The Impact of Sanctions on Russian Litigation in London

In light of the situation in Ukraine, the immediate response of NATO member countries was to impose wide-ranging sanctions that targeted individuals, banks, businesses, exchanges and SWIFT payments, as well as imposing import and export controls. In the weeks that followed, many UK law firms rapidly closed their offices in Moscow and voluntarily severed relationships with Russian clients.

Western allies, including the US, the EU and the UK, further expanded the scope and scale of existing sanctions against President Putin, members of his government, prominent business people, oligarchs, and others who were identified as pro-Kremlin. Primarily, this involves travel bans and asset freezes.

Comprehensive economic sanctions were also introduced against multiple Russian entities, “to impose severe consequences on Russia for its actions and to effectively thwart Russian abilities to continue the aggression”, according to the European Council. In more restrained language, the gov.uk website outlines the UK’s sanctions regime: “It is aimed at encouraging Russia to cease actions destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine”.

The tone may vary, but the objective is the same: to cause significant economic disruption that forces Russia’s hand. Inevitably, Russian litigation work in London has also been disrupted. According to the Portland Communications Commercial Courts Report 2022, Russians were the second-largest group of litigants by nationality to use English courts to settle commercial disputes in the year to March 2022. Of the 21 cases involving Russian litigants, four were brought by the Russian state-owned bank VTB, which is subject to sanctions.

Last September, the UK government stated that it would introduce its own version of the EU’s announced restriction on the provision of legal advisory services to sanctioned entities and individuals. As a result, law firms will no longer be able to provide “transactional legal advisory services” to Russian clients, which rolls back on the exemption of legal services from its previous sanctions strategy.

But the ban has not yet been implemented in law, except for “certain commercial and transactional services”. In the announcement, the UK government noted that “Russia is highly dependent on Western countries for legal services, with 85% of all legal services being imported from G7 countries. The UK accounts for 59% of these imports”.

Although the UK sanctions regime inevitably impacts on the conduct of litigation in London where a Russian party is subject to sanctions, it is not intended to deny access to the English Courts, to prevent the progress of ongoing litigation and the commencement of claims, or to prohibit the entry of judgment post-trial. Indeed, the Office of Financial Sanctions Implementation (OFSI) says that it has long had a position of not prohibiting designated persons subject to an asset freeze from obtaining legal representation. 

Nevertheless, some large international law firms decided to anticipate events by taking steps to dispense with Russian litigation clients. For example, Freshfields Bruckhaus Deringer told the High Court last year that it had ceased to act for VTB – one of several cases involving Russian litigants where major law firms have dropped their Russian clients. Similarly, White & Case also told the High Court that it was going to stop representing the Russian Federation in another dispute. These are just two examples but there are countless more.

A court ruling last year in the British Virgin Islands highlights law firms’ conflicting obligations to their client and to compliance with sanctions. Sitting in the Eastern Caribbean Supreme Court, Mr Justice Jack refused an application by Ogier, an international offshore law firm, to stop acting in another lawsuit involving VTB.

The firm said that it could not “represent VTB without the risk of Ogier and people who work

for Ogier being in breach of the sanctions regime”. But the judge concluded: “VTB may be a pariah. It is precisely when VTB is stigmatised as a pariah that VTB needs the best endeavours of their legal representatives to advise them. Even pariahs have rights”.

Ogier’s global managing partner, Edward Mackereth, said: “The judgment raises some really interesting jurisprudential questions as to the rule of law versus the political and legislative directives of sanctions. There’s no precedent that we have found”.

Beyond the BVI ruling, we also see a conflict in the UK between the constitutional assertion that all individuals (regardless of race or nationality) should be regarded as equal before the courts, and the stubborn refusal of insurers and banks to allow firms to accept mandates, as well as licence issues in relation to sanctions.

Although the UK may currently still allow Russian individuals and entities that are subject to designation to pay for legal representation (provided that they are covered by a licence), they are struggling to secure proper representation because of these other factors. Lawyers should still be able to act for designated persons, particularly in relation to compliance advice and the protection of their rights in the UK and EU courts. But in reality, some are being denied access to justice.

In this context, disputes lawyers in the UK also face multiple challenges. These include: the internal policies which prevent banks (including correspondent banks) from taking money; insurers being unwilling to allow firms to take on Russian work (sanctioned or otherwise) as a result of concerns as to how law firms have de-risked these parties; and concerns expressed by both banks and insurers as to the reputational risks of them being associated with work for designated persons. 

Regarding this latter point, there is an argument to be had as to whether reputations are impacted at all by the sanctions when it is the policy of the UK government (which imposed the sanctions in the first place) that sanctioned Russian individuals and entities should retain the ability to instruct and pay lawyers. 

As everyone who works within this field knows, it can take an inordinately long time to secure specific licences from OFSI, albeit there has been some improvement in this regard in recent months. The number of applications for specific licences has undoubtedly reduced since OFSI issued the General Licence for Legal Fees in October 2022, which was extended in April 2023. 

Taken together, the combined effect of these factors has created a labyrinthine legal landscape which many practitioners are struggling to navigate. This has led to law firms being unable to take on work, potential claimants being denied the ability to bring claims and defendants being rushed to trial without representation. There are also significant obstacles to designated Russian individuals and entities representing themselves. The Court Funds Office will not accept direct payments from them and foreign lawyers instructed by them are not authorised to conduct litigation before the English courts.

So, what can law firms do? Whatever obstacles they may face, lawyers must be nimble, decisive and absolutely committed to the work that they take on. It is clear that innovative solutions will be required to weather London’s turbulent Russian litigation market in the months, and potentially years ahead.

Notably, the Portland Communications Commercial Courts Report 2023, which was published in April, identified a record number of Russians who appeared in London’s Commercial Courts over the past 12 months: a substantial jump of 41% in the year to March 2023. Despite the headwinds, some Russian litigants have succeeded in getting representation. In the interests of justice, it is important that they continue to do so.