25 March 2022

Russia Will Challenge Economic Sanctions At The WTO

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As explained in our recent insight on Canadian Sanctions Targeting Russia, Belarus and Separatist Territories in Ukraine, Russia is facing unprecedented economic sanctions imposed by numerous countries...
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As explained in our recent insight on Canadian Sanctions Targeting Russia, Belarus and Separatist Territories in Ukraine, Russia is facing unprecedented economic sanctions imposed by numerous countries in response to Russia's invasion of Ukraine. Russia has announced that it will challenge those sanctions under the WTO dispute settlement system, arguing that they violate international trade obligations. A successful challenge would mean that the measures would have to be withdrawn and could lead to retaliation by Russia in the form of high tariffs on Canadian exports as well as Canadian services suppliers being shut out of the Russian market. However, WTO law would appear to offer a solid legal defence for Canada should its measures be challenged, permitting Canada (and others) to stay the course on implementing sanctions.

Russia Secured Valuable Benefits on Becoming a WTO Member

Russia became a member of the WTO in 2012-the last major economy to do so-following 18 years of complex and sometimes difficult negotiations. WTO membership gave Russia a coveted seat at the multilateral trade table and the promise of a new level of integration into the global economy. WTO membership held the promise of a major boost to Russia's exports of both goods and services, as well as an influx of foreign investment. As a WTO member, Russia enjoys the right to most favoured nation (MFN) treatment in its international trade relations, meaning that Russian exports receive the same regulatory and tariff treatment accorded to products of other WTO members, and its service suppliers enjoy non-discriminatory market access in several sectors. With WTO accession, Russia also secured an automatic right to challenge other WTO members' actions before a WTO dispute settlement panel when Russia considered that those members had violated their WTO obligations.

Russia's Legal Challenge of Economic Sanctions in the WTO: Several Steps Are Involved

It is not yet clear which sanctions Russia will challenge; the reported announcement by Dmitry Birichevsky, Director of the Department for Economic Cooperation in Russia's Foreign Ministry, refers to challenging "those trade restrictions that were adopted in violation of the rules and norms of the [WTO] Organization." Moreover, there are a number of steps Russia must take before it arrives at the litigation phase. These include holding mandatory consultations with challenged WTO members with a view to settling the claims. If settlement is not achieved (which is likely), Russia must then seek the establishment of dispute settlement panels by the WTO Dispute Settlement Body, a WTO committee composed of all 164 WTO members. This will take time (several weeks) but it will not be problematic; panel establishment is automatic provided certain conditions are met. Once established, panels of experts (three per dispute) must be composed by agreement between Russia and the other disputing parties, or, if they cannot agree on composition (which is likely), the WTO Director-General will compose the panels.

These steps together are likely to take several months. By then, the geopolitical landscape may have changed considerably and the use, extent and impact of economic sanctions may very well have changed. Russia would have to decide whether it wishes to continue to the litigation phase of the disputes, involving exchanges of written legal submissions and hearings in Geneva before the panels of experts. If Russia does pursue the legal challenges after panels have been established and composed, it would be a year or more before the expert panels' decisions would be rendered.

Birichevsky observed that Russia has "sufficient experience in successfully defending [its] interests in the WTO."  Indeed, Russia has been an active player in the WTO dispute-settlement system, participating in more than 100 cases thus far. Most have been as a "third party," where WTO members participate as an interested party rather than as complainant or respondent. But it has taken more active roles as well-Russia has brought eight legal challenges (four against the EU, two against the United States and two against Ukraine) and responded to 11 (six by the EU, three by Ukraine, one by Japan, one by the United States).

In the event that Russia proceeds with its proposed WTO challenge of economic sanctions, it is safe to assume that Canada's measures will be among those challenged. As outlined in our blog (see link above), Canada has taken a variety of measures against Russia. It was one of the first countries to remove Russia's entitlement to MFN tariff treatment, leading to the imposition of a 35 percent import tariff on virtually all goods originating from Russia. In addition, Canada has prohibited imports into and exports from certain areas of Ukraine controlled by Russia as well as prohibited the acquisition of financial services related to tourism to those areas, banned certain investments and related financial transactions, prohibited the import, purchase and acquisition of petroleum products from Russia, implemented a no-fly zone for Russian aircraft in Canadian airspace and closed Canadian territorial waters to Russian-owned, flagged or chartered vessels. Canada has also frozen the assets of, and blocked transactions with, an extensive list of Russian individuals and entities, imposed sanctions on the Russian central bank and cooperated with other countries to block access by certain Russian banks to the inter-bank messaging system SWIFT. Additional measures could be forthcoming.

