ukrainian ports, the risks for navigationin the Black and Azov seas, theaters of the conflict, and restrictions on transit in the Bosphorus, where Turkey has already announced its intention to implement the provisions of the Montreaux Convention that allow it to restrict navigation, in particular warships, through the Dardanelles. Following the decisions of the European Union, the United States and other countries to close their airspace to aircraft flying the Russian flag – and the reciprocal measures adopted by the Russian government – trade is further restricted also by air.

If the effects of the conflict have and will have global repercussions, the “price” that the Russian Federation risks paying could be very high. The condemnation of the conflict, in the foregone paralysis of the United Nations Security Council, came almost unanimously from the United Nations General Assembly which, with a resolution adopted on 2 March last, requested the Russian Federation to “immediately, completely and unconditionally withdraw all of its military forces from the territory of Ukraine within its internationally recognized borders”. Several like-minded states(including Australia, Canada, South Korea, Japan, United Kingdom, Singapore, United States of America, Switzerland, among others) and the European Union have responded to the heavy mobilization of troops with employment of all its economic strength, implementing numerous unilateral measures – but certainly “agreed” – in reaction to the blatant violation of Art. 2.4 of the United Nations Charter, and the previous Soviet recognition of the separatist republics of Luhansk and Donetsk. Many of these coercive measures(commonly – and improperly – known as “sanctions”) have also been extended to subjects and entities of Belarusian nationality, due to the complicity of the Lukashenko regime in military intervention alongside the Russian Federation. Clearly, these measures are aimed at isolating the Russian state and evaporating the economic resources necessary for the conduct of the war.

Economic Coercive Measures in Question

The measures adopted include the freezing of assets of individuals and commercial companies, the limit on bank deposits and access to bank credit, the prohibition of bargaining for industries operating in the defense sector, the imposition of duties, restrictions on the access to the market and commercial measures such as the withdrawal of concessions and the blocking of exports (of arms, first of all, together with products, systems and technologies susceptible of so-called dual use). The assets of the Russian central bank in the territory of the EU and the United States have been blocked, as have those of the main Russian and Belarusian banks, whose “operation” was severely limited by disconnection from the SWIFT system (acronym for Society for Worldwide Interbank Financial Telecommunication), which made payments of a transnational nature connected to trade and financial activities substantially more complex, articulated and lengthy. In total, some 700 people and 60 entities are now subject to sanctions, including President Putin, ministers and senior officials of the Russian administrative apparatus, 351 deputies of the Duma and well-known personalities of the Russian financial elite, including billionaires Alexei Mordashov, Vladimir Lisin and Alisher Usmanov, considered to be very close to the Russian President, whose assets have also been subject to seizure orders in Italy. These measures, which are already quite incisive in themselves, have been accompanied by provisions that impose a ban on the stay and movement of affected individuals on the territory of the states that impose the sanction (travel ban) and blockades of air and naval traffic. In addition, the main international clearing systems, Euroclear and Clearstream, have decided to refuse transactions in rubles, as well as several commercial banks have temporarily suspended the sale and purchase of the currency, the value of which has fallen by more than 40%. Other global financial players, such as major payment and credit card networks, have suspended their operations in Russia and Belarus. Many multinational companies, including the so-called big-tech, have suspended sales of their products and services in Russia.

International Instruments

All the instruments listed (without any claim to be exhaustive) have been adopted unilaterally by the States and by the European Union or voluntarily by private subjects. As regards the measures adopted by the States and the Union, it should be emphasized that these coercive measures were implemented in the absence of a decision by the United Nations Security Council pursuant to art. 41 of the United Nations Charter which, as is well known, allows for the adoption of measures not involving the use of force when one of the situations envisaged by art. 39 of the United Nations Charter. The legitimacyof the countermeasures adopted by States not particularly harmed by an international offense is still today the subject of a wide debate on the level of general international law (on this point, it is permissible to refer to the considerations of Gadkari and Chowksey regarding the sanctions on Russia’s sovereign debt market; De Sena and Gradoni regarding the measures adopted in 2014 in the to the Russian Federation and, more generally, to the studies of Asada; Dawidowicz; Hofer; Silingardi; Sossai; Tzanakopoulos; and Ronzitti). However, it is clear that some measures can be framed in specific regulatory regimes: in particular, this practice appears questionable in the light of international trade law.

