Risk of financial sanctions being imposed against Russia

Background

In November 2013, the then President of Ukraine, Viktor Yanukovych rejected a deal that would have led to greater economic integration for the country with the European Union. In February 2014, after weeks of mass protests, a violent response by the Ukrainian national security forces, and an escalation in the internal conflict, Yanukovych fled. In March 2014, Russia annexed Crimea.

In 2014, the US, the EU (and so, at the time, the UK), Canada, Australia, Switzerland, Norway and Japan imposed sanctions on Russia. Following the UK’s departure from the EU the UK imposed its own independent sanctions, effectively mirroring those of the EU. The sanctions imposed against Russia have targeted individuals and legal entities; the US list of specially designated nationals (SDNs) and the EU list (which is also followed by other countries) of designated persons (DPs) serve to freeze the assets of (including assets and property directly/indirectly controlled or majority owned by) the SDNs and DPs. Sectoral sanctions have also been put in place against key areas of the Russian economy, including finance (particularly, access to capital markets), energy, dual-use technology and defence (including arms and military equipment).

In the years since the annexation of Crimea, unrest has affected Ukraine, including an ongoing conflict between the Ukrainian Government and Russian backed separatists in the Donbass in Eastern Ukraine. The international community has continued to impose sanctions against Russia, including in January 2018 when the US imposed new sanctions on twenty-one individuals (including Russian officials) and nine companies that were connected to the conflict, as well as in the UK, where under The Russia (Sanctions) (EU Exit) Regulations 2019, 180 individuals and nearly 50 entities have become subject to UK asset freezing orders.

What might further sanctions involve?

Whilst we clearly hope no such steps turn out to be necessary, it does appear that further sanctions are very likely to be imposed against Russia in relation to the ongoing crisis on the Russia-Ukraine border, particularly if Russia were to invade Ukraine. Since mid-December EU leaders have been actively considering the imposition of sanctions and in early January, British Foreign Secretary Liz Truss warned of severe, coordinated sanctions against Russia should it invade Ukraine. A small foretaste of such was issued on Thursday, when the US Treasury issued sanctions against a number of Ukrainian politicians that it alleges were involved in a plot to take over the Government of Ukraine following a Russian invasion (see here).

Russian troops entering Ukraine in any number could result in the most serious economic and trade sanctions ever imposed on Russia. US officials have indicated, and from their actions on Thursday, evidenced, that they have developed a sanctions plan that is ready for immediate implementation in the wake of any invasion of Ukraine. While the European and British reaction may not be as swift, or, ultimately, as robust as the American response, it is overwhelmingly likely that should the circumstances arise, America’s allies would impose very material sanctions packages of their own.

At the time of writing, everything about this situation remains fluid, and there is no detail as to what the sanctions plans being contemplated would involve. They are however, expected to be comprehensive and most likely include a combination of financial and trade sanctions designed to cut off Russia – or at least large parts of its economy – from the global economy. These measures may involve:

• Direct financial sanctions targeting specific persons and entities, particularly individuals linked to Putin, the Russian intelligence agencies and military and their commercial suppliers.
• Impeding Russian participation in the global financial system. At the extreme end this could include excluding Russia from the SWIFT global financial network (as was the case with Iranian sanctions in 2012 and 2018) and seeking to deny key industries (in particular the energy sector) access to global debt markets.
• Restricting dealing with key Russian industrial sectors.
• Restricting exports to Russia, specifically of necessary items not produced domestically, such as key technologies (eg, software, high-tech componentry) and electronic consumer goods (eg, smartphones and computers).
• Restricting imports of Russian goods and technologies.
• In the US, introducing secondary sanctions.

The Russian energy sector is very likely to be central to any sanctions strategy —this is of particular consequence to Europe, not least because of the socio-economic implications it could have across several countries. Given previous sanctions, including those most recently announced in late-2021, Nord Stream 2 appears to be obvious target for the US; such sanctions would have implications for Germany, and Europe more broadly.

How coordinated will sanctions be?

Ultimately, it is a political question as to the extent to which the UK, the EU and potentially other American allies will impose coordinated sanctions with the US. Some mooted measures, most particularly any effort to exclude Russia from SWIFT, would in practice require multilateral support. It would not be a surprise if US sanctions came first and were stronger than those subsequently imposed by other states. However, the intensity of dialogue between the US and NATO on this issue over recent weeks would suggest that those involved intend to achieve a relatively close degree of coordination.

What should you do now?

The risk and scale of the threatened sanctions is such that financial institutions and companies with significant ties to Russia – and in particular any entities likely to be designated - should take steps to prepare themselves at the earliest. While (mirroring the approach taken to the 2018 US sanctions on Iran) there is some prospect that US sanctions may include a wind down period in respect to most financial and trade sanctions, those imposed by the UK and EU will very likely take effect immediately. Failure to take steps at this stage increases the risk of inadvertent sanctions breaches and potentially leads to costly investigations in due course.

At first instance, firms should consider closely examining ties to potentially sanctioned entities, as well as whether, and how, they can be severed or modified in the event they are impacted by sanctions. This may for instance include:

• Ascertaining direct or indirect financial or commercial exposure to Russia, and to Russian entities and individuals. This should include analysis of your businesses’ transactional and contractual ties to Russian markets and counterparties (including those companies with Russian subsidiaries).
• Assessing whether your business has arranged reasonable means of adapting or disengaging from Russian markets or counterparties that are likely to be sanctioned within reasonable time periods.
• Preparing contingency measures including by identifying commercial alternatives should your business lose the ability to deal with Russian markets or counterparties.
• Engaging with commercial counterparties in Russia to prepare for the possibility of sanctions imposition and planning how to adjust commercial relationships accordingly.