US, EU AND UK INCREASE PRESSURE ON RUSSIA WITH FURTHER SANCTIONS
Since late February 2022, the United States (U.S.), the European Union (EU) and its member states, the United Kingdom (U.K.), and many others—including Japan, Australia, New Zealand, Taiwan and Canada—have imposed sweeping new sanctions on Russia in response to its invasion of Ukraine.
This note updates and consolidates our February 28, March 22 and April 27 publications. It summarizes the most significant new sanctions coming out of the U.S., EU and U.K., as they stood at midday on August 10, 2022. In addition, it annexes a table of key individuals and entities named as being subject to the U.S., EU and U.K. sanctions. The table has been updated since the April 27 publication, to reflect some key additions to the sanctions lists.
As a reaction to these sanctions, the Russian government has announced a number of retaliatory sanctions, including foreign currency restrictions and measures targeting foreign businesses in Russia.
The landscape continues to evolve. We are tracking these developments and may provide further updates as the situation develops.
Prior to Russia’s invasion of Ukraine, named Russian persons and businesses were already subject to wide-ranging international sanctions, linked to Russia’s annexation of Crimea and other events. Since late February, increasingly intensive rounds of international sanctions have been imposed as the conflict in Ukraine has escalated.
G7 countries removed key Russian banks from using the secure financial messaging system operated by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) and imposed sanctions on the Russian Central Bank, designed to significantly restrict the bank’s access to its foreign currency reserves. The G7 have also committed to taking action to deny Russia its most-favored-nation status at the World Trade Organization and continue a campaign of pressure through targeted sanctions and additional trade restrictions of key goods and technology.
The global sanctions range from directly targeting the assets of Russian financial institutions, online media outlets linked to the Russian government disinformation campaign, corporations and individuals to extending restrictions on certain categories of transactions, investments or trade with Russia. The U.S. has banned imports of Russian-origin oil and gas into the U.S., and the EU and U.K. have announced plans to substantially reduce their imports. New trade controls on imports and exports of certain categories of goods and a comprehensive trade and investment embargo on the self-proclaimed Donetsk and Luhansk People’s Republics (respectively, DNR and LNR) have also been implemented. Several countries have announced restrictions on the operations of Russian flights in their airspace, and many have implemented travel bans on sanctioned individuals. Many jurisdictions have also targeted Belarusian individuals and entities and/or trade with Belarus in response to Belarus’ support for the Russian campaign against Ukraine.
- The sanctions related to Russia’s invasion of Ukraine are multi-faceted and at times complex and far-reaching, with potential implications for any business operating in the global economy, even those with no immediate or direct ties to Russia, Belarus or Ukraine.
- Corporates and financial institutions should conduct a risk assessment to determine if and how these sanctions may impact their operations and business relationships. Businesses and individuals with any links to Russia, Belarus or Ukraine should draw up a list of their connections with Russia or Belarus and be vigilant as new sanctions are introduced or developed.
- Any necessary corrective action should be taken in time to meet applicable deadlines or permissible wind-down measures. Companies should review and update their compliance policies and procedures to effectively mitigate against new sanctions, AML and anti-corruption risks.
- Legal advice should be sought in complex cases as the impact of these sanctions is unavoidably a fact-specific inquiry and will be dependent on the specific details of the transactions and circumstances in question. These sanctions as a whole contain few generally applicable rules and do not necessarily apply in the same way or to the same entities in each jurisdiction.
The U.S. sanctions regime consists of a number of sanctions programs with a combination of country-wide, sectoral, targeted and secondary sanctions. The sanctions program related to Russia and Ukraine is implemented primarily by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC)—along with the State Department and Commerce Department’s Bureau of Industry and Security (BIS)—pursuant to Executive Orders (EOs) issued by the President and legislation passed by Congress. OFAC has laid out additional measures in response to the Russian invasion of Ukraine in a series of new directives and determinations with certain wind-down periods and exceptions authorized through general licenses.
The U.S. sanctions regime is binding on all U.S. persons, including all U.S. citizens and permanent resident aliens regardless of their location, all persons and entities within the United States and all U.S.-incorporated entities and their foreign branches. Non-U.S. persons may also be exposed to secondary sanctions risk if they transact with individuals or entities subject to sanctions—including, if they materially assist, sponsor or provide financial, material or technological support for, or goods or services to or in support of, certain activities, a person whose property and interests in property are blocked. Non-U.S. persons may also expose themselves to liability if they “cause” a violation of U.S. sanctions by unlawfully introducing some U.S. nexus to a prohibited transaction. Violations of U.S. sanctions can lead to significant criminal or civil penalties.