Canada-Russia trade is not insignificant: the total value of Canada's imports from Russia was US$1.19 billion in 2020. Almost one quarter consisted of mineral fuels and oils and waxes. Notably, 10 percent of Canada's fertilizer imports come from Russia. As for Canadian exports to Russia, they totaled US$617 million in 2020, one-third of which included nuclear reactors, machinery, mechanical appliances and boilers. Helicopters and airplanes, spacecraft and agricultural machinery also figured prominently.

Several of Canada's actions against Russia are likely to be challenged, including the lifting of MFN treatment (a cornerstone of the WTO rules) and the imposition of tariffs in excess of bound rates, banning certain imports and exports, prohibiting the acquisition of certain services and prohibiting access to Canadian territorial waters. Other measures, such as those targeting financial institutions and SWIFT the messaging system, and the imposition of a no-fly zone in Canadian airspace, may escape WTO scrutiny as they may not be covered by WTO rules.

It would be for Russia as complainant to discharge the onus of demonstrating any alleged WTO violations for each measure it chooses to challenge. If Russia were successful in its legal challenge(s), any measures found to be in violation of WTO obligations would have to be withdrawn. Failure to do so could result in Russia taking retaliatory measures against Canada, such as imposing very high tariffs on Canadian exports to Russia or prohibiting Canadian services suppliers from accessing the Russian market. Although Russia may be able to mount an arguable challenge with respect to some of the measures imposed, past WTO decisions would appear to suggest that Canada would be able to counter with strong legal defences.

The "Security Defence" Under WTO Law

Article XXI of the GATT 1994 (and corresponding provisions in other WTO agreements) allows WTO members to justify actions taken in violation of WTO obligations if the conditions set forth in the provision exist. Referred to as the "security exception," Article XXI has been invoked rarely in the more than 25 years of WTO dispute settlement. It reads in relevant part:

Nothing in this Agreement shall be construed . to prevent any [WTO member] from taking any action which it considers necessary for the protection of its essential security interests  . taken in time of war or other emergency in international relations.

Notably, Russia was the first WTO member to successfully invoke Article XXI in response to a legal challenge brought by Ukraine. In 2016, Ukraine challenged restrictions imposed by Russia on traffic in transit by road and rail from Ukraine through Russia and bound for Kazakhstan and the Kyrgyz Republic. Ukraine argued that the restrictions violated GATT rules on freedom of transit found in Article V of the GATT.

Relying on the security defence under Article XXI, Russia asserted that it took the measures "[i]n response to the emergency in international relations that occurred in 2014 that presented threats to the Russian Federation's essential security interests." Russia argued further that Article XXI is self-judging and, therefore, once Russia had invoked the exception, the WTO dispute settlement panel could not inquire into the invocation of the exception or the impugned measures. (The United States filed a submission in agreement with Russia on the self-judging nature of the exception, while several other WTO members, including Canada, rejected Russia's interpretation.)

The dispute settlement panel in that case was the first to interpret the security defence. It disagreed with Russia's contention that Article XXI is self-judging. However, it concluded that although Russia's actions in restricting traffic in transit would have been inconsistent with its WTO obligations had they been taken "in normal times," the measures were justified under Article XXI.

The panel affirmed that it is for every WTO member to define for itself what it considers to be "its essential security interests," provided it does so in good faith and does not invoke Article XXI as a means to circumvent its international trade obligations. It also required that measures taken to protect those interests not be so remote from or unrelated to the "war or other emergency in international relations" that it would be implausible that the measures were taken to protect those interests.

