EJIL: Talk! | 15 January 2026
EU sanctions and the undoing of international investment arbitration
by Toni Marzal
Toni Marzal is Professor of Law at the University of Glasgow.
It is well known that the EU has a complicated relationship with international investment arbitration. Whilst the two appear to be grounded in comparable commitments to a liberal international economic order, EU institutions have taken the view that investor-state dispute settlement (ISDS) interferes with the operation of the EU legal system and may even threaten its very foundations. Until recently, the most visible points of conflict have been international investment treaties concluded between EU Member States and the ISDS clauses contained within them, which the Achmea decision found contrary to EU law. Over the last few months, however, the relationship between the two systems has become spectacularly more tense, as the EU legislator has taken decisive steps to protect EU sanctions against Russia from the threat of ISDS proceedings.
Are these efforts to protect the EU’s sanctions regime actually compatible with the international legal framework that supports ISDS? An action has already been brought before the Court of Justice of the European Union (CJEU) arguing that they are not. The EU legislator has nevertheless insisted that the measures are perfectly reconcilable with ‘customary rules of international law’ and the respect owed by Member States to ‘their applicable international obligations’. There are good reasons to be profoundly sceptical of this claim—and to see in the EU’s anti-ISDS measures perhaps the most profound challenge yet mounted to the international legality on which today’s remarkably powerful system of international investment arbitration is built.
The conflict between EU sanctions and ISDS
An increasing number of sanctioned individuals and entities are initiating (or threatening to initiate) ISDS proceedings against EU member States, alleging violations of international investment treaties and claiming dizzying amounts in compensation. One prominent example is Mikhail Fridman’s USD 16 billion claim against Luxembourg, for the freezing of his assets. Another is the USD 12 billion case brought by Belarussian state-owned company Belaruskali, for the termination by Lithuania of an agreement for the transportation of fertiliser products. A recent report has identified 24 publicly known sanctions-related ISDS claims (against EU and non-EU countries), amounting in total to USD 62 billion—not far from the USD 70 billion provided by the EU in military assistance since the start of the war.
Whether the amounts claimed are actually justified is open to question. In any case, the sheer risk of such awards is a considerable threat to the viability of EU sanctions. It also undermines more broadly the EU’s capacity to intervene geopolitically. Indeed, the fear of a crippling ISDS award has been a key reason why the proposal to use the frozen Russian central bank assets to provide a loan to Ukraine has ultimately been aborted.
It is not surprising therefore that the EU has taken significant measures to defuse or at least mitigate the threat of ISDS claims. The two most important are found in Regulation 2025/1494, which amends Regulation 833/2014 and was adopted last July as part of the 18th sanctions package. The first measure invokes a public policy exception to refuse recognition or enforcement to any decision by a foreign-seated ISDS tribunal (or non-EU court), ‘which could lead to the satisfaction of any claims in connection’ with EU sanctions, in proceedings brought against a Member State. The second introduces what we may refer to as a recovery or clawback rule, per which any damages and costs incurred by a Member State as a consequence of sanctions-related ISDS claims must be recovered by way of judicial proceedings brought before that Member State’s courts. The two will be considered below in turn.
The public policy exception and the ICSID Convention
The public policy exception is a well-known doctrine that allows, amongst other things, the non-recognition or enforcement of a foreign decision or arbitral award, where it is in violation of some basic principle of justice or essential policy rule. It is not surprising therefore to see this exception invoked by the EU legislator against ISDS awards that contravene the EU sanctions regime.
In reality, however, under the legal framework that underpins international investment arbitration, public policy is not available against every kind of arbitral award. This is the case with awards issued under the International Centre for Settlement of Investment Disputes (ICSID) Convention rules. One of the most important features of that Convention, and indeed probably the one most defining of the ICSID arbitration system, is that ICSID money awards are not subject to any sort of substantive review by national courts. Under Article 54 of the ICSID Convention, such an award must be recognised and enforced ‘as if it were a final judgment of the courts of a constituent state’. There is, in other words, simply no space for any sort of public policy review.
It may be that the EU legislator did not worry about ICSID because Russia is not party to the Convention. Sanctioned Russian individuals cannot therefore benefit from the ICSID system of streamlined enforcement. Sanctions are not however only targeted against Russia—they are also aimed at Belarus, who is indeed part of the ICSID membership. Affected individuals can also be nationals of other States, who may again be ICSID members—as e.g. in the ICSID claim brought only last summer against France by Samvel Karapetyan, an Armenian national, for the seizure of his real estate assets. Furthermore, where sanctions affect a corporate entity, ISDS proceedings may indeed be initiated by that entity, but also by those holding shares or other kinds of interests in the company—which may again very easily turn out to be nationals of an ICSID member state.