The table annexed to this note lists key entities and individuals named as being subject to U.S. (as well as EU and U.K.) sanctions.
The new U.S. sanctions implemented in response to Russia’s invasion of Ukraine as of August 10, 2022, include:
- Specially Designated Nationals (SDNs) designations. The U.S. administers blocking sanctions through the publication of a list of Specially Designated Nationals and Blocked Persons with whom transactions are prohibited. U.S. persons are prohibited from all direct and indirect dealings with SDNs and must block (i.e., freeze) any property in their possession in which such individuals or entities have any interest. Additionally, individuals on the SDN list are subject to travel restrictions. Recent U.S. designations include:
- Major Russian financial institutions, along with certain executives and board members;
- Defense and war-related enterprises;
- Russian President Vladimir Putin;
- Russian government officials, including Foreign Minister Sergei Lavrov, Defense Minister Sergei Shoigu and Kremlin Press Secretary Dmitry Peskov;
- Members of the Russian Duma;
- Russian business and political elites, along with certain family members;
- Nord Stream 2, along with corporate officers;
- Russian-backed media companies, along with several of their employees;
- Russian darknet market and virtual currency exchanges; and
- Individuals with links to the DNR or LNR.
- Comprehensive Embargo on the DNR and LNR. These sanctions are similar to the 2014 sanctions imposed on the Crimea region following Russia’s incursions there and effectively prohibit nearly all U.S.-nexus trade with the DNR and LNR, along with any other regions of Ukraine that may be later added by the Secretary of the Treasury, in consultation with the Secretary of State (the “Covered Regions”). The sanctions under EO 14065 prohibit (1) new investment by a U.S. person in the Covered Regions, (2) the import into the U.S. of any goods, services or technology from the Covered Regions, (3) the export from the U.S. or by a U.S. person of any goods, services or technology to the Covered Regions and (4) U.S. persons from financing, facilitating or guaranteeing transactions that U.S. persons would be prohibited from engaging in directly.
- Trade & Investment restrictions. In addition to the comprehensive trade embargo in place on the DNR and LNR, the U.S. has imposed a series of new trade restrictions and investment bans on numerous segments of the Russian economy:
- Oil and gas. Issued on March 8, EO 14066 banned the import of Russian-origin oil, liquified natural gas and coal into the United States. In April, U.S. President Biden also signed into law the Ending Importation of Russian Oil Act, which codified the prior ban on Russian oil, gas and coal imports. OFAC has confirmed that, to the extent imports of Russian-origin oil, gas and coal outside of the U.S. do not involve a sanctioned person or otherwise prohibited transaction, non-U.S. persons would not be subject to U.S. sanctions if they continue to import these products to non-U.S. jurisdictions. BIS also extended existing export control restrictions—initially imposed in 2014 in response to the Russian annexation of Crimea—that target Russia’s access to oil and gas refinery equipment. Restrictions on the provision of goods, technology and services (with the exception of financial services) by U.S. persons in support of specified energy projects (e.g., projects run by Lukoil, Gazprom and Rosneft) have been in place since 2014;
- High-tech goods. BIS announced new restrictions on exports from the U.S. and on foreign items using U.S. equipment, software and blueprints to Russia of high-tech goods, including semiconductors, computers, telecommunications, information security equipment, lasers and sensors;
- Luxury goods. Issued on March 11, EO 14068 prohibits the export of U.S.-origin luxury goods, including certain spirits, tobacco products, clothing items, jewelry, vehicles and antique goods into Russia;
- Seafood, diamonds and alcohol. Certain U.S. imports of Russian-origin seafood, non-industrial diamonds, alcohol and any other products later designated are prohibited pursuant to EO 14068;
- U.S. banknotes. Exports from the U.S. into Russia of U.S. banknotes are prohibited pursuant to EO 14068.
- Russian gold. On May 24, the U.S. prohibited the importation of Russian gold, the country’s largest non-energy export, pursuant to a determination under E.O. 14068. Even prior to this new determination, certain gold-related transactions designed to circumvent regulations were sanctionable under U.S. sanctions authorities.
- Suspension of Normal Trade Relations. In addition to restrictions on specific imports and exports, in April, President Biden signed the Suspending Normal Trade Relations with Russia and Belarus Act, which denies most-favored nation tariff treatment to Russian and Belarussian products. The Act also reauthorized sanctions authorizations under the Global Magnitsky Human Rights Accountability Act to target human rights violations and corruption.
