Financial sanctions against Russia, following the invasion of Ukraine

Sanctions in the United Kingdom

In the last week, the UK has taken a significant step towards implementing an expanded package of financial and trade sanctions on Russian and Belarusian individuals, businesses and Government agencies, including specifically targeted financial sanctions measures which have not before been a feature of UK or EU sanctions regimes.

These measures include extending the existing asset freeze provisions to a range of Russian and Belarusian individuals and entities, as follows:

• Tuesday 22 February: three oligarchs and five banks were sanctioned. The only entity of particular market significance (albeit limited) was Promsvyazbank / PSB.

• Thursday 24 February: five oligarchs and six entities were added to the consolidated list, the effect being that their assets were immediately frozen. The entities in question include VTB Bank and five companies involved in the Russian military's supply chain. The Office for Financial Sanctions Implementation ("OFSI") has over the weekend published a General Licence allowing for the wind down of transactions involving VTB Bank, including the closing out of positions, and carrying out any activity reasonably necessary to effect this. This licence applies until 27 March 2022.

• Friday 25 February: the foreign held assets of President Putin and foreign Minister Sergey Lavrov were frozen.

• Monday 28 February: three further Russian financial institutions were made subject to an asset freeze, including VEB.

• Tuesday 1 March: five individuals and three entities added to the consolidated list and are now subject to an asset freeze, including senior members of the Belarusian armed forces and several Belarusian defence companies, the Russian Direct Investment Fund (Russia's sovereign wealth fund), and its Chief Executive Officer.

• Also on 1 March the sanctions package was expanded very significantly through the following measures addressing financial sanctions, trade sanctions and export controls and shipping related restrictions:

  • Russia (Sanctions) EU Exit (Amendment) (No. 2) Regulations 2022 (Financial Sanctions);

  • Russia (Sanctions) EU Exit (Amendment) (No. 3) Regulations 2022 (Trade Sanctions / Export Controls);

  • Russia (Sanctions) EU Exit (Amendment) No. 4) Regulations 2022 (Shipping); and

  • Russia (Sanctions) EU Exit (Amendment) (No.5) Regulations 2022 (Financial Sanctions).

• Five general licences have been issued in conjunction with these measures.

Key financial sanctions measures

The key financial sanctions measures introduced as part of this extended package are as follows:

• An extension of the restrictions on dealing in transferable securities or money-market instruments issued by specified Russian entities, which have been in place since 2014 to include:

  • transferable securities or money-market instruments issued after 1 March 2022 by UK subsidiaries of entities listed in 2014 (previously was an exemption in relation to securities issued by UK subsidiaries);

  • transferable securities or money-market instruments issued after 1 March by "persons connected with Russia" including:

    • any individual ordinarily resident or located in Russia;

    • any entity incorporated or constituted in Russia (except where that entity is domiciled outside of Russia);

    • any entity which is a branch or subsidiary of an entity incorporated or constituted in Russia (except where the parent entity is domiciled outside of Russia);

    • any entity (including a non-Russian entity) which is owned by or acting on behalf of any of the above categories of persons;

  • transferable securities or money-market instruments issued after 1 March 2022 by or on behalf of the Government of Russia.

• An expansion of the scope of existing prohibitions on issuing new loans or credit to the same persons identified above in the context of the restrictions on dealing in transferable securities and money market instruments, applicable from 1 March 2022.

• A prohibition on UK credit or financial institutions from establishing or continuing correspondent banking relationships with designated persons or subsidiaries (including UK and non-UK credit and financial institutions).

• A prohibition on UK credit or financial institutions from processing (i.e. clearing or settling) sterling payments to, from or via a designated person or its subsidiaries (including UK and non-UK credit and financial institutions).

• An additional prohibition on correspondent banking and sterling clearing by Sberbank, which has been added via an amendment to the list of persons subject to financial and investment restrictions (this is a change in approach - entities on this list were previously all subject to same restrictions on dealing in transferable securities and money market instruments and making new loans).

• A prohibition on the provision of financial services for the purpose of foreign exchange reserve and asset management to the Russian Central Bank, National Wealth Fund and Ministry of Finance and persons controlled by them or acting on their behalf.

A number of general licences have been issued which accompany these measures. These have been drafted quickly and in some cases that shows, with the effect of some of them not being entirely clear or consistent with previous approach to the measures. These can be summarised as follows:

• "Transferable securities, money-market instruments, loans and credit arrangements", which authorises until 8 March 2022 dealing, directly or indirectly, with transferable security or money-market instruments and the granting of new loans (except for loans to the Government of Russia), which is otherwise prohibited under the investment and lending bans. It is not entirely clear how this will apply in practice, since much of the activity within its scope has been prohibited since 2014 with no licence grounds previously made available. It may act as a grace period for transactions involving UK subsidiaries of restricted entities (which were previously outside scope) or the incredibly broadly defined "persons connected with Russia" which are already underway and can't be unwound immediately. Further guidance from OFSI may shed some light, though there isn't much time for that to be issued and acted on before the licence expires.

• "Correspondent Banking Relationships & Processing Sterling Payments", which authorises:

  • a UK credit or financial institution to continue a correspondent banking relationship with Sberbank until 31 March 2022; and

  • a UK credit or financial institution to continue to process sterling payments to, from or via Sberbank until 31 March 2022.

• "Correspondent Banking Relationships & Processing Sterling Payments in relation to Energy