It is therefore clearly wrong to think that the sanctions-related ICSID proceedings may not be brought against an EU country. And so, if such proceedings resulted in an award for the claimant, it should not be possible, under the ICSID Convention, for that decision to be reviewed on public policy grounds.
From the public policy exception to a sanctions carveout
The situation would appear to be different for non-ICSID awards, those that fall under the 1958 New York Convention—by far the most important treaty across international arbitration. Its Article V(2)(b) does include a public policy violation as a ground for non-recognition/enforcement, and this is the provision that the EU legislator explicitly contemplated when invoking public policy against sanctions-related ISDS awards (Regulation 2025/1494, preamble para. 24).
The first thing to say here is that the fact that the EU legislator has explicitly declared its sanctions regime to be a matter of public policy was not really necessary for domestic EU courts to be able to invoke Art V(2)(b) to refuse recognition or enforcement of awards in sanctions-related cases. For instance, two German courts have already done this against arbitral awards enforcing commercial contracts that had been rendered unenforceable by the sanctions regime. The CJEU is in any case due to confirm soon the public policy nature of that regime (as explained well here), in two preliminary references brought also in a commercial arbitration setting (here and here).
That said, the way that the no-recognition/enforcement rule has been designed in the 18th sanctions package does not actually fit well with the public policy exception—even if the EU legislator has chosen to label it as a mere application of that doctrine.
As traditionally understood, the public policy exception requires demonstrating that the arbitral tribunal has breached or circumvented a core principle or key policy of the forum. Here, however, the no recognition/enforcement rule applies to any decision ‘which could lead to the satisfaction of any claims in connection with’ sanctions (amended Regulation 833/2014, Article 11.2a). The scope of the exception is therefore much broader, since it applies to every award granting any form of ‘satisfaction’ in a sanctions-related case—whatever the grounds for doing so.
Furthermore, if one considers what is being claimed in some of the more notorious sanctions-related ISDS cases, it is not necessarily obvious how an award would trigger a public policy challenge. If we take Mikhail Fridman’s case against Luxembourg, for instance, the arbitration claim is not an attempt at circumventing the EU sanctions regime, but at directly questioning the lawfulness of its implementation as regards Mr Fridman, based on standards of international investment law. In his request for arbitration, much emphasis is placed on basic ideas of due process, non-discrimination, and the protection of individual property—all commitments that the EU legal system similarly enshrines and purports to guarantee. Indeed, EU law does already provide for mechanisms of redress for sanctioned individuals, potentially leading to monetary compensation, delisting and other forms of satisfaction, where sanctions are found to have been unlawfully imposed.
Thus, there is considerable overlap between the standards invoked by sanctioned persons before ISDS tribunals and those guaranteed under EU law. It therefore seems more appropriate to understand the non-recognition/enforcement rule as based, not on any unacceptable content in the substantive law to be applied by investment tribunals, but on the exclusive competence of EU courts to adjudicate on such claims. Ultimately therefore, that rule finds its basis on the autonomy of EU law—a principle that, as developed by the CJEU, justifies that certain matters be governed by EU law or its institutions, where to fail to do so would threaten the very foundations of its legal system.
The CJEU’s famous Kadi decision, also concerning sanctions and frozen assets, is a well-known example of how the principle of autonomy may serve to guarantee the ability of the EU to operate independently from any interference from external legal systems—including international law. The difference is that, where Kadi was about guaranteeing access to EU remedies for sanctioned individuals, here the point is to prevent access to non-EU remedies—those afforded by international investment arbitration. A more illuminating parallel is therefore Opinion 2/13, which prevented accession to European Convention on Human Rights in order to safeguard the CJEU’s position as the ultimate arbiter of fundamental rights review within the EU (and incidentally, it is not necessarily obvious why the 18th sanctions package no-recognition/enforcement rule, even though designed for ISDS, would not also apply to a decision of the European Court of Human Rights, if it condemned an EU member state in a sanctions-related affair for a human rights violation).
In any case, however this may seem from the perspective of the EU legal system, its claim to exclusivity in relation to sanctions is again not easy to reconcile with international investment law. Under international investment treaties, the subject-matter jurisdiction of arbitral tribunals tends to be defined very broadly to include any dispute related to an ‘investment’. Some treaties define it more narrowly through specific carveouts, as for instance in relation to taxation. In that sense, therefore, the no-recognition/enforcement rule is better seen as the EU unilaterally imposing such a carveout for sanctions-related matters, in the application of investment treaties to which an EU member State is a party.
The recovery rule
I turn now to the second key provision, the recovery rule, which requires that any costs and damages incurred by a Member State as a result of sanctions-related ISDS proceedings be recovered judicially (amended Regulation 833/2014, Article 11e). So for instance, if an award is rendered in Hong Kong for Mikhail Fridman ordering Luxembourg to pay costs and a certain amount of compensation, and Mr Fridman later succeeds in enforcing that decision against assets that Luxembourg may happen to have outside the EU, then under EU law, Luxembourg must recover this money by bringing a damages claim before its own courts.
