Economic Sanctions as a Tool of Foreign Policies: Collateral Issues in International Arbitration Courts.

(published Aug 26th; updated Nov 10th, 2024)

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Notes for drafting thoughts on the issue of Banning People, Corporations, or States in the Economic International Markets.

The Double-Edged Sword of Economic Sanctions in International Relations

Economic sanctions have become a prominent tool in the arsenal of global powers, used to influence the behaviour of states, organisations, and even individuals. These measures, which can range from trade restrictions to asset freezes, are often deployed as a response to perceived violations of international norms, such as human rights abuses, territorial aggression, or the development of weapons of mass destruction. While economic sanctions are seen as a non-violent method of coercion, their legal and ethical implications are complex and multifaceted, raising significant questions about their effectiveness and the moral responsibilities of the states that impose them.

Effectiveness of Economic Sanctions: Achieving Policy Objectives?

The primary goal of economic sanctions is to compel a target to change its behaviour without resorting to military action. However, the effectiveness of sanctions in achieving these objectives is widely debated. Proponents argue that sanctions can pressure regimes by devastating their economies and forcing them to comply with international demands. The case of Iran's nuclear program, where sanctions played a critical role in bringing Tehran to the negotiating table, is often cited as an example of success.

However, critics point out that sanctions often fail to achieve their intended outcomes, mainly when they target authoritarian regimes. In such cases, the ruling elite may remain insulated from economic hardship while the general population bears the burden of suffering. This can lead to unintended consequences, such as increased poverty, humanitarian crises, and even the consolidation of power by the targeted regime, which may rally domestic support by portraying itself as a victim of foreign aggression. The prolonged sanctions against Cuba and North Korea illustrate the challenges of using economic pressure to effect political change. Will either of the regimes collapse due to the sanctions? And their respective population?

Legal Basis of Economic Sanctions: International Law and Sovereignty

International law, particularly the principles of state sovereignty and non-intervention, is the legal foundation of economic sanctions. Under the United Nations Charter, the UN Security Council can impose sanctions to maintain or restore international peace and security. These sanctions are legally binding on all UN member states. However, when sanctions are imposed unilaterally by individual states or groups of states, such as the European Union or the United States, the legal justification becomes more contentious.

Unilateral sanctions often raise questions about their compatibility with international law, mainly when they affect third-party states or involve extraterritorial measures, such as the U.S. secondary sanctions against entities doing business with sanctioned countries. These actions can be seen as infringing on the sovereignty of other nations and violating the principle of non-intervention. Using unilateral sanctions without a clear mandate from an international body like the UN can undermine the legitimacy of these measures and provoke diplomatic tensions.

Ethical Dilemmas: Human Rights and the Collateral Damage of Sanctions

The ethical implications of economic sanctions are among the most contentious issues in international relations. While sanctions are often justified by promoting human rights and upholding international norms, they can lead to significant humanitarian suffering. The broad-based sanctions imposed on Iraq in the 1990s, for example, are estimated to have caused severe shortages of food, medicine, and other essential goods, leading to widespread malnutrition and disease among the Iraqi population.

This raises a critical ethical dilemma: can the potential benefits of sanctions justify the human cost? The principle of "no harm" in international ethics suggests that policymakers should carefully weigh the consequences of sanctions on innocent civilians against their intended political objectives. To address these concerns, there has been a shift towards more targeted or "smart" sanctions, which aim to minimise collateral damage by focusing on specific individuals, entities, or sectors directly linked to objectionable behaviour. However, even targeted sanctions can have ripple effects, particularly in interconnected global economies.

Compass for Navigating the Legal and Ethical Minefield of Sanctions

Economic sanctions remain a vital foreign policy tool, exerting pressure on states and non-state actors without resorting to military force. However, their use must be carefully calibrated to balance effectiveness, legal justifications, and ethical considerations. Policymakers must ensure that sanctions are part of a broader diplomatic strategy and not an end in themselves. Moreover, the international community must work towards developing more explicit guidelines and frameworks that enhance the legitimacy and accountability of sanctions while minimising their humanitarian impact.

