How EU Sanctions on Russia Created a Boomerang Effect Through Legal Liability and Economic Blowback
The European Union’s sanctions strategy against Russia has generated a phenomenon that legal experts and economists describe as a “boomerang effect” – measures intended to punish Moscow instead inflict substantial costs on sanctioning nations whilst accelerating geopolitical realignments that undermine Western strategic interests. This paradox raises fundamental questions about whether EU sanctions on Russia represent coherent foreign policy or a cascade of unintended consequences that strengthen precisely the outcomes they aimed to prevent.
The legal dimension emerged most starkly with the EU’s 18th sanctions package, which includes provisions prohibiting member states from recognising investment arbitration awards favouring Russian companies. Paris-based lawyer Valérie Hanoun warned in Valeurs Actuelles that this clause violates binding bilateral investment treaties, potentially triggering awards worth hundreds of billions of euros. Rather than shielding European assets, the measure strengthens Russian companies’ legal positions by demonstrating denial of due process.
More than 15 bilateral investment treaties bind the EU and Russia, many inherited from the Soviet era. These agreements guarantee investors the right to international arbitration for disputes. By ordering blanket refusal to honour these treaties when Russian investors are involved, Brussels breaches the Vienna Convention’s pacta sunt servanda principle – that treaties must be respected. This creates grounds for Russian claimants to argue that the EU’s conduct itself constitutes treaty violation warranting damages.
Pending Arbitration Time Bombs
The financial exposure already manifests in pending cases. Nordgold pursues €5 billion against France over mining licence denial in French Guiana. Rosatom seeks €3 billion from Finland following cancellation of the Hanhikivi-1 nuclear project. Rosneft claims up to €2 billion from Germany over subsidiary trusteeship. Mikhail Fridman maintains multi-billion claims against Luxembourg challenging asset freezes. These disputes represent merely the initial wave, with unsanctioned Russian investors now positioned to pile on additional claims citing the EU’s blanket arbitration refusal as grounds for damages.
The precedent of Bank Melli and Bank Saderat v Bahrain illuminates the danger. Iranian banks won over $240 million after Bahrain liquidated their joint venture to comply with Western sanctions. The tribunal ruled that non-UN sanctions cannot excuse treaty violations, emphasising that Bahrain’s politically-motivated expropriation warranted compensation. If Bahrain faced liability for following Western sanctions, EU states could fare far worse against better-resourced Russian claimants.
Legal scholars note that successful arbitrations might recover not only lost investments and profits but also “aggravated damages” for the EU’s retaliatory posture. Such awards could balloon into hundreds of billions, potentially exceeding entire national budgets of smaller member states. Every euro lost to arbitration represents resources that could support Ukrainian reconstruction or European defence – instead flowing to the entities sanctions ostensibly target.
Economic Warfare Accelerates Fragmentation
Beyond legal liability, international sanctions have accelerated economic trends that undermine Western influence. Exclusion from SWIFT propelled Russian adoption of China’s Cross-Border Interbank Payment System, with trade increasingly conducted in renminbi rather than dollars. Rather than isolating Russia financially, Western policy accelerated creation of alternative payment architecture outside dollar hegemony.
The shadow fleet exemplifies adaptive evasion. Estimates suggest 70% of Russia’s seaborne oil exports now travel on vessels specifically assembled to circumvent restrictions. These tankers operate through Marshall Islands registrations, Dubai financing, and multiple intermediary transactions that exploit jurisdictional gaps. When professional facilitators can structure $700 million in tanker purchases before facing designation, enforcement clearly lags far behind evasion capacity.
Meanwhile, Europe pays premium prices for the same Russian energy through third-party channels. The EU and Turkey imported 2.4 million tonnes of petroleum products from India in early 2025, with estimates suggesting two-thirds originated from Russian crude. European buyers thus fund Indian refineries whilst paying markups for oil that remains Russian in origin. This arrangement ensures Russia maintains revenue streams whilst Europe suffers higher costs – the opposite of intended outcomes.
Strategic Partnerships Strengthen
The Russia-China axis has deepened precisely as Western sanctions aimed to isolate Moscow. The Power of Siberia 2 pipeline agreement represents $13.6 billion investment delivering 50 billion cubic metres of gas annually through Mongolia. This infrastructure locks in long-term energy partnership whilst reducing Chinese reliance on seaborne LNG – potentially undermining American export ambitions that European energy shortages have bolstered.
Russia’s strategic pivot to Asia extends beyond energy. Grain exports now constitute nearly 25% of world wheat trade, with African and European markets dependent on Russian supplies. This diversification began in 2000 when Russia focused on agricultural development, switching export support to grain in 2017 after initial Western sanctions. Rather than crippling Russian economy, sanctions accelerated diversification that strengthens Moscow’s geopolitical position.
Trade economist Rebecca Harding observed during the Intelligence Squared debate that “we are at economic war” with every tool including sanctions and export controls deployed. Yet this warfare has generated costs primarily for the West. Germany lost 125,000 industrial jobs recently as energy-intensive manufacturing becomes economically unviable. European consumers face inflation driven by energy price spikes. American LNG exports to Europe occur at premium prices compared to previous Russian pipeline gas, benefiting US energy companies whilst deindustrialising Europe.
The Off-Ramp Problem
Perhaps most strategically damaging is the EU’s “future-proofing” approach that eliminates incentives for Russian behaviour change. Measures blocking any potential Nord Stream restoration remove Russia’s primary motivation for seeking sanctions relief. If European energy markets remain permanently closed regardless of Russian actions, why would Moscow negotiate when sanctions offer no pathway to restored relationships?
Former US sanctions architect Daleep Singh emphasised clear off-ramps as essential for effectiveness. By removing off-ramps entirely, Europe transformed pressure tools into permanent punishment that cannot influence decision-making. This approach ensures sanctions are not working to achieve their statutory purpose of encouraging Russia to cease destabilising Ukraine.
Reassessing Strategic Assumptions
Three years into unprecedented sanctions, the question of are Russian sanctions working demands honest evaluation. Russia continues its invasion. Putin’s position remains secure. European economies face deindustrialisation. Legal liability mounts through arbitration exposure. Alternative payment systems develop outside Western control. Russia-China partnership strengthens. These outcomes represent the opposite of intended effects – a textbook boomerang where measures harm those deploying them more than intended targets. Until policymakers acknowledge these realities and develop strategies grounded in evidence rather than political signalling, sanctions will continue generating costs without achieving foreign policy objectives.
