Investor-State dispute settlement as a response to sanctions

Introduction

The unprecedented scale and scope of international sanctions in response to Russia's invasion of Ukraine have created a complex legal landscape that extends far beyond traditional diplomatic, economic measures and/or United Nations' sanctions. These sanctions, while designed to put pressure on governments that threaten international peace and its enablers, have significant collateral consequences under international investment law, triggering investor-State disputes that challenge the boundaries between legitimate regulatory measures and compensable interference with foreign investments. How sanctions regimes intersect with bilateral investment treaties and other investment agreements has exposed fundamental tensions between States' sovereign rights to protect their essential security interests and their obligations to provide fair and equitable treatment to foreign investors. This provokes novel questions around State responsibility and the limits of investment protection.

International sanctions, whether targeting States or individuals, come from fundamentally different legal sources, with distinct implications in terms of binding force and scope of application. Whereas sanctions imposed by the United Nations Security Council under Chapter VII of the UN Charter constitute international law obligations that are binding upon all members of the international community, other sanctions regimes operate through domestic legal frameworks that nonetheless have significant international consequences. The United States sanctions system, administered by the Office of Foreign Assets Control ('OFAC'), exemplifies this phenomenon as these measures are domestic in nature yet generate far-reaching extraterritorial effects due to the global influence of the US financial system and the dollar's role as the dominant international reserve currency. Ukrainian sanctions (as others) similarly derive from domestic legislation but impact international commercial relationships and investment flows. European Union ('EU') sanctions occupy a unique position within this taxonomy, as they emanate from a sui generis regional legal source rooted in EU law which while supranational in relation to EU Member States, remains distinct from universal international law obligations^[1]. Thus, similar challenges may apply.

The legal challenges in this context encompass not only direct State actions such as formal expropriations and asset seizures, but also more subtle forms of interference including the failure to exercise regulatory or supervisory functions, and omissive conducts that amplify the effects of sanctions, thereby expanding the potential scope of State liability in ways previously unexplored in international investment arbitration.

To date, there has not been a decision on jurisdiction or award on the matter. To better understand what to expect in the novel intersection between international investment obligations and unilateral sanctions, this article offers a general background on the most relevant existing and announced Investor State Dispute Settlement ('ISDS') cases involving sanctions and closes with a reflection on potential challenges that may arise.

Cases resulting from international sanctions

Mikhail Fridman v Luxembourg

On 9 February 2024, Russian-Israeli businessman Mikhail Fridman filed a notice of intent against Luxembourg. He claims that Luxembourg violated international law when it froze his assets, and seeks USD 16 billion in compensation for damage to his investments, which include major stakes in the Alfa Group conglomerate and his GBP 1.8 billion interest in Holland & Barrett.^[2] He argues that Luxembourg's implementation of EU sanctions amounts to unlawful expropriation and violates key investment protection standards, including fair and equitable treatment, non-impairment guarantees, and free transfer provisions.^[3]

According to public sources, the arbitration has not yet been formally registered.

Samvel Karapetyan v France (ICSID Case No ARB/25/26)

Russian-Armenian businessman Samvel Karapetyan has started ICSID proceedings against France under the 1995 Armenia-France bilateral investment treaty. This follows French authorities' seizure of his real-estate portfolio during an anti-money-laundering investigation that he claims unfairly targets Russian-linked business figures. Officials claim Karapetyan's luxury Mediterranean estate, worth EUR 120 million, involves complex corporate structures linked to Gazprom and its banking affiliate, suggesting the State energy company is the true owner despite Karapetyan purchasing it a decade ago. This legal challenge occurs within France's broader 2022 enforcement directive that allows judicial authorities to seize Russian-connected assets through expanded money laundering laws.^[4] In addition, Karapetyan appears on US Treasury Department sanctions lists that identify him as an oligarch who gained influence during Putin's administration. There are also US restrictions affecting his aircraft operations, which use Malta-registered carriers allegedly connected to the Kremlin.^[5]

Karapetyan's investment treaty claim argues that France's use of criminal laws that presume money laundering constitutes discriminatory and excessive conduct that violates bilateral treaty obligations. He points to weak evidence and procedural deficiencies, including asset freezes lasting over 12 months without the right to appeal. The Claimant seeks monetary compensation for investment losses caused by the criminal proceedings and requests interim relief to stop France from continuing these alleged treaty violations.^[6] ICSID has recently registered the case and the Tribunal is being constituted (to date, the Claimant has appointed Cavinder Bull from Singapore, and France has appointed Loretta Malintoppi from Italy).

