(Bloomberg) -- When YouTube blocked three Russian channels it said were controlled by sanctioned supporters of Vladimir Putin’s invasion of Ukraine, the US video company thought any disputes would be resolved in courts in California and England.
It couldn’t have been more wrong. Almost two years on — and nine countries later — the Russian media firms behind those channels turned to the South African courts in the latest bid to enforce a Moscow judge’s decision to issue fines for Google, YouTube’s parent company, which now run into billions of dollars.
The case is a sign of how multinational companies are finding themselves unexpectedly exposed to the Russian legal system, and in turn wider political disputes. After Russian judges used new laws to allow businesses affected by sanctions to pursue Western companies overseas, courts in England and elsewhere have issued previously rare counter-rulings. The rows threaten to undermine decades of mutual recognition among legal systems that underpin world trade, the experts fear.
“The scale and intensity of legal nationalism and lawfare in the current geopolitical conflict are largely unprecedented,” said Oleksandra Iordanova, international lawyer at Sweden-based law firm Snellman. “This represents a fundamental fracture in the international legal order at a time when global trade and investment are more intertwined than ever.”
Litigants in cross-border disputes have been using some of these tactics to pick the most advantageous legal system for years, yet Russia’s increasing isolation has led to new ways to wield the courts. Moscow has introduced a raft of new laws in response to western sanctions, including one that expands the powers of its courts over western companies that fight cases abroad, and its courts are increasingly prepared to assume rulings from unfriendly countries aren’t fair, according to western lawyers.
Companies including Volkswagen AG, Barclays Plc, Linde and Euroclear Holding are fighting Russian firms through the courts — though Google’s case is the sprawling example so far. In March, the High Court in South Africa froze Google’s local trademarks and shares, though the US firm is challenging the action, according to the technology company’s own lawsuit filed in California.
There’s a lot at stake if the Russian firms can enforce the original ruling: Google’s fines are doubling every week the company refuses to pay, meaning the initial penalty of about a thousand dollars now threatens to overtake Alphabet’s trillion-dollar market value. Google’s Russian subsidiary filed for bankruptcy months after the invasion of Ukraine.
Test Case
Courts in Russia “have been weaponized to support Russia’s efforts to undermine US sanctions,” Google’s lawyers said in filings last month, part of six lawsuits the technology giant has filed in California and London to seek legal protection for its assets. A spokesperson said in an emailed statement the “unprecedented fines and arbitrary legal penalties” are punishment for compliance with sanctions.
The Russian media companies, meanwhile, have argued that Google curtailed their free speech and the penalties were meant to enforce court’s orders to reinstate the YouTube channels, which Google did not follow. Google fought and lost the argument in Russia, and is only now challenging the standing of the system, lawyers for the firms said.
“An old Russian proverb states, if you’re afraid of wolves, don’t go into the forest,” lawyers for the media companies said in a US filing. “For Google the proverb might well read, if you’re afraid of the Russian legal system, don’t do business in Russia.”
A US court last month temporarily restrained the three media companies from pursuing Google’s assets abroad and commencing more cases. A similar order was handed by a UK court a month earlier.
“We will contest the cases and ask the courts to lift the restrictions,” said Artur Zurabyan, a partner at Moscow-based law firm Art De Lex, which is acting for the three media firms. More than 30 mass media companies in Russia have applied to Russian courts for similar orders and this “may be regarded as the test case,” he added.
“Courts are not weapons. Courts just decide the issues in accordance with the laws in the country and defend national interest, that is interests of local companies and citizens,” Zurabyan said.
More than two years into Russia’s full-scale invasion of Ukraine, sanctions imposed by western nations including the US are still redrawing sections of the global economy. There’s no sign of the international curbs being relaxed soon, as Putin prepares for a long confrontation with the west, while calls grow to seize an estimated $280 billion of Russian sovereign assets that have been frozen abroad.
The European Union issued its 14th round of economic restrictions on Russia in June, proposing a ban on transactions with Russian firms that use anti-sanctions measures in their local courts.
Unilateral sanctions have led to a steady escalation in tensions in disputes between Russian and western companies, said Nikolas Ireland and Francis Bond, lawyers at Macfarlanes in London. “Both courts and businesses were far more comfortable dealing with sanctions issued by the United Nations Security Council and enforced by all UN member states,” they said. “The new environment is much messier and leads to far more legal discord, as foreign policy increasingly encroaches on domestic legislation.”