Ultimately, deploying economic sanctions is a double-edged sword: it can either advance the cause of global peace and justice or exacerbate human suffering and international tensions. The challenge lies in wielding this tool responsibly, with a keen awareness of its potential. Ultimately, deploying economic sanctions is a double-edged sword: it can either advance the cause of global peace and justice or exacerbate human suffering and international tensions. The challenge lies in wielding this tool responsibly, with a keen awareness of its potential consequences. The US and the EU have extensive experience banning programmes for years as a tool for implementing their Foreign Affairs Offices; let's observe their respective performances and connect the general approach with facts in real life. Consequences. The US and the EU have extensive experience banning programs for years as a tool for implementing their Foreign Affairs Offices; let's watch their respective performances and connect the general approach with facts in real life.

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US Sanctions Controversies and Effects on International Arbitration Processes

Over the past five years, the United States has imposed various sanctions on third parties and states, many of which have led to international controversies and arbitration disputes. Here are some key examples:

1. Sanctions on Iran

Re-imposition of Sanctions (2018): Following the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA), the U.S. reinstated sanctions on Iran, affecting sectors such as finance, oil, and shipping. These sanctions targeted Iranian entities and foreign companies doing business with Iran, leading to disputes involving European companies and other foreign entities engaged in lawful business with Iran under the JCPOA framework. The snapback of sanctions has led to several arbitration claims by European companies seeking compensation for losses due to the re-imposed sanctions.

2. Sanctions on Russia

Sanctions Related to Ukraine (since 2014 and onwards): Although these sanctions began in 2014, their scope has expanded in the last five years. They target various sectors, including energy, defence, and finance. They have affected European companies involved in joint ventures with Russian firms.

Nord Stream 2 Pipeline Sanctions (still onwards): The U.S. imposed sanctions on entities constructing the Nord Stream 2 pipeline, leading to disputes between European companies and the German government. Arbitration cases have arisen from affected companies seeking to recover investments or damages.

3. Sanctions on Venezuela

Targeted Sanctions (since 2017 and onwards): The U.S. imposed sanctions on Venezuelan officials and state-owned enterprises, particularly the oil company PDVSA. These measures affected foreign companies involved in the Venezuelan oil sector. And the spin-off in the Citgo Dispute: The sanctions led to controversies over the ownership and control of Citgo, a U.S.-based subsidiary of PDVSA, with multiple arbitration claims filed by bondholders and other stakeholders.

4. Sanctions on China

Trade War Sanctions (since 2018 and onwards): The U.S. imposed tariffs and sanctions on Chinese goods and entities, including technology firms like Huawei and ZTE. These measures led to disputes between Chinese companies and the Chinese government, with potential arbitration claims over breaches of trade agreements. The Hong Kong-related Sanctions (2020) targeting Chinese officials and entities over actions in Hong Kong have led to disputes with international businesses operating in the region.

5. Sanctions on Turkey

The S-400 Missile System Sanctions (2019): The U.S. sanctioned Turkey for purchasing the Russian S-400 missile system. These sanctions affected Turkish defence companies, leading to disputes within NATO and with European partners. The Arbitration Cases that followed: Turkish entities affected by these sanctions have sought redress through international arbitration, claiming violations of trade agreements and investment treaties.

6. Sanctions on Myanmar

The Post-Coup Sanctions Policy (2021): Following the military coup, the U.S. imposed sanctions on Myanmar's military leaders and state-owned enterprises, impacting international business operations in Myanmar. The lever to push potential cases with those companies affected by these sanctions exploring arbitration to recover losses incurred due to the sudden political and economic changes.

Effects on International Arbitration Procedures

U.S. sanctions in the last five years have led to numerous international arbitration disputes, with companies and states seeking compensation for the adverse effects of these measures. These cases often involve complex legal arguments about the intersection of international law, trade agreements, and sovereign rights. If you are interested in diving into the scene, the sort of issues you will have to deal with are of four main kinds:

•  Breach of Investment Treaties: Sanctioned entities and affected third parties often claim breaches of Bilateral Investment Treaties (BITs) and seek compensation for expropriation, loss of business, and other damages.

• Sovereign Immunity and Enforcement: Arbitration awards against states can face challenges in enforcement due to sovereign immunity issues.

•  Jurisdictional Challenges: States may contest the jurisdiction of arbitration tribunals, arguing that sanctions are sovereign acts not subject to arbitration.

• Complexities of Multi-party Disputes: Sanctions often lead to multi-party disputes involving state actors, private companies, and international organisations, complicating arbitration procedures.

But now, what should we see about the performance of the EU sanction system?