Although Russia was vague in articulating the situation that led to the imposition of the transit measures, stating that it wished to "keep the issues such as wars, insurrections, unrests, international conflicts outside the scope of the WTO which is not designed for resolution of such crises and related matters," the panel concluded that the situation between Russia and Ukraine from 2014 to 2016 constituted an "emergency in international relations" within the meaning of Article XXI. In coming to this conclusion, the panel referred to the annexation of Crimea and the military conflict in eastern Ukraine as well as UN General Assembly Resolution 71/205, which characterized the situation between Ukraine and Russia as involving armed conflict. The panel also cited the fact that relations between Ukraine and Russia had deteriorated to such a degree that they were a matter of concern to the international community and noted that several countries had imposed sanctions against Russia in connection with the situation. The panel found that there was a clear correlation between the measures taken and the emergency in international relations and decided that Russia had satisfied the conditions of Article XXI.

The only other WTO ruling on the applicability of the security defence was in connection with Qatar's 2018 challenge of measures taken by Saudi Arabia related to the protection of intellectual property rights. As part of an umbrella policy of preventing any form of interaction with Qatari nationals, Saudi Arabia denied Qatari nationals access to civil remedies through its courts, including by preventing law firms from representing Qatari-based entities seeking to enforce their intellectual property rights (specifically in this case, a sports company challenging unauthorized distribution and streaming of its licensed media content in Saudi Arabia). Saudi Arabia successfully invoked Article 73 of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (the equivalent of Article XXI under the GATT 1994) in relation to some of its challenged measures.

The panel in the Qatari case found that there existed "a situation of heightened tension or crisis" sufficient to establish an "emergency in international relations" within the meaning of Article 73. The panel pointed to the severance of diplomatic relations with Qatar by Saudi Arabia and several nations, to the "grave and serious nature of the deterioration and rupture in relations" between Qatar and Saudi Arabia, and while not taking a position on them, to Saudi Arabia's allegations that Qatar supported terrorism and interfered in the internal affairs of other countries. It also found that it was not implausible that the challenged measures, which were part of an umbrella policy prohibiting interaction between Saudi Arabia and Qatar, were taken by Saudi Arabia in order to protect its stated essential security interests-namely, the dangers to its people and territory of terrorism and extremism. Thus, the panel found that although the measures were inconsistent with Saudi Arabia's WTO obligations, they were justified under Article 73.

What Would be the Elements of Canada's Defence to a Russian WTO Challenge?

If Russia were to challenge Canada's measures taken in response to Russia's military operation in Ukraine, including removal of MFN treatment and import and export prohibitions, the findings in the only two WTO panel decisions to date addressing the security exception suggest that Canada could satisfy the conditions in the exception and thereby justify its measures.

First, Canada would be able to rely, among other things, on the UN Security Council Resolution  adopted on March 2  to establish that the measures were taken "in time of war or other emergency in international relations." It was the first time in 40 years that the UN Security Council referred a crisis to the UN General Assembly (UNGA). This led to the adoption of the resolution by a vote of 141 to 5 condemning the Russian actions as a violation of the UN Charter, which prohibits the use of force against the territorial integrity or political independence of any state. Second, Canada could demonstrate that it considered its measures "necessary for the protection of its essential security interests." In announcing on February 24, the first set of sanctions taken against Russia, Prime Minister Trudeau called Russia's military action "a massive threat to security and peace around the world." It could also point to the UNGA resolution stating that " urgent action is needed to save this generation from the scourge of war" and condemning Russia's decision "to increase the readiness of its nuclear forces." Finally, Canada's defence could make the connection between the measures taken and the emergency in international relations by pointing out that its actions were taken in concert with similar actions taken by the United States and the EU, and by the G7 acting together, with a view to contributing to the united effort to isolate the Russian regime and to the joint impact of  measures designed to hobble the Russian economy.

As mentioned above, if Russia were to pursue its intentions to challenge economic sanctions at the WTO, it would take several months to establish and compose a dispute settlement panel and reach the litigation phase. By that time, the geopolitical situation and sanctions landscape may well have changed However, given the gravity of the current situation and the inevitable fallout across the globe in terms of the developing humanitarian crisis and the severe economic and political implications, it is unlikely that matters will have returned by then to what the WTO panel in the Russia-Ukraine dispute referred to as "normal times". New or continuing economic and other measures may be necessary. Therefore, a WTO challenge by Russia would not necessarily be eliminated with the passage of time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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