“Google’s situation reflects how companies can become pawns and legal systems are becoming battlegrounds in geopolitical conflicts,” said Iordanova, the lawyer at Snellman. The cases against Google could start a trend of cases in neutral countries and influence how other multinational corporations decide “whether they will withdraw from dealing with Russia at all or accept the Russian terms of doing business,” she said.
Linde, meanwhile, will pursue all legal options to protect its and shareholders’ interests, the company said in a statement. The engineering firm and its subsidiaries are pursuing Gazprom and its subsidiary firm in a Hong Kong arbitration court, New York and the Netherlands, it said. A Russian court this year froze assets in its British subsidiary in a dispute over a stalled gas plant. Barclays declined to comment.
Euroclear will continue to defend itself against the “significant number’’ of legal proceedings, almost exclusively in Russia, the bank said in July along with its half year results. “The impact of the lawsuits on Euroclear is uncertain and Euroclear has received a number of unfavourable rulings since Russia does not recognise the international sanctions,’’ it said. Euroclear’s spokesperson declined to comment further.
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Tipping Point
Earlier this year, courts in the UK and Russia clashed over a sanctions dispute, with both insisting the other judges halt their case.
The UK’s Supreme Court ruled in April that a Gazprom subsidiary could not pursue a case in Russia against Italian lender UniCredit SpA over funding a gas treatment plant that was caught up in sanctions. UniCredit had argued that its funding came with a condition it would be governed by English law. Within days of this ruling, a Russian court froze $1 billion of local assets tied to UniCredit as well as Germany’s Deutsche Bank AG and Commerzbank AG.
“It was a good example of the risk of retaliation through the Russian courts,” said Ajay Malhotra, a partner at law firm Herbert Smith Freehills in London.
Soon after, the UK and Russian courts disagreed again, this time over control of a strategically crucial port in the Black Sea. A London judge went against Russian court orders, which had tried to penalize jailed tycoon Ziyavudin Magomedov $7.5 billion for pursuing sanctioned pipeline operator Transneft PJSC in the UK.
It’s still undecided if Magomedov, who was arrested for embezzlement in 2018, can bring his case to the English justice system — but a London judge said the penalty would have been “utterly disproportionate.”
The English court orders to stop foreign proceedings “show that the battleground is shifting from the Russian courts to deterring international enforcement of Russian judgments,” said Malhotra. Ignoring English court rulings would make it tougher for Russian firms to re-engage in international business, he added. “But they may have decided that the prospect of that is so distant that they are nevertheless willing to do so.”
‘Rare Beast’
Orders to stop foreign rulings from being enforced used to be “a relatively rare beast,” but have “significantly increased against the background of ongoing events arising from the Russian-Ukraine conflict,” Judge David Foxton observed in May while deciding on a separate case.
The English judge handed another unusual victory to Barclays called a negative declaration, saying the British bank did not owe money to Sovcombank PJSC as sanctions prevented that payment.
“Whatever reluctance the English court might once have felt about granting negative declaratory relief, that reluctance has now passed,” the judge said.
Sovcombank can appeal the ruling. Its legal team told the judge of difficulties finding local lawyers willing to represent a sanctioned business. The UK last year changed its laws to make it tougher for wealthy individuals and big businesses from Russia to hire lawyers in Britain.
Russian courts have issued orders against assets of western companies such as Volkswagen AG and JPMorgan Chase & Co. this year, spanning contract disputes and sanctions issues. Volkswagen declined to comment, citing ongoing legal proceedings in Russia. JPMorgan’s spokesperson declined to comment. The bank’s “remaining exposure to Russia is not material” but despite its challenges to the claims, its Russian assets “could be seized in full,” JPMorgan said in a US filing in June.
Hundreds of such cases are still meandering through courts in Russia, Europe and the US.
Ireland and Bond, the Macfarlanes lawyers, said that further strains on cooperation appear “increasingly inevitable.”
“The practical implication of this for businesses is that they now have to think much more about geopolitical risk in their supply chains and in the location of their assets – the days of business planning purely from the perspective of economic expediency are over,” they said.
(Updates to add further comment from lawyers in 16th paragraph.)
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