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EU Sanctions Controversies and Effects on International Arbitration Processes

The European Union (EU) has also imposed various sanctions over the past five years, leading to international arbitration disputes. These sanctions are typically aimed at maintaining international peace and security, promoting human rights, and upholding international law according to their understandings of peace, security, human rights, and support. Here are some key examples of their targets and decisions:

1. Sanctions on Russia

Crimea and Sevastopol Sanctions (since 2014 and onwards): Following Russia's annexation of Crimea, the EU imposed sanctions that included asset freezes, travel bans, and restrictions on economic relations. These measures have been expanded and extended in subsequent years. The sectoral sanctions have been led on EU-targeted sectors such as finance, energy, and defence, impacting European companies engaged in these sectors and their Russian counterparts. Consequently, several arbitration cases have been connected: European companies have filed arbitration claims under investment treaties, seeking compensation for losses incurred due to these sanctions. Notable cases include those under the Energy Charter Treaty (ECT).

2. Sanctions on Iran

Nuclear-Related Sanctions (Before JCPOA and Post-2018): Before the JCPOA, the EU had extensive sanctions on Iran. While these were lifted in 2015, some were reinstated following the U.S. withdrawal from the JCPOA in 2018, despite the EU's efforts to keep the deal alive. In a surprising turn in the story, the EU updated its Blocking Statute to protect European companies from the extraterritorial impact of U.S. sanctions on Iran [Note: has someone gone too far?] It has led to legal disputes and arbitration cases involving European companies seeking to mitigate losses.

3. Sanctions on Venezuela

Targeted Sanctions (since 2017 and onwards): The EU imposed sanctions on Venezuelan officials and entities involved in human rights abuses and undermining democracy. These measures included asset freezes and travel bans. In correlation, European companies affected by these sanctions have considered arbitration to seek redress for disruptions to their operations and investments in Venezuela.

4. Sanctions on Belarus

Post-Election Process Sanctions (2020): Following the disputed 2020 presidential election in Belarus and the subsequent crackdown on protests, the EU imposed sanctions on Belarusian officials and entities. The Economic Sanctions (2021) referred to measures targeting key sectors such as potash, petroleum products, and tobacco. Companies affected by these sanctions have explored arbitration options to recover losses.

5. Sanctions on Myanmar

Post-Coup Sanctions (2021): In response to the military coup in Myanmar, the EU imposed sanctions on military leaders and entities associated with the military. These sanctions included asset freezes and travel bans. As in the case of the US policies, International businesses with investments in Myanmar have been considering arbitration to address the adverse impacts of these sanctions on their operations.

6. Sanctions on Turkey

As in the cases of Drilling Activities in the Eastern Mediterranean (2019), the EU imposed sanctions on Turkish individuals and entities involved in unauthorised drilling activities in the Eastern Mediterranean. Companies affected by these sanctions, particularly in the energy sector, pushed several arbitration cases, seeking arbitration to resolve disputes over disrupted projects and investments.

Effects on International Arbitration Procedures

In recent years, the EU's sanctions have similarly led to several international arbitration disputes, with companies and states seeking compensation for the adverse effects of these measures. These cases involve intricate legal issues relating to international law, trade agreements, and sovereign rights, reflecting the broader geopolitical and economic impacts of the EU's sanction policies. Four are the relevant issues to notice in the EU affair:

• Breach of Investment Treaties: Similar to the U.S., the EU's sanctions have led to claims of violations of Bilateral Investment Treaties (BITs) and the Energy Charter Treaty (ECT). Affected parties seek compensation for expropriation, loss of business, and other damages.

• Blocking Statute and Jurisdictional Issues: The EU's Blocking Statute has added a layer of complexity, leading to jurisdictional challenges in arbitration cases involving U.S. sanctions on European companies. This singular effect deserves a separate post.

• Sovereign Immunity and Enforcement: Arbitration awards against states are difficult to enforce due to sovereign immunity issues, mainly when sanctions are involved.

• Complex Multi-party Disputes: Sanctions often lead to complex, multi-party disputes involving state actors, private companies, and international organisations, complicating arbitration procedures. Two questions sprout in particular in scenarios of this kind: a) To what extent shall an arbitral tribunal apply sanctions that are not part of the law the parties have agreed to govern their agreement?; b) Shall an arbitral tribunal apply sanctions that are part of the law of the seat of arbitration or part of the law of a country closely connected to the dispute? [precisely, these two questions were out loud in the last Annual Conference of The CIArb European Branch in Copenhagen last April, achieving an unclear even odds conclusion].