- Ban on new investment and certain services. Issued on April 6, 2022, EO 14071 prohibits all “new investment” in the Russian Federation by U.S. persons, wherever located, as well as the direct or indirect provision by U.S. persons of any category of services determined by the Secretary of the Treasury.
- Provision of accounting, trust and corporate formation and management consulting services. Issued on May 8, 2022, U.S. persons are prohibited from providing certain accounting, trust and corporate formation and management consulting services to any person located in the Russian Federation pursuant to a determination under E.O. 14071.
- Financial services sector. A sectoral determination pursuant to E.O. 14024 authorizes the imposition of sanctions on individuals or entities determined to be operating in the financial services sector of the Russian economy.
- Aerospace, electronics, and marine sectors. On March 31, 2022, a determination pursuant to EO 14024 authorized the imposition of blocking sanctions on persons determined to be operating in the aerospace, electronics and marine sectors of the Russian economy.
- Accounting, trust and corporate formation and management consulting services sectors. A sectoral determination pursuant to E.O. 14024 authorizes the imposition of sanctions on individuals and entities that operate or have operated in the accounting, trust and corporate formation services or management consulting sectors of the Russian economy.
- Russian sovereign debt restrictions. Directive 1A under EO 14024 prohibits U.S. financial institutions from dealing in the secondary market for new ruble or non-ruble denominated bonds issued by Russia’s Central Bank, National Wealth Fund and Ministry of Finance. While U.S. financial institutions were previously banned from participation in the primary market for new debt issued by these entities, the restrictions now apply to secondary market trading activities for bonds issued after March 1, 2022;
- Correspondent and payable-through account restrictions. Directive 2 under EO 14024 imposes correspondent and payable-through account restrictions (CAPTA) restrictions on the Public Joint Stock Company Sberbank of Russia and its foreign financial institution subsidiaries (listed in Annex 1 to the Russia-related CAPTA Directive). These sanctions require U.S. financial institutions to close, before March 26, 2022, any correspondent and payable-through accounts and reject future transactions involving Sberbank and its subsidiaries;
- New debt and equity restrictions. Similar to previous Directives imposing sectoral sanctions related to Ukraine, Directive 3 under EO 14024 prohibits U.S. persons from all transactions in, provisions of financing for, and other dealings in new debt of longer than 14 days maturity and new equity issued by listed entities on or after March 26, 2022. OFAC may also add additional entities under Directive 3. Newly added entities will be subject to prohibitions on new debt and equity 30 days after OFAC makes its determinations; and
- Restrictions on transactions with Russia’s Central Bank, National Wealth Fund and Finance Ministry. Directive 4 under EO 14024 prohibits U.S. persons from engaging in any transactions involving Russia’s Central Bank, National Wealth Fund and Ministry of Finance, including any transfer of assets to or foreign exchange transaction for or on behalf of these entities. Directive 4 was implemented in accordance with the joint announcement on February 26, 2022, with the European Commission, France, Germany, Italy, the U.K. and Canada. The effective result is that any assets of these entities that are held in U.S. financial institutions are immediately frozen, and financial institutions outside the U.S. that hold U.S. dollars for these entities will be unable to disburse those funds.
- Airspace restrictions. On March 1, 2022, the U.S. announced that it would block all Russian aircraft and airlines from entering U.S. airspace. The move came after Europe and Canada imposed similar restrictions.
The U.S. has also imposed sanctions on Belarus for its role in supporting the Russian invasion. BIS imposed restrictions, similar to those placed on Russia, on the exports of high-tech goods and luxury goods to Belarus. OFAC also designated several Belarusian individuals for their support of the Russian invasion of Ukraine.
In addition to new sanctions, OFAC has issued a number of general licenses that authorize transactions otherwise prohibited by U.S. sanctions. These include wind-down periods for some restrictions and exceptions for certain categories of transactions or with certain individuals or entities. On April 19, 2022, OFAC published a fact sheet, which provides an overview of applicable authorizations and exemptions for agricultural trade, access to communications, and other support to those impacted by the war in Ukraine.
U.S. officials have underscored their commitment to enforce US sanctions imposed in response to Russia’s invasion of Ukraine. Announced on March 2, 2022, the KleptoCapture Task Force is an interagency task force dedicated to enforcement of the U.S. measures imposed in response to Russia’s invasion of Ukraine, including sanctions, export restrictions and economic countermeasures. Another initiative launched in March the Russian Elites, Proxies and Oligarchs (“REPO”) Task Force, is a multilateral partnership between the U.S. and its allies in Australia, Canada, Germany, France, Italy, Japan, the United Kingdom and the European Commission to target the assets of Russian oligarchs to inflict maximum pain on those close to the Putin regime. Already, the REPO Task Force has blocked more than $30 billion worth of sanctioned Russian assets in financial accounts and economic resources, immobilized about $300 billion worth of Russian Central Bank assets, seized yachts and real luxury real estate, and taken steps to restrict Russia’s access to the global financial system.