Although the Karapetyan dispute appears to focus on French anti-money-laundering enforcement rather than the direct implementation of sanctions, international sanctions will likely play a major role in the arbitration proceedings because the Claimant faces sanctions from multiple jurisdictions. As mentioned, Karapetyan is on US Treasury Department lists that identify Russian oligarchs and political figures associated with the Putin administration. He also faces European Union sanctions that have expanded to cover Russian-linked business networks following the Ukraine conflict. These overlapping sanctions create a complex legal situation where France's asset seizure actions, while officially based on domestic money laundering laws, may be influenced by or coordinated with broader international efforts to restrict Russian-connected wealth and investments. This is an illustrative example of how the intersection of sanctions compliance obligations and bilateral investment treaty protections raises new jurisdictional and merits questions about how sanctions and international investment obligations interact.

ABH Holdings v Ukraine (ICSID Case No ARB/24/1) and Emis Finance B.V. v Ukraine (ICSID Case No ARB/25/10)

ABH Holdings and Emis Finance have filed separate ISDS claims after Ukraine took over Alfa Bank Ukraine. In July 2023, Ukraine nationalised the bank for 1 hryvnia (USD 0.02) after ABH Holdings — the bank's sole shareholder — was placed on Ukraine's national sanctions list. Ukrainian law allows the government to take over banks whose owners appear on both Ukrainian and Western sanctions lists. ABH Holdings is the parent company of Alfa Group, one of Russia's largest private financial groups. Its majority owner is Andrei Kosogov (41%), while Mikhail Fridman and Petr Aven, another Alfa executive, hold smaller stakes. ABH Holdings has been sanctioned by Ukraine, and Kosogov, Fridman, and Aven have also been individually sanctioned. Fridman and Aven additionally face sanctions from the United Kingdom, the European Union, and the United States.^[7]

Following the nationalisation, ABH Holdings filed an ICSID arbitration against Ukraine, claiming the State breached its obligations under the bilateral investment treaty between Ukraine and the Belgium–Luxembourg Economic Union. The investor seeks USD 1 billion in compensation, arguing that Ukraine's actions constitute expropriation and violate the fair and equitable treatment (FET),^[8] and full protection and security (FPS) standards. ABH Holdings also claims that Ukraine imposed arbitrary and discriminatory measures before the nationalisation.^[9]

Similarly, EMIS Finance B.V. filed an ICSID claim against Ukraine. The Dutch lender argues that by nationalising the bank, Ukraine prevented EMIS from receiving payments on a USD 470 million loan it had extended to ABH Ukraine Ltd. Before the nationalisation, ABH Ukraine Ltd had been servicing its loan obligations using profits from its stake in Alfa Bank Ukraine. EMIS claims that Ukraine breached the expropriation, FET, and free transfer provisions of the Netherlands-Ukraine bilateral investment treaty and seeks approximately USD 400 million in damages.^[10] The Tribunal, composed by Professor Georges Affaki, Ms Jean E. Kalicki and Prof. Lawrence Boo, presiding, has recently rendered a procedural order on confidentiality and transparency.^[11]

Volga-Dnepr Airlines LLC v Canada (PCA Case No 2025-09)

On 26 August 2024, Volga-Dnepr Airlines filed a request for arbitration against Canada under the Canada-USSR bilateral investment treaty. The claim is based on Canada's seizure of one of the airline's aircraft at Toronto Airport, which followed a February 2022 restriction that prevented the aircraft from leaving Canada due to a ban on Russian-operated aircraft using Canadian airspace. Canada adopted these measures as part of sanctions imposed in response to Russia's invasion of Ukraine. The airline was founded and managed^[12] by Alexey Isaikin, who appears on sanctions lists in Canada and other countries.^[13]The Claimant argues that Canada's actions constitute expropriation and other treaty breaches, and estimates its damages at a minimum of USD 100 million on a preliminary basis.^[14]

