Following Russia’s invasion of Ukraine last week, the UK (along with the EU, US, Canada, Australia and New Zealand) has strengthened existing sanctions against Russia, as set out in The Russia (Sanctions) (EU Exit) Regulations 2019 ("the 2019 Regulations").

The aim of these sanctions is to halt Russian military action in Ukraine. It is intended that these measures will have an intense financial impact on the Russian Government and Russia’s economic development.

Additional measures introduced in February

The existing sanctions regime (as set out in the 2019 Regulations) was amended on 10 February by the Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022 ("the 2022 Regulations") to broaden the category of persons or entities who may be designated as subject to financial sanctions.

The definition of "designated person" has been expanded to include any person who "is or has been involved in obtaining a benefit from or supporting the Government of Russia". Previously, the definition was limited to any person "who is or has been involved in destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine".

Banks and companies previously allowed to operate without specific restrictions, such as Aeroflot (a Russian airline that was previously a sponsor of Manchester United and has now banned from UK airspace), are now being caught by the "involved in obtaining a benefit from or supporting the Government of Russia" addition.

In consequence of the expanded definition, the UK Government designated

  • an additional 5 banks (Bank Rossiya, Black Sea Bank for Development and Reconstruction, Joint Stock Company Genbank, IS Bank and Promsvyazbank (PSB)) on 22 February 2022
  • three individuals (Gennadiy Nikolayevich Timchenko, Boris Romanovich Rotenberg, and Igor Arkadyevich Rotenberg) on 22 February 2022
  • a further 5 individuals (Kirill Shamalov, Petr Fradkov, Denis Bortnikov, Yury Slyusar and Elena Aleksandrovna Georgieva) on 24 February 2022
  • 5 companies (Rostec, Uralvagonzavod, Tactile Missile Corporation, United Aircraft Corporation, United Shipbuilding Corporation) and a bank (VTB Bank) on 24 February.

All assets held by designated persons were frozen and they are subject to travel bans, which prohibit them from travelling to and entering the UK.

Repercussions of dealing with sanctioned entities

The impact of these sanctions is that UK nationals and entities, individuals located in the UK, and companies with operations within the UK are prohibited from "dealing with" the sanctioned individuals and entities. "Dealing with" should be interpreted broadly to cover making funds available to or for the benefit of designated persons, or making economic resources available to or for the benefit of designated persons. Any such person having dealings with sanctioned individuals and entities will be liable to criminal prosecution and a potential custodial sentence, or an unlimited financial penalty.

Sectors of strategic importance to the Government of Russia

It is important to note that entities may be considered as being "involved in obtaining a benefit from or supporting the Government of Russia" where they carry on business in a "sector of strategic importance" to the Government of Russia. These sectors are:

  1. the Russian chemicals sector;
  2. the Russian construction sector;
  3. the Russian defence sector;
  4. the Russian electronics sector;
  5. the Russian energy sector;
  6. the Russian extractives sector;
  7. the Russian financial services sector.
  8. the Russian information, communications and digital technologies sector; and
  9. the Russian transport sector.

Extension of regional sanctions

On 24 February 2022 the UK government announced that sanctions already imposed in relation to Crimea would be extended to the Donetsk People's Republic (DNR) and the Luhansk People's Republic (LRN) regions. These are two quasi-states located in the Donbas region of eastern Ukraine. The sanctions in relation to Crimea prohibited the provision of technology for oil and gas exploration and the provision of credits to Russian oil companies and state banks. These sanctions have been extended to apply also in the DNR and LRN regions of Ukraine. In addition, named Russian citizens who had been identified as being having been involved in the annexation of Crimea were capable of being designated by the Secretary of State and thus subject to financial sanctions and UK travel restrictions. This power has also been extended to those involved in supporting the military activities of the Russian Government in the DNR and LRN regions of Ukraine

Additional measures to be introduced

On 28 February, the UK Government also announced a range of additional measures to be imposed against Russia. These will cover:

  • Restrictions to prohibit UK persons from undertaking financial transactions involving the Central Bank of the Russian Federation, the Russian National Wealth Fund, and the Ministry of Finance of the Russian Federation.
  • Restrictions against Russian financial institutions.
  • Measures to prevent Russian companies from issuing transferable securities and money market instruments in the UK. This is in addition to the prohibition of the Russian state raising sovereign debt in the UK, announced on 23 February and coming into force on 1 March 2022.
  • A power to prevent designated banks from accessing Sterling and clearing payments through the UK, mirroring the position already in place in the UK. Banks subject to this measure will be unable to process any payments through the UK or have access to UK financial markets.
  • A set of measures to strengthen significantly UK trade restrictions against Russia. This will include a prohibition against the export of a range of high-end and critical technical equipment and components in sectors including electronics, telecommunications, and aerospace.

The current position and next steps

As matters stand, more than 100 companies and oligarchs have had sanctions imposed against them in the form of both asset freezes and travel bans. The UK government has noted that further measures are under consideration, in particular the exclusion of Russian banks from the SWIFT international payment system. There are also indications that additional measures (hitherto limited to economic and financial sanctions) will be introduced in relation to trade. On 28 February, the UK Foreign Secretary announced that measures banning exports to Russia would be introduced across a range of "critical sectors". While these have yet to be confirmed, it seems likely that they will broadly mirror the sectors of strategic significance as set out in the 2022 Regulations, including chemicals, defence, energy and financial services. Those operating in these sectors should be prepared for export licence revocations, refusals of in-process licence applications and a general ban on exports.

We will continue to monitor developments and produce updates as the position evolves.

If you would like to discuss the issues covered in this update please contact one of the authors or your usual Brodies contact. You can also find a link to our quick guide to UK sanctions here.

Contributor

Paul Marshall

Partner