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Drafting a Balance of US and EU policies when considering Arbitral Awards generated by those public policies of sanctions in the last decades

The balance of U.S. and EU policies concerning arbitral awards generated by sanctions-related disputes reveals a complex interaction between international arbitration, state sovereignty, and geopolitical interests. Here is an overview of how these policies have played out over the last decades: So, what is expected to happen if facing a case with such interference, in a nutshell:

1. Recognition and Enforcement of Arbitral Awards

The United States

General Stance: The U.S. has generally respected arbitral awards, aligning with its commitment to international arbitration under the New York Convention and other relevant treaties.

Sanctions Context: Enforcing arbitral awards in cases involving sanctions can be complicated. For example, U.S. courts have sometimes refused to enforce awards if they perceive that doing so would violate U.S. sanctions policy or national security interests.

Example: The case involving the enforcement of a $2 billion award to Iran's Bank Markazi against Citibank in the context of U.S. sanctions illustrated the U.S. courts' reluctance to enforce such awards directly due to overriding national security concerns.

The European Union

General Stance: The EU also generally upholds international arbitration awards consistent with its legal obligations under international treaties.

Sanctions Context: The EU has been more consistent in respecting arbitral awards, even in the context of sanctions, as long as the enforcement does not explicitly contravene EU regulations. However, there have been instances where enforcement is contested if it conflicts with EU foreign policy objectives or sanctions regimes.

Example: The EU Blocking Statute, aimed at countering U.S. extraterritorial sanctions, can lead to legal complexities in arbitration, particularly when European companies are caught between complying with U.S. sanctions and EU regulations.

2. Support for Claimants in Arbitration

The United States

Backing for U.S. Entities: The U.S. government has occasionally supported American companies in arbitration disputes, particularly when the companies are adversely affected by foreign sanctions or expropriation.

Impact of Sanctions: However, U.S. sanctions often expose American companies to disputes without much recourse. When U.S. sanctions are involved, claimants usually face significant legal hurdles, and the U.S. government may not always provide direct support.

Example: Claims by U.S. companies against Venezuelan entities following U.S. sanctions on Venezuela have led to complex arbitration cases where U.S. claimants sought compensation under BITs, sometimes without substantial U.S. government intervention.

The European Union

Protection of European Companies: The EU has shown a stronger inclination to protect its companies against extraterritorial sanctions imposed by other countries, notably the U.S.

Blocking Statute: The EU Blocking Statute is a clear example of this protection. It allows European companies to recover damages through legal actions within the EU if they are affected by U.S. sanctions.

Example: European companies involved in lawful business with Iran under the JCPOA have used the Blocking Statute to shield themselves from U.S. sanctions, leading to arbitration and legal disputes where the EU's backing has been significant.

3. Cases and Outcomes

Notable Arbitration Cases

Iran Sanctions: European companies have pursued claims against the U.S. for reimposing sanctions on Iran, arguing that the move violated investment treaties. These cases often involve complex arguments about jurisdiction and the interplay between U.S. and EU regulations.

Russia Sanctions: U.S. and European companies have engaged in arbitration against Russia under the Energy Charter Treaty (ECT) and BITs, seeking compensation for expropriation and other losses due to sanctions and geopolitical conflicts. Some of these claims have been successful, leading to significant arbitral awards. [Note: But you should remember that The Yukos Case was finally in favour of The Russian Federation in the Supreme Dutch Court and against the expectations of former Yukos shareholders.

Venezuela Sanctions: Due to takeovers and the impact of sanctions, multiple claims have been filed by U.S. and European companies against Venezuela. These cases often result in substantial awards, though enforcement can be challenging due to Venezuela's financial situation and sovereign immunity issues.

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As a preliminary conclusion regarding the balance of U.S. and EU policies and their effects on arbitral awards related to sanctions demonstrates a nuanced approach:

The U.S. generally respects arbitral awards but may resist enforcement if it conflicts with sanctions policy. U.S. entities may face challenges in arbitration when sanctions are involved, with limited direct government support.

The EU: More consistently supports arbitral awards and provides mechanisms like the Blocking Statute to protect its companies from extraterritorial sanctions. European entities often receive more substantial backing from the EU in arbitration disputes.

In both cases, the specific outcomes of arbitration and enforcement depend heavily on the interplay between international law, national interests, and the evolving geopolitical landscape.

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The Geopolitical Chess Game visits the Courts