In the EU, decisions on the adoption of sanctions are taken by the Council of the European Union on the basis of proposals from the High Representative of the Union for Foreign Affairs & Security Policy. The High Representative together with the European Commission seek to give effect to these decisions by submitting joint proposals for Council regulations, which are then adopted by the Council. The Commission also oversees member-state implementation of EU sanctions regimes.
In addition, member states of the EU are permitted to introduce their own sanctions regimes against third countries. Several EU sanctions have involved or been presaged by similar actions by particular EU member states, notably those concerning the prohibition of Russian aircraft or the use of airspace. The SWIFT sanctions have also been imposed via groups of EU member states and other countries acting together.
Scope of Sanctions
The territorial scope of the EU’s Russian sanctions is broad. The sanctions typically apply: (1) within the territory of the EU, including its airspace; (2) on board any aircraft or vessel under the jurisdiction of an EU member state; (3) to EU nationals, wherever they are located; (4) to any legal entity incorporated under the law of an EU member state, whether that entity is situated inside or outside the EU; and (5) to any legal entity in respect of business done in whole or in part within the EU.
Members of the European Parliament have unanimously voted that all sanctions against Russia should also be mirrored for Belarus, in light of its support for the Russian campaign against Ukraine.
The table annexed to this note lists key entities and individuals named as being subject to EU (as well as U.S. and U.K.) sanctions.
EU sanctions against Russia include the following categories of measures:
- Asset freezes, prohibiting the provision of funds or economic resources to sanctioned individuals (who are named in Annexes to the relevant implementing legislation and listed on the EU’s consolidated financial sanctions list (individual accounts must be set up to gain access)).
- Financial services restrictions:
- prohibiting dealings in transferable securities and money-market instruments issued by sanctioned entities, as well as other categories of related entities (e.g., non-EU entities that are more than 50% owned by the sanctioned entity). The prohibition also applies to certain securities and instruments issued by the Russian government and Russian Central Bank;
- restricting sanctioned entities’ ability to access EU capital markets;
- banning the listing and provision of services in relation to the shares of Russian or Belarusian State-owned entities on EU trading venues;
- significantly limiting financial inflows from Russia or Belarus to the EU by prohibiting: (1) the acceptance of deposits exceeding certain values from Russian nationals, residents or legal entities established in third countries that are majority-owned by Russian nationals or residents; (2) the holding of Russian-client accounts by EU central securities depositories; as well as (3) the selling of Euro-denominated banknotes or securities to Russian or Belarusian clients;
- prohibiting investment or participation in projects co-financed by the Russian Direct Investment Fund, as well as transactions related to the management of assets and reserves of the Russian Central Bank and the Belarusian Central Bank;
- prohibiting support, including financial assistance, to Russian publicly-owned or controlled entities;
- prohibiting the use of SWIFT by specified Russian and Belarusian entities; and
- prohibiting the provision of credit rating services to Russian individuals or entities.
- Trade restrictions on a range of goods, including a ban on the import, purchase or transfer of Russian gold (including jewelry). Other restricted goods include dual-use goods and technology and related services as well as coal and other solid fossil fuels. The EU is phasing out Russian crude oil imports into the EU by December 2022, with refined products following by February 2023. An exception has been agreed for imports of crude oil via pipeline, which are crucial for EU states such as Hungary. Subject to this phasing out, firms will still be permitted to conclude deals with Russian state-owned oil companies that are strictly necessary for the purchase, import or transport of oil. Engaging in transactions with Russian public entities is otherwise prohibited. The EU has announced a ban on insuring ships carrying Russian oil, which will take effect from December 2022.
- Professional services restrictions on the provision of accountancy, management consultancy and public relations services to the Government of Russia or Russian companies.
- Maritime and transport restrictions, prohibiting vessels registered under the Russian flag from accessing EU ports and locks, as well as the transportation of goods by road within the EU by Russian and Belarusian haulage companies. The EU has placed a number of Russian airlines on its EU Air Safety List in response to Russia’s seizure and operation of foreign-owned aircraft without valid certificates of airworthiness. The EU Air Safety List is not a sanctions measure, but means that the listed airlines will not be permitted to enter EU airspace.
- Media restrictions, restricting access to Russian state-owned media, including RT (Russia Today) and Sputnik News.
