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Russia sanctions update – key points for businesses

As the crisis in Ukraine continues to escalate, the UK, US, EU and other allies worldwide have imposed a flurry of sanctions against Russia, with the situation continuing to evolve on a daily basis. Walker Morris Head of International Trade Andrew Northage summarises the latest news and offers his practical advice.

Not only Russian people and entities are affected

  • The global landscape of sanctions against Russian individuals and entities is changing on a daily, if not hourly, basis. Latest developments are summarised later in this update.
  • Non-Russian businesses will be affected by the sanctions to the extent that they deal, directly or indirectly, with any sanctioned individual or entity, or any entity that is directly or indirectly owned 50% or more by a sanctioned individual or entity. The UK Government’s latest Russia sanctions guidance sets out the prohibitions and requirements imposed by the relevant regulations, covering financial, trade, shipping and immigration sanctions. In relation to financial sanctions, for example, you must immediately stop dealing with a sanctioned individual/entity, freeze any assets you are holding for them and inform the Office of Financial Sanctions Implementation (OFSI) as soon as possible. Businesses should review the guidance carefully and ensure that they have the necessary controls procedures in place (see our earlier briefing). Breaching UK sanctions is a criminal offence. Breach of financial sanctions carries a maximum sentence of seven years’ imprisonment or a fine (the greater of £1 million or 50% of the estimated value of the funds or resources) or both.
  • If your business operates in multiple jurisdictions, you will need to consider the impact of multiple sanctions regimes. Be aware that the applicability of UK sanctions extends to all UK nationals and entities (including branches), wherever they are in the world. Note that a breach will fall within OFSI’s remit if it involves sufficient connection to the UK. This could include transactions using UK clearing services, actions taken by a UK company’s local subsidiary, or actions taking place overseas but directed from the UK. Parties located in the EU or doing business there must comply with EU sanctions, and foreign branches of US entities will be caught by US sanctions. Importantly, non-US parties can be caught if there is a sufficient nexus to US jurisdiction (including transactions in US dollars). Penalties for breach of most US sanctions programmes include up to 20 years’ imprisonment and fines of up to $1 million. Note that entities directly or indirectly owned 50% or more by one of the parties on the Office of Foreign Assets Control’s ‘Specially Designated Nationals and Blocked Persons List’ are treated as if they are on it.
  • While the UK and its allies have applied a joined-up approach to sanctions implementation, that does not mean that the sanctions will be identical. In addition to sanctions imposed by the UK, US and EU, measures have been taken by a raft of other nations including Canada, Japan, Switzerland, Singapore and Australia. Many countries have also been imposing restrictions on Belarus in light of its role in the crisis.
  • Businesses should review their contracts, including identifying any tensions between complying with sanctions and existing contractual obligations. See our earlier briefing regarding options in relation to existing contracts and the protections that can be put in place in relation to future contracts.
  • Now is the time to reconsider supply chain due diligence for sanctions compliance and to identify potential commercial issues that may affect the business as a result of sanctions biting the supply chain. Our earlier briefing sets out practical measures that can be put in place to manage sanctions and supply chain risk.
  • The National Cyber Security Centre continues to call upon organisations in the UK to bolster their online defences. You can read its latest guidance here.

How we can help

The sanctions situation is complex, fluid and constantly evolving. Our experts are available to answer any queries and to provide advice or assistance on any aspects of sanctions compliance, training, contract drafting or available termination or related options. Please get in touch with Andrew or your usual WM contact.

The UK

After initially adding five Russian banks and three high net worth individuals to the UK sanctions list, the government announced its intention to introduce the following measures:

  • Sanctioning those members of the Russian Duma and Federation Council who voted to recognise the independence of Donetsk and Luhansk, over the coming weeks extending the territorial sanctions imposed on Crimea to non-government controlled territory in those breakaway republics, and preventing Russia from issuing sovereign debt on UK markets – see the press release.
  • Comprehensive sanctions covering Russian elites, companies and financial institutions, shutting off Russia’s banking system from UK markets, banning Russian state-owned and key strategic private companies from raising finance on those markets, hitting more than 100 companies (including financial institutions) and individuals with asset freezes and travel bans, new restrictions on trade and export controls against Russia’s hi-tech and strategic industries, banning Russia’s national airline Aeroflot from UK airspace, imposing new restrictions to cut off wealthy Russians’ access to UK banks, and working with allies to exclude Russia from the SWIFT financial system – see the press release.
  • Freezing the assets of President Putin and Foreign Minister Lavrov – see the press release.
  • Further economic sanctions targeted at Russia’s Central Bank – see the press release.
  • Suspending existing export licences and the approval of new ones for dual-use items to Russia with immediate effect.
  • Bringing forward new legislation to tackle economic crime. The Economic Crime (Transparency and Enforcement) Bill will be introduced to Parliament today. A new register will require anonymous foreign owners of UK property to reveal their real identities to ensure criminals cannot hide behind secretive chains of shell companies, setting a new global standard for transparency. Sanctions enforcement will be intensified by introducing a more wide-ranging ‘strict civil liability test’ for monetary penalties, making it easier for OFSI to impose significant fines. OFSI will also be able to publicly name organisations that have breached financial sanctions but have not been fined. See the press release.

Following the addition of VTB Bank to the sanctions list on 24 February, OFSI issued a general licence permitting the wind-down of transactions involving the bank and its UK subsidiaries.

The government has today updated its comprehensive Russia sanctions guidance and the Transport Secretary tweeted that the UK has become the first nation to pass a law involving a total ban of all ships with any Russian connection at all from entering British ports.

The US

Key developments announced in the US include:

  • An Executive Order imposing severe restrictions on economic activity with the so-called Donetsk and Luhansk People’s Republics.
  • Sanctioning two major Russian state-owned financial institutions (including certain subsidiaries), imposing additional restrictions on Russian sovereign debt, and sanctioning five Kremlin-connected elites, in response to actions in Donetsk and Luhansk – see the press release and White House factsheet.
  • Targeting the core infrastructure of the Russian financial system, including all of Russia’s largest financial institutions (including certain subsidiaries) and the ability of state-owned and private entities to raise capital, and sanctioning additional Russian elites and their families. These sanctions cut off major parts of the Russian financial system and economy from access to the US financial infrastructure and the US dollar more broadly. See the press release.
  • A sweeping series of stringent export controls primarily targeted at Russia’s defence, aerospace and maritime sectors – see the press release.
  • Imposing sanctions on President Putin and Foreign Minister Lavrov – see the press release.
  • Prohibiting US persons from engaging in transactions with the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation, effectively immobilising any assets of the Central Bank held in the US or by US persons, wherever located, and imposing sanctions on key sources of Russia’s wealth – see the press release.

The EU

Key developments announced in the EU include:

  • A package of sanctions in response to Russia’s recognition of the non-government controlled areas of Donetsk and Luhansk, including targeted restrictive measures on all members of the Russian State Duma and 27 high profile individuals and entities, and a sectoral prohibition to finance the Russian Federation, its government and Central Bank. See the press release.
  • Sanctions against President Putin and Foreign Minister Lavrov, and wide-ranging individual and economic sanctions, including financial sanctions targeting 70% of the Russian banking market and key state-owned companies, and restrictions in the energy, transport and technology sectors. See the press release.
  • Severe restrictive measures related to aviation and finance – see the press release.
  • Sanctions imposed on an additional 26 individuals and one entity – see the press release.