Neutral jurisdiction with common law system attracts sanctions-hit businesses
HONG KONG -- Russian companies are turning to Hong Kong for dispute arbitration services as sanctions over the Ukraine war restrict their access to Western courts.
Lawyers in the city say Russian companies are also increasingly adopting Hong Kong's governing law in their commercial contracts for similar reasons.
Russian litigants have traditionally favored London's commercial courts for their proximity and the common law legal system. But after the U.S. and European Union slapped sanctions on Russia over the Ukraine war, many large Western law firms dropped Russian clients.
In Hong Kong, more than half a dozen senior lawyers who have handled disputes involving a Russian party told Nikkei Asia that they have seen a spike in Russian companies arbitrating in Hong Kong and switching from British governing law in their contracts to Hong Kong law due to the city's sanctions-neutral policy.
"They have nowhere else to go," said a Chinese lawyer who declined to be named because his work involves Russian companies. "Hong Kong being a Chinese city with a colonial past is an advantage. This is 'one country, two systems,' and it is very attractive for the Russians."
"The position [among Russian companies] is that Hong Kong is a sophisticated, common law jurisdiction, just like the U.K.," said another disputes lawyer. "But it is neutral -- Hong Kong doesn't impose sanctions on Russian companies and any unilateral sanctions."
The lawyer said that what was once a "trickle" of requests for dispute resolution services from Russian companies "became an avalanche with the start of the war because the sanctions became immediate overnight and were crippling to the point that Russian businesses could no longer operate."
Some experts say that providing such services to Russian companies actively undermines the effectiveness of Western sanctions.
"While the core purpose of Hong Kong's arbitration system is to provide a neutral platform for dispute resolution, it indirectly aids sanctioned companies in carrying out their business transactions," said Julien Chaisse, a law professor specializing in international economic law and arbitration at the City University of Hong Kong.
"By resolving disputes in a reputable jurisdiction like Hong Kong, these companies can ensure their contracts are still enforceable in many parts of the world," he said. "This can pave the way for smoother business transactions, even when faced with sanctions."
The Hong Kong International Arbitration Centre (HKIAC) declined to provide specific statistics on cases handled that involved Russian parties but said the number of those disputes was "consistent" over the past five years.
Robert Rhoda, a Hong Kong-based partner at Dentons specializing in disputes, said Russian parties lately are increasingly inclined to agree to contracts using Hong Kong governing law.
"We see that interest through every stage, from the contract formation stage where the parties opt for Hong Kong arbitration agreements, and so possibly Hong Kong governing law, through to the commencement of arbitration proceedings themselves," Rhoda said.
Hong Kong was returned from British to Chinese rule in 1997 under the one country, two systems formula, which granted the city continued use of the common law system and guaranteed judiciary independence and rule of law.
These features have been attractive to Russian officials and businesses for some time, according to several lawyers. The city strengthened its legal ties with Russia in 2019 when the HKIAC became the first foreign arbitration institution permitted to administer corporate disputes in Russia, provided they involved international parties.
Relations between China and Russia have grown even closer since the invasion of Ukraine, with trade hitting record amounts. The total value last year came to $190 billion, and Russia's prime minister said he expects the figure to hit $200 billion in 2023.
At the same time, China-U.S. ties grew more fraught. Last year, Hong Kong's chief executive said the city would not enforce sanction measures after it was criticized by the U.S. for allowing the yacht of sanctioned Russian billionaire Alexey Mordashov to dock in its harbor.
Brian Kot, a research assistant at the Carnegie Endowment for International Peace, said Hong Kong authorities have not scrutinized Russian activities in the city as other jurisdictions have, giving Russian businesses the confidence to operate there and maintain a connection with the global business community.
"Russian entities are further reassured by the Hong Kong government's increased subservience to China, which has been a vital economic partner of Russia in counteracting the disruptions posed by harsh Western sanctions," Kot said.
Hong Kong has also been used to continue exporting dual-use goods and advanced chips -- two categories that are subject to U.S. export controls -- into Russia, Nikkei previously reported. Many Russian companies, meanwhile, have switched from the U.S. dollar to the Chinese yuan for trade and investment.
One reason Russian companies might refrain from seeking legal services in Hong Kong comes from their home country.
Legislation passed in 2020 allows Russian courts to have exclusive authority over disputes that involve Russian parties subject to international sanctions. This could deter Russian businesses from having their disputes handled in Hong Kong, some lawyers feared, dealing a blow to the city's ambitions to become a legal arbitration hub.
And last month, a Russian court said Hong Kong's arbitration center was not in fact sanctions-neutral and that because of the common law system, Russian entities could not be guaranteed a fair trial.
The HKIAC says on its website that it is not liable for any breach of sanctions during the proceedings and does not treat any party listed under a sanctions regime differently from any other parties.
Western and Japanese companies have already moved many of their disputes to regional rival Singapore due to concerns over judicial independence in Hong Kong after the enactment of the national security law in 2020.
"Western countries turn away from us because they think we're biased towards the Chinese and the Russians think we're too Western," the Chinese lawyer said. "We're stuck in the middle with nothing."