- Diplomatic measures, such as prohibiting Russian diplomats and other officials from benefiting from visa facilitation provisions.
A range of exemptions exist, including to permit member states to release frozen funds or resources in certain limited circumstances, such as where necessary to satisfy basic needs such as foodstuffs or medicines or for payment of reasonable professional fees. The EU has clarified that none of its sanctions are intended to target trade between Russia and third countries in food, agricultural products (including fertilizers) or pharmaceutical and medical products.
The EU ban on transactions with Russian public entities is subject to a range of exemptions, including where a transaction is strictly necessary to ensure access to legal or administrative proceedings or for the purchase, import or transfer of oil or refined petroleum products from or through Russia. The oil and petroleum product exemption is subject to the incoming ban on imports of those products in December 2022 / February 2023.
Penalties for breaches of EU sanctions are imposed and enforced at a member state level. The European Commission monitors the enforcement of sanctions by member states and can launch an infringement procedure against a member state it perceives has failed to comply with its EU law obligations.
The U.K. has historically operated its own sanctions regime, which was distinct from, and often more far-reaching than, that of the EU. The U.K.’s overarching domestic sanctions regime is established under the Sanctions and Anti-Money Laundering Act 2018, which grants the U.K. government wide-ranging powers to introduce and enforce new sanctions.
Scope of Sanctions
U.K. sanctions are binding on both individuals and legal entities within (or undertaking activities in) the U.K., as well as U.K. persons (U.K. nationals and entities incorporated under the law of the U.K.) wherever they may be in the world (“U.K. Persons”). They include financial sanctions, described in further detail below, as well as trade, immigration and aircraft and shipping sanctions. The full and current list of sanctioned persons (including those sanctioned prior to February 2022) under the U.K. sanctions regime can be found on the U.K. Sanctions List. Sanctions imposed on Russian and Belarusian banks and individuals have been added to extensively recently (Alfa Bank and Sberbank, for example, were recently made subject to a full asset freeze in the U.K., while certain Russian military leaders have been subjected to asset freezes and travel bans for atrocities committed on the frontline in Ukraine) so sanctions lists should be checked daily for updates. Some financial sanctions (e.g., investment bans and asset freezes) are also targeted at categories of firms or individuals which are not specifically designated but should be considered in addition to those named on the U.K. sanctions lists.
The table annexed to this note lists key entities and individuals named as being subject to U.K. (as well as U.S. and EU) sanctions. This table does not generally include entities and individuals falling within generic categories of sanctions (e.g., U.K.-incorporated subsidiaries of Russian entities subject to an investment ban), although certain entities that have been specified as being owned or controlled by a sanctioned individual have been included for reference on a non-exhaustive basis. You can search more generally for financial sanctions applicable to a particular entity or individual using the U.K. government’s consolidated list search tool. The search tool shows information relating to asset freeze and investment ban targets across all U.K. financial sanctions regimes.
The relevant U.K. financial sanctions in place as of August 10, 2022 include:
- Asset freezes, which prohibit U.K. Persons from dealing with assets belonging, or making funds or other assets or economic resources available, to the named individuals and entities (including entities they own or control) or specified types of individuals or entities, or engaging in actions that circumvent those prohibitions. The U.K. Government’s Consolidated List of Financial Sanctions Targets in the U.K. shows entities and individuals subject to asset freezes. The asset freezes also apply to entities owned or controlled by a designated person, even though these entities may not be designated in their own right and so may not appear on the list of designated entities.
- Travel bans on the majority of individuals subject to a U.K. asset freeze (with certain exceptions, e.g., President Putin and Foreign Minister Lavrov), preventing them from leaving or remaining in the U.K. from the date they are designated as a sanctioned person. The U.K. Sanctions List notes where individuals are subject to travel bans.
- Investment bans, namely:
- against key Russian industries previously targeted in response to Russia’s annexation of Crimea in 2014, covering 11 Russian entities, shown on the U.K. Government’s list of persons named in relation to financial and investment restrictions. The bans are designed to inhibit access to investment for strategic Russian industries, such as oil and gas. U.K. Persons are prohibited from dealing in certain securities issued by those 11 entities since 2014, or issued by U.K.-incorporated entities they own or control on or after March 1, 2022, including by providing investment services relating to such securities;
- against key Russian state institutions as well as any persons owned or controlled by, or acting on behalf of, those institutions. The restrictions prevent U.K. Persons from dealing in or offering financial and brokering services in respect of securities issued by those entities on or after March 1, 2022;
- against persons connected with Russia (i.e., persons located, ordinarily resident, incorporated, constituted or domiciled in Russia), preventing U.K. Persons from dealing in certain securities issued by such persons (or entities they own or control) on or after March 1, 2022, including by providing investment services relating to such securities;
- against outward investment in Russia, prohibiting U.K. Persons from acquiring ownership over Russian land or over entities connected with Russia, as well as banning the establishment of joint ventures in Russia, the opening of Russian offices or subsidiaries, or providing investment services in respect of any of these activities; and
- in respect of Crimea, the DNR and LNR, relating to Russia’s annexation of Crimea in 2014 and subsequent recognition of the DNR and LNR as independent states, prohibiting investment in land or commercial opportunities in the region.