The tools most often used by governments for sanctions include embargoes, boycotts or the imposition of quantitative restrictions on trade, as well as the creation of non-tariff barriers, such as prescribing specific licensing or packaging requirements. Such measures could violate various clauses of the WTO agreements, in particular the General Agreement on Tariffs and Trade (GATT) and the General Agreement on Trade in Services(GATS), whose founding principles are reciprocity and non-discrimination in commercial relations, the latter expressed by the well-known standardsof national treatment and most favoured nation(MFN). In particular, Article I, paragraph 1, of the GATT (as well as Article II of the GATS) provides for equal treatment with respect to similar products originating in or destined for the territories of all the other Contracting Parties: some countries, such as Canada, have already withdrawn this privilege with regard to goods from the Russian Federation and Belarus, while legislative proposals to this effect have been introduced at the US Congress. On 15 March 2022, the President of the European Commission announced that this measure will also be implemented by the European Union and its Members within the framework of the World Trade Organization.

As a result of these decisions, goods and services from the Russian Federation could incur much higher tariffs. Furthermore, the unilateral measures implemented so far have established quantitative restrictions on the export of various categories of goods, which could constitute a violation of art. IX of the GATT, which prescribes the elimination of the so-called quotas, as well as the limitations imposed on air, sea and land transport could result in a violation of the rule that requires the free transit of goods and services in the territories of the Contracting Parties (art. V GATT). In addition, it should be noted that art. 23 of the Understanding on Dispute Settlement (DSU) prohibits the use of unilateral self-helpmeasures, establishing the obligation to resort to the dispute resolution system provided for by the Agreement: this interpretation has been confirmed by various panels, including those set up in cases US-Shrimp (par. 7.43) and Canada – Aircraft Credits and Guarantees (par. 7.170), which have clearly identified as “prohibited” the measures taken individually by States outside the procedural framework managed by the Dispute Settlement Body. These and other provisions, therefore, would render illegitimate any unilateral coercive measure of a commercial nature adopted by one Member State against another.

However, the WTO agreements also include clauses of exception to the general regime of trade liberalization, allowing that – in the presence of specific requirements – Member States can adopt measures that have the effect of restricting commercial traffic in order to protect values and non-economic needs. Specifically, while art. XX of the GATT (and art. XIV of the GATS) outline a series of general exceptions (see Espa, pp. 193-228; Mauro, pp. 159-162), art. XXI of the GATT and XIVbis of the GATS (as well as Article 73 of the agreement relating to the Trade Related Aspects of International Property Rights – TRIPS) instead offer the opportunity to use measures based on essential security needs. Such clauses have very rarely been invoked in WTO practice (see Mavroidis, Bermann, Wu, pp. 684-786).

As dictated by the letter of art. XXI of the GATT, however, this security exception is directly linked to the objectives of peace protection and maintenance of international security professed by the United Nations Charter, as well as letter (b) of the same provision prescribes that such measures can be decided in period of war or emergency in international relations. By invoking this provision, Ukraine has decided to apply a full embargo to products originating from the Russian Federation and not to apply the WTO agreements with the same state, as summarized in a letter addressed to the Chairmanof the General Council of the WTO. It is questionable, however, whether the coercive measures adopted by Ukraine and other states against the Russian Federation and Belarus are legitimate and therefore can fall within the exception clause.

WTO Jurisprudence

Two recent cases in the WTO may come in support, as the use of unilateral economic measures was specifically considered in them. In 2017, Qatar had resorted to the WTO dispute settlement body because of the actions of four states – Bahrain, Egypt, Saudi Arabia and the United Arab Emirates (UAE) – arguing that the coercive economic measures taken by those states constituted a violation of the Organization’s rules, impeding the freedom of transit of goods and frustrating most of the commercial exchanges between the two countries. However, although the panelestablished in the dispute between Qatar and Saudi Arabia had recognized the existence of a state of “tension” and the breakdown of diplomatic relations between the two countries, in the decision only some measures adopted by the Saudi government had been deemed justified by security reasons: rather surprisingly, however, there was no elaboration or analysis in the report about the nature of the emergency situationthat would have justified trade restrictive measures (see Saudi Arabia – Measures Concerning The Protection Of Intellectual Property Rights, par. 7.257; on the subject, see Glöckle). A previous case between Ukraine and Russia, opened in 2016, instead resulted in a decision in 2019 that provides a more complete interpretation of the security exception under Article XXI (see Russia – Measures Concerning Traffic In Transit; in subject, see Adinolfi and Marotti; Voon). As is well known, the dispute arose following the serious deterioration of relations between the two countries in February 2014, a situation that had led the Russian Federation to limit the transit through its territory of Ukrainian goods destined for Central Asian markets. Ukraine had challenged these restrictions before the WTO bodies as contrary to Article V of the GATT as well as to various trade commitments under the Protocol of Accession of the Russian Federation to the Organization. Russia replied by invoking Article XXI (b) (iii) of the GATT, which as mentioned provides that a member of the WTO can take any action “which it considers necessary for the protection of its essential security interests taken in time of war or other emergency in international relations”. The panelthen considered that Russia had satisfied the requirements to invoke the exception and had interpreted the requirement of emergency in international relations as a “situation of armed conflict, or of latent armed conflict, or of heightened tension or crisis, or of general instability engulfing or surrounding a state” (par. 7.75-7.76). Consequently, the situation between these two states could well be considered an emergency in international relations, justifying the restrictive measures adopted against Ukrainian goods pursuant to article XXI (b) (iii) of the GATT (par. 7.5.7; on the subject, see Neuwirth and Svetlicinii). According to the panelists, in fact, there was evidence that relations between Ukraine and the Russian Federation had deteriorated to the point of causing concern for the entire international community, in light of the recognition of the situation by the United Nations General Assembly and the protests and unilateral measures adopted by numerous governments.

