Expert comments

The Russian Federation is in survival mode. In 2016, GDP was 1283.2, falling from a high of 2230.6 in 2013.

Its economic decline can largely be attributed to the drop in global commodity prices, as well as economic sanctions issued against it as a result of its annexation of the Ukrainian-held territory of Crimea in 2014, the latter of which has seen heavy limitations placed on Russia’s participation in global capital markets.

How long those sanctions remain in place is unclear. In June, both Houses of Congress agreed to expand the United States’ sanctions regime to include individuals who are responsible for Russian state-sponsored cyber-attacks, while that same month the European Union extended its sanctions against Russia, which target the financial, energy, and defence sectors, and access to dual-use goods to 21 January, 2018. 

Their impacts are wide-ranging, as is the intention. Domestically, insolvencies (or bankruptcies) have risen by approximately 20% since 2008, with 50,000 filed in 2015, 41,000 of which were accepted by the courts. While, outside of Russia, trouble is brewing for its European-based banks which face the task of potentially having to restructure their operations to avoid being classified as ‘significant institutions’, which would alter their capital requirements. 

Litigation v Arbitration

A more informal response to sanctions is that the Russian economy has turned to the East, with Russian state companies having particularly started to choose Singapore and Hong Kong for their cross-border transactions. 

While some commentators still believe that London remains attractive for big ticket Russian disputes, one source told CDR that Russian parties have been put off by London’s legal pricing and what we have been experiencing are contracts coming to fruition; recent London Court of International Arbitration statistics suggest that may be the case, with the number of Russian parties in its 2016 caseload falling by more than half than in the previous year.

Victor Petrov, a partner and head of litigation at Vegas Lex in Moscow, says that Russian parties have a specific legal consciousness and still consider domestic litigation to be more effective since it is “faster, less expensive and more predictable”.

The arbitration reform itself was necessary and positive changes are obviously forthcoming, he says, although it will take time to see how it will influence the usual dispute resolution process. “The public courts are overwhelmed with the amount of claims, this reform will make the choice between government courts and arbitration more comfortable for the parties.”

Where is the work?

As practitioners looking to identify future streams of work, assuming that sanctions remain in place, Petrov outlines that the number of bankruptcy cases, which cannot be arbitrated under the new law, are particularly sanctions-sensitive.

Economic sanctions, says Petrov, have had a short-term influence on commercial disputes in Russia.

“Indeed the number of bankruptcy proceedings triggered by inability to perform contractual obligations due to the sanctions, and disputes caused by the breach of contract due to the same reason, have increased in the last two years,” he explains.