- Financial services restrictions, namely:
- loan and credit arrangements: a prohibition on entering such arrangements with: (1) a maturity of more than 30 days with certain sanctioned entities (and entities they own); (2) a maturity of more than 30 days with persons connected with Russia (and entities they own); or (3) any maturity with the Russian government;
- correspondent banking relationships: a prohibition on such relationships between U.K. credit or financial institutions and designated persons (currently only Sberbank) or any other financial institutions owned or controlled by such persons; and
- foreign exchange reserves and asset management: a prohibition on the provision of financial services related to key Russian state institutions, as well as any persons, owned or controlled by, or acting on behalf of, such persons.
A similar sanctions regime is also in place for Belarusian state and privately-owned entities.
Various other measures affecting financial markets have been introduced in the U.K, including:
- a ban on exporting Sterling or Euro banknotes to Russia or making those currencies available to, or for use in, Russia or persons connected with Russia;
- a ban on U.K. government-backed guarantees, loans or insurance for exports to Russia and Belarus; and
- U.K. support for international moves to ban Russian banks from SWIFT.
Other sanctions measures imposed by the U.K. include:
- an airspace restriction preventing all Russian air traffic from operating in U.K. airspace;
- maritime restrictions and restrictions on the use of U.K. aviation and maritime technical services;
- trade restrictions on a wide range of goods including: (i) military, dual-use (i.e., with both civilian and military applications) and other ‘critical-industry’ goods and technology; (ii) maritime goods and technology; (iii) materials that are key to Russia’s manufacturing and heavy machinery sectors e.g., chemicals, plastics, rubber and machinery; (iv) oil refining goods and technology; (v) jet fuel and fuel additives; (vi) quantum computing goods and technology; (vii) a range of luxury goods; and (viii) iron and steel products. The importation, acquisition, supply or delivery of Russian gold into the U.K. is now prohibited. Equivalent prohibitions for coal and coal products come into force on August 10, 2022, and for oil and oil products from December 31, 2022.
- restrictions on the provision of services, including:
- insurance services (which notably include a ban on the provision of insurance for Russian gold imports (which will extend to Russian coal shipments from August 10, 2022 and Russian oil shipments from December 31 2022); and
- certain professional services, namely a ban (applicable to firms established in the U.K., or U.K. firms operating overseas) on providing accountancy, management consultancy and public relations services. Legal services are not included and so can still be supplied to Russian clients who are not sanctioned (or who benefit from licenses);
- import tariffs (additional 35% duty payable) for imports of key products from Russia and Belarus, including electrical machinery/equipment, metals (e.g., iron, steel, copper, aluminum, lead, platinum and palladium), ships, works of art and antique, and certain dry foods and spirits;
- trading in the shares of certain companies on the London Stock Exchange (e.g., Lukoil, Sberbank, VTB, Gazprom and Rosneft) has been suspended. Separately. the Moscow Stock Exchange is no longer a recognized stock exchange for U.K. tax purposes, meaning those trading securities listed on MOEX acquired on or after May 5, 2022 will not be able to utilize certain U.K. tax benefits. MOEX-listed securities purchased prior to this date will not be impacted by the changes.
- Social media and internet access service providers are now required to take reasonable measures to restrict U.K. users from interacting with online content created by sanctioned individuals.
General licenses can be granted by the U.K. Office of Financial Sanctions Implementation (OFSI), which permits the conduct of activities for a limited period of time that would otherwise be prohibited by the sanctions. These are intended to allow firms to wind down their transactions and affairs with sanctioned entities and individuals in an orderly way. OFSI has granted an indefinite license permitting certain public bodies and regulators (e.g., the National Crime Agency, Serious Fraud Office, Her Majesty’s Revenue and Customs, the U.K. police force and the U.K. Financial Conduct Authority) to carry out certain activities, including in pursuit of investigating and recovering proceeds of crime. OFSI has also granted a license permitting individual retail investors to use the retail banking services of sanctioned credit and financial institutions for their own personal use until September 10, 2022, subject to a limit of £50,000 on payments that are made by the individual or processed by U.K.-regulated firms. OFSI publishes a list of General Licenses, as well as a list of expired General Licenses.