The recovery rule may be seen as nothing more than the logical consequence of a commitment to ensuring the effectiveness of EU law, and again it finds a parallel in the EU’s post-Achmea efforts at protecting the EU internal market from ISDS (as with the European Commission March 2025 decision in the Antin case). From the perspective of the international arbitration system, however, the consequences are considerably more far-reaching.
To begin with, it is important to note the fact that the recovery rule is characterized as a claim for ‘damages’—i.e. a remedy for a legal wrong. What however is the wrong in question? The EU legislator makes it clear that it is the very initiation of arbitral proceedings against a Member State—one that it describes as ‘abusive’ (Regulation 2025/1494, preamble para. 24). This is confirmed by the fact that the damages claim will cover the arbitration costs, as well as any compensation awarded. Such a view of arbitration proceedings is certainly not unheard of. For instance, courts sometimes grant anti-arbitration injunctions, which prohibit a party from pursuing claims before an arbitral tribunal, when to do so would be abusive or otherwise oppressive. In our case, however, the ‘abusive’ character of an ISDS proceedings is predicated simply on it being brought in a sanctions-related matter, rather than any demonstration of a concrete inequity. This characterization serves, in other words, nothing more than to protect the EU’s unilateral curtailment of the jurisdiction of arbitral tribunals—which, as stated before, is in conflict with current investment treaties.
Moreover, the EU legislator also views it as ‘illegal’ to seek enforcement outside the EU of any arbitral award eventually rendered. So it is not just having recourse to international arbitration to bring a sanctions-related claim against an EU Member State that is characterized as unlawful—it is also turning to authorities of other countries at the enforcement stage, even where the EU may have friendly relations with those countries. This may resemble the practice of anti-enforcement injunctions—i.e. where a court prohibits a party from seeking to enforce an arbitral award in other jurisdictions. Such injunctions are even rarer and considerably more problematic than anti-arbitration orders, due to the higher level of interference they involve with foreign courts. In the present context, however, the EU legislator is taking a step further, by creating an action for the undoing of an enforcement that has already happened under the authorization of a legitimate foreign authority.
More fundamentally, there is no basis, either in the ICSID Convention or the New York Convention, for the idea that, where an award is unenforceable in jurisdiction A, but enforced in jurisdiction B, jurisdiction A may subsequently intervene to undo enforcement in jurisdiction B by allowing for the recovery of any sums thus incurred. Such an idea is clearly in tension with the basic customary principle—one that underlies the entire system of international arbitration—that the enforcement of judgments or awards is the exclusive prerogative of the territorial sovereign. It is also very clearly in tension with principles of comity—since the EU is questioning the authority of foreign courts to grant enforcement in their own territory, claiming extraterritorial authority to decide in their place, and ultimately causing the non-EU enforcement proceedings to have been a waste of foreign resources.
Conclusion: a weakened ISDS system?
It seems clear, in conclusion, that the EU’s sanctions-protecting measures cannot be reconciled with the international legality that underpins ISDS. As shown, the EU is essentially attempting to remove its sanctions regime from the reach of international investment law by unilaterally excluding the jurisdiction of investment tribunals over sanctions-related disputes, introducing a review mechanism for ICSID awards, characterising as a legal wrong the very bringing of an ISDS claim, and asserting an extraterritorial claim over the enforcement of arbitral decisions beyond EU borders.
What however is the broader significance of the EU’s measures for ISDS? Over the last two decades many have severely questioned the international legality that has allowed international investment arbitration to become so central to global economic governance. That critique has mainly been based on reasons related to the perceived illegitimacy of international arbitral tribunals to decide on sensitive issues related to the general interest and the ‘regulatory freeze’ effect large investment awards are said to have on important areas of public intervention such as decarbonisation. The ISDS system has nevertheless remained resilient in the face of these sorts of challenges.
The EU’s anti-ISDS measures constitute however a different kind of challenge—and doubtless a more formidable one. On the basis of geopolitical reasons—enhancing the effectiveness of the EU’s response to Russia’s aggression—key building blocks of the ISDS system are being unilaterally discarded or at least severely qualified, including ICSID’s mechanism for streamlined enforcement, the broad treaty-based competence of arbitral tribunals to adjudicate on investment-related disputes, or the territorial sovereignty of States to decide on the enforcement of awards within their own jurisdiction. The inescapable conclusion is that the ISDS system is left severely weakened, as well as vulnerable to comparable future challenges. Indeed, even if the EU’s measures are focused solely only on sanctions, it is hard to see why other sensitive concerns may not justify similar unilateral action to limit or undermine the operation of international investment arbitration—especially if brought by sufficiently powerful and determined actors.