In light of the previous – albeit sparse – case law related to the security exception, a first assessment of the coercive measures implemented against the Russian Federation and Belarus in February / March 2022 can therefore be proposed. First of all, there seems to be no doubt about the fact that the current conflict can be considered a situation of “war or emergency in international relations” which makes art. XXI – and the relevant provisions contained in the other agreements – and consequently possible the non -applicationof the WTO rules by Ukraine vis-à-vis the Russian Federation. However, it has to be ascertained whether the Ukrainian state can also disregard the obligations arising from agreements that are not strictly “commercial”: the Ukrainian diplomatic note, in fact, speaks in a generic way of “WTO Agreements”, also including other annexes to the WTO Agreement, such as the DSU and the Agreement relating to periodic review of commercial policies. The exception clauses for security reasons, on the other hand, refer exclusively to the obligations present in the agreements in which they are contained and could therefore be invoked only in reference to obligations under the GATT, GATS and TRIPS. This circumstance was underlined by the Russian Federation itself in its diplomatic reply note.

Secondly, in relation to the measures implemented by third countries, such as Canada, and by the European Union, it seems that the exception clause can still apply: the text of art. XXI of the GATT, in fact, does not contain any reference to emergency situations that directly involve the State invoking the exception, but refers to generic “essential interests” of security, which, in the opinion of the writer, may well include compliance the principle of the prohibition of using force in international relations, the safeguarding of the territorial integrity and political independence of other States and the obligation to resolve disputes peacefully. Nor do the cited clauses limit their scope of application to purely national situations: for example, letter (c) of art. XXI of the GATT makes a clear reference to the Charter of the United Nations and the obligations related to the maintenance of international peace and security, allowing WTO Members to disregard ex GATT obligations in order to implement the coercive measures decided by the Security Council on the basis of articles 39 and 41 of the Charter (pp. 622-623). Based on these considerations, the suspension of commercial obligations would also be allowed by countries not directly involved in the Russian-Ukrainian conflict.

Finally, however, it should be remembered that the predominant interpretation of the exceptions in question recognizes the power of states to self-determine, in a completely subjective way, which situations jeopardize their national security and what actions are necessary to deal with this emergency. Consequently, this assessment is beyond the control of any bodies responsible for establishing the legitimacy of such measures in the framework of the WTO dispute settlement system (see the aforementioned Russian – Measures Concerning Traffic in Transit decision, para. 7.102-7.103). However, the invocation of art. XXI (b) of the GATT is not completely non-justiciable: the paneland the eventual WTO Appellate Body will in any case have to assess that the appeal to the exception is made in good faith (more fully, see Schill and Briese, pp. 106-110).

The art. XXI of the GATT and the “sister” provisions contained in the other WTO agreements, therefore, could offer a certain margin of maneuver to justifycoercive measures of a unilateral nature which in principle would be prohibited by the DSU and contrary to various provisions of the WTO agreements: it will be It is clearly necessary to objectively demonstrate the existence of an exceptional situation for international relations and, furthermore, that the measure was undertaken reasonably and without abuses. If not, there appears to be no justification in the WTO special regime for such measures. Certainly, the Organization’s dispute resolution system may soon have to confront this issue again, by virtue of the many measures adopted against the Russian Federation and, to a lesser extent, Belarus, by other states in response to the conflict.