Specific licenses may be issued in respect of investment bans or financial services restrictions, permitting activities that would otherwise breach sanctions e.g., for humanitarian assistance, activities conducted by or on behalf of financial regulators for the purposes of their regulatory functions, actions taken to protect U.K. financial stability and anything done to deal with an “extraordinary situation.”
A 2019 Cayman Islands case, Palladyne International Asset Management B.C. v Upper Brook (A) Ltd. & Ors, also determined that directors of a company whose assets (which included shares in the company) were subject to an asset freeze were permitted to exercise their voting rights in order to remove a director. As a British Overseas Territory, the Cayman Islands have adopted the U.K.’s sanctions regime, so the decision provides a useful interpretation of U.K. sanctions.
A breach of the U.K. financial, trade or transport sanctions regimes constitutes a criminal offence. U.K. Government agencies monitor compliance with sanctions and can refer cases to law enforcement agencies for prosecution. In certain cases, monetary penalties can also be imposed (including for breaches of financial and trade sanctions).
OFSI can now impose penalties for breaches of financial sanctions on a strict liability basis, meaning liability can be incurred even where the firm or individual in question has no knowledge or suspicion that their actions constitute a sanctions breach.
Action Required by Regulated Firms and OFSI Reporting
Certain firms, including those with permission to conduct regulated activities in the U.K., must notify HM Treasury as soon as possible if, based on information gleaned while conducting their business, they know or have reasonable cause to suspect that a person is a designated person or has committed an offense by breaching the financial sanctions. If the designated person is a customer of the firm, it should also state the nature and amount of funds or economic resources held by it at the time it came to suspect the designated person.
The U.K, Financial Conduct Authority has published a Policy Statement on the steps that authorized fund managers (AFMs) should take to protect investors where funds are impacted by the war. From July 11, 2022, AFMs are allowed to separate affected investments into “side pockets”, enabling investors to continue investing in, and benefiting from, the fund’s unaffected assets. AFMs will continue to manage the side pocket assets in line with the FCA’s Policy Statement and aim to terminate that class of assets at the most opportune time.
Other U.K. Measures
The U.K. government has enacted the Economic Crime (Transparency and Enforcement) Act 2022, which (amongst other things) increases transparency in the ownership of U.K. property and businesses. The majority of the Act came into force on August 1, 2022 (with some provisions having been in force since May 2022 and others expected to come into force on September 5, 2022). The Cabinet Office has also asked all public sector organizations to review their contracts to identify any with Russian and Belarusian companies and, if possible, switch suppliers and/or pursue any legal routes of canceling them.
Certain other measures have been announced by the U.K. government but are yet to enter into force. These include limits on the level of deposits Russian nationals may hold in U.K. banks (expected to be set at £50,000). The U.K. also plans to eliminate U.K. imports of Russian gas as soon as possible after the planned phase-out of Russian oil (in December 2022) and coal (in February 2023). A prohibition on all outward investment to Russia has also been announced, though is not expected to be implemented until the latter half of 2022.
On February 26, 2022, a joint statement by the U.S., EU, U.K., France, Germany, Italy and Canada condemned Russia’s attack on Ukraine. The states committed to implementing certain measures, including preventing certain Russian banks from using the SWIFT messaging system, restrictions on the deployment of international reserves by the Russian Central Bank and the creation of a transatlantic task force to identify and freeze assets of sanctioned individuals and companies held within each nation’s jurisdiction. A total of ten Russian entities (together with their designated Russia-based subsidiaries) and four Belarusian entities have now been removed from SWIFT.
Blocking selected Russian banks from their ability to use the SWIFT system is a rare step, which will affect their ability to operate in the global financial system. The only other countries whose institutions have been blocked previously from SWIFT are Iran and North Korea.
A G7 joint statement on March 11, 2022, announced additional commitments, including taking action to deny Russia its most-favored-nation status at the World Trade Organization and closing loopholes and methods for evasion, including cryptocurrency.
