Mikhail Fridman, founder of Alfa Group, has launched a landmark $16bn arbitration claim against Luxembourg, contesting the freezing of his assets under EU sanctions. The case could open a "Pandora’s box" if he wins.

The legal suit follows Fridman’s offer to settle the dispute out of court, made in February, expired. Fridman gave the government six months to respond. Lawyers interviewed by Vedomosti say that Fridman has a “non-zero” chance of winning his case in court.

Back in the late 2000s, Fridman and his partners in Alfa Group combined all their financial assets into the holding company ABH Holdings, registered in Luxembourg, which were frozen after Fridman was sanctioned in February 2022.

Fridman’s lawyers filed the action at the Hong Kong International Arbitration Centre (HKIAC) on August 13, challenging the basic legality of the sanctions regime in general and that of the freeze on Fridman’s assets in particular, as part of the EU sanctions regime imposed on Russia due to the Ukraine conflict.

Fridman’s assets are held through Luxembourg-based companies. The businessman argues that these measures constitute illegal expropriation. He is demanding $16bn in compensation, which he asserts is the total value of his frozen assets. Fridman is represented by a legal team that includes Cherie Blair KC, a prominent British barrister and wife of former UK Prime Minister Tony Blair.

Fridman contends that the sanctions, imposed due to his Russian citizenship and business success, are a “grave injustice” and a violation of international law. The sanctions, implemented outside the United Nations framework, have, according to Fridman, destroyed the value of his investments and tarnished his and his companies' reputations. His legal team has also indicated that Fridman will seek additional compensation for personal stress, the amount of which is yet to be determined.

The case is the most serious legal challenge to the sanctions regime imposed on oligarchs for no more than being “close to Putin”. Oligarchs have filed dozens of legal cases disputing the legality of sanctions, which are often based on slipshod evidence and unsubstantiated media reports. As bne IntelliNews reported, Uzbek-born Russian billionaire Alisher Usmanov has won a string of legal cases against German prosecutors for making baseless claims that were used to launch investigations into the tycoon’s businesses.

Fridman also won cases against the EU and the European Court of Justice in Luxembourg partially lifted sanctions on him and his business partner, Petr Aven, in April, overturning two of the three grounds for sanctions against him. The third criterion – "leading businessman" – was not the subject of consideration by the European Court, but is likely to be included in the new lawsuit.

Forbes estimates Aven and Fridman's fortunes at $4.3bn and $13.1bn respectively. They are two of Russia’s best-known oligarchs that rose to prominence in the 1990s during the chaotic Yeltsin-era when the first generations of super-rich emerged.

In that case the court found that “although the grounds put forward by the [European] Council may be such as to establish, as the case may be, a degree of proximity between Petr Aven and Mikhail Fridman and Vladimir Putin or his entourage, they do not demonstrate that they have supported actions or policies that undermine or threaten the territorial integrity, sovereignty and independence of Ukraine, or that they have provided material or financial support to the Russian decision-makers responsible for the annexation of Crimea or the destabilisation of Ukraine, or that they have benefited from those decision-makers.”

Fridman is hoping that the impartiality of the courts will find the sanctions, that were rushed out in the first months of the war in Ukraine, are more of a political decision than a reaction to any demonstrable wrongdoing. Fridman is banking on Europe’s strong property right laws. European leaders are nervous as if he wins this case, it could open a Pandora’s box of similar lawsuits and will force a European rethink of the whole sanction’s regime on oligarchs.

At the same time if the sanctions are lifted, Fridman will continue to pursue his claim against Luxembourg for compensation, his lawyers warned, reports Vedomosti. “The damage to his assets has already been done,” the lawyers said, crippling Alfa Assets Management, Fridman’s Luxembourg-based management company, leading to its liquidation due to regulatory non-compliance.

Fridman said the sanctions on him are a "grave injustice" and violate international law, since the restrictions were imposed by the EU outside the UN. He bases his legal argument on a 1989 bilateral investment treaty between Belgium and Luxembourg and the Soviet Union, under which investments by nationals of either party cannot be expropriated without compensation. The treaty stipulates that any such measures must be accompanied by prompt and fair compensation equivalent to the real value of the investments.

Russia has similar investment guarantee agreements with many Western countries including Germany, Spain and the UK, that have all sanctioned oligarchs and impounded their property. If Fridman wins all of these countries can expect similar compensation claims from the other oligarchs. The EU has confiscated about $22bn worth of oligarch assets since the start of the war.

The case marks the first time a legal challenge has been launched against the basic legitimacy of sanctions as a foreign policy tool, rather than merely contesting specific sanctions against individuals.

“This case is unprecedented in its scope, as it directly questions the legality of sanctions as a whole, a cornerstone of Western foreign policy,” a source close to the case told Vedomosti.

Lastly, even if Fridman wins, he will find it very difficult to enforce the decision to compensate him. The defendant countries’ courts often do not enforce investment compensation decisions, on the grounds that this would violate their public order.