New challenges under ISDS

Investor-State arbitration tribunals typically decide on disputes by applying international law principles alongside the domestic legal rules of the host State involved, where such rules are deemed relevant to the dispute in question. This established framework of applicable law has significant implications for how tribunals assess the legality of sanctions-related measures; international arbitral tribunals may consider obligations arising from the national laws of third States – such as compliance with OFAC or EU sanctions – to fall outside the scope of applicable law. Consequently, while a host State may argue that its actions were prompted by sanctions imposed by third-party jurisdictions, such justifications may not necessarily provide a complete defence under the bilateral investment treaty or multilateral investment agreement governing the dispute, particularly where the applicable treaty lacks specific carve-outs for sanctions compliance or essential security exceptions.

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^[1] BVerfG, Internationale Handelsgesellschaft (Solange I), judgment of May 29, 1974, 37 BVerfGE 271, 2 C.M.L.R. 540 (1974), para. 19.

^[2] S. Moody, 'Sanctioned businessman files mega-claim against Luxembourg', Global Arbitration Review (13 August 2024) <https://globalarbitrationreview.com/article/sanctioned-businessman-files-mega-claim-against-luxembourg> (requires subscription) accessed 3 October 2025.

^[3] Ibid.

^[4] J. Ballantyne, 'Armenian real estate tycoon takes France to ICSID', Global Arbitration Review (5 June 2025) <https://globalarbitrationreview.com/article/armenian-real-estate-tycoon-takes-france-icsid> (requires subscription) accessed 3 October 2025.

^[5] Ibid.

^[6] Ibid.

^[7] T. Jones, 'Ukraine hit with billion-dollar claim over bank takeover', Global Arbitration Review (4 January 2024) <https://globalarbitrationreview.com/article/ukraine-hit-billion-dollar-claim-over-bank-takeovereview> (requires subscription) accessed 5 September 2025.

^[8] The Claimant argues that, prior to the nationalisation, Ukraine had imposed arbitrary, discriminatory, disproportionate, and unreasonable restrictions on the banks' operations. See ABH Holdings v Ukraine, ICSID Case No ARB/24/1, Request for Arbitration, 29 December 2023, paras 106-107.

^[9] T. Jones, 'Ukraine hit with billion-dollar claim over bank takeover', Global Arbitration Review (4 January 2024) <https://globalarbitrationreview.com/article/ukraine-hit-billion-dollar-claim-over-bank-takeovereview> (requires subscription) accessed 5 September 2025.

^[10].        S. Moody, 'Dutch lender makes good on threat against Ukraine', Global Arbitration Review (18 February 2025) <https://globalarbitrationreview.com/article/dutch-lender-makes-good-threat-against-ukraineview> accessed 5 September 2025.

^[11].        Emis Finance B.V. v Ukraine, ICSID Case No ARB/25/10, Procedural Order No 2 (Confidentiality and Transparency Order), 26 June 2025.

^[12].        Mr Isaikin resigned from his position at the airline in August 2022. (D. Charlotin, 'Russian airline lodges sanctions-related treaty arbitration against Canada', Investment Arbitration Reporter (26 August 2024) < https://www.iareporter.com/articles/russian-airline-lodges-sanctions-related-treaty-arbitration-against-canada/orter> (requires subscription) accessed 5 September 2025.

^[13].        In connection with Volga-Dnepr's purported involvement in supporting Russian forces in Ukraine.

^[14].        D. Charlotin, 'Russian airline lodges sanctions-related treaty arbitration against Canada', Investment Arbitration Reporter (26 August 2024) < https://www.iareporter.com/articles/russian-airline-lodges-sanctions-related-treaty-arbitration-against-canada/orter> (requires subscription) accessed 5 September 2025.