The Russian government has introduced a range of measures designed to combat the effect of Western sanctions in Russia and/or to have a retaliatory effect. Some are targeted at “unfriendly” states, a list of which has been drawn up and includes the U.S., all EU member states, the U.K., Japan, Canada, Australia, New Zealand and other states. In many cases, the Russian legislation requires further guidance from the Russian Bank to establish the parameters of the sanctions. Key measures adopted include:
- Foreign currency and asset management measures, such as:
- mandatory prior approval for certain activities involving “unfriendly” states (e.g., granting loans in foreign currency to, or conducting real estate or securities transactions with, residents of “unfriendly” states). This restriction may also apply to persons from “friendly” states in certain circumstances e.g., where the transactions involve securities or real estate acquired from foreign persons from “unfriendly” states after February 22, 2022;
- a prohibition on taking foreign currency cash or monetary instruments exceeding $10,000 in value out of Russia; restrictions have also been imposed on transfers of money to accounts opened overseas - as of 1 July 2022, Russian residents (individuals) may transfer no more than $1 million or an equivalent amount in another foreign currency during one calendar month from their accounts with a Russian bank to their foreign accounts or to another individual abroad;
- a debt management mechanism that permits Russian entities, municipalities and residents to service certain debt obligations owed to overseas creditors associated with unfriendly states with the Russian ruble equivalent of any outstanding foreign currency debt that exceeds RUB10 million in value per calendar month via an account opened with a Russian credit institution. A similar mechanism for servicing foreign currency debt obligations in rubles may also apply in relation to debts to foreign creditors not associated with “unfriendly” states in certain circumstances; and
- granting authority to the Russian Central Bank to set limitations on any amounts prepaid or paid in advance by Russian residents to non-Russian entities and individuals under certain specific contracts.
- Cancellation of Foreign-Listed Depositary Receipts: on April 16, President Putin signed legislation that requires Russian companies to cancel and delist their depositary receipts from global exchanges and convert them to locally held securities by May 5, 2022.
- Eurobonds: to regulate settlements under the sovereign bonds of the Russian Federation denominated in foreign currency, Russia has introduced a special payment procedure through the Russian National Settlement Depository in rubles. The bonds denominated in foreign currencies issued by Russian legal entities abroad shall be replaced with Russian bonds.
- Trade restrictions: including on exports from Russia to particular countries of certain products and raw materials (e.g., technological, telecommunications and medical equipment, vehicles, agricultural machinery and electrical equipment) until December 31, 2022. Some products may be exported to certain countries or regions with a permit. The Russian Government legalized “parallel imports”, i.e., the import of certain branded goods (e.g., petroleum, mineral fuels, pharmaceuticals and medical products, chemical products, clothing and footwear, base metals, equipment and devices for the nuclear industry, electrical machinery and equipment, land vehicles, ships, furniture) to Russia from third party providers without the consent of trademark holders, in a bid to combat the decision many Western companies have made to exit Russia.
- Russian gas supply: payments for Russian gas by foreign buyers must be made through a special account opened in Gazprombank. The payment can be made in foreign currency, which Gazprombank will then convert to rubles. If a foreign buyer fails to comply with the procedure, further gas supplies to the buyer must be suspended.
- Intellectual Property rights: a new method of payment to “unfriendly” intellectual property (IP) rightsholders requires Russian residents to pay for the use of IP rights in rubles through a special account opened in a Russian authorized bank.
- Russian designations: Russia has introduced a list of designated persons (e.g. energy companies incorporated in EU states, the U.S., the U.K., Singapore and Switzerland) and prohibited Russian federal and municipal authorities as well as organizations and individuals under the Russian Federation jurisdiction from executing transactions or performing outstanding obligations under existing transactions with designated persons, conducting financial or export operations benefiting designated persons.
- Airspace ban: flights of air carriers from 36 states and territories (primarily European states) have been banned.
- Personal sanctions: Russian Ministry of Foreign affairs has banned top officials of the EU, the U.S., the U.K., Canada, Japan, Australia and other states from entering Russia.
The Russian Parliament has also submitted a draft law for consideration that would criminalize compliance with foreign state sanctions against Russia by company directors and officers. Proposed penalties would include fines, compulsory labor or imprisonment for up to 10 years. The Russian Parliament adopted, on first reading, a draft law providing for external administration (and possible sale/spin-off or liquidation) of foreign companies, with at least 25% foreign capital, exiting Russia. Two further readings of the draft law are to follow. Only after the third reading and signing by the President will the draft be fully adopted as a law. The Russian Central Bank has announced that Russia’s second largest bank, VTB, will merge with Otkritie (which was nationalized by the Russian Central Bank in 2017) and VTB’s former subsidiary, RCNB. The move is designed to improve the Russian banking sector’s capital adequacy and operational efficiency. Precise details of the deal are still under discussion.
Special thanks to trainees Vitaliy Zomko and Matthew Dow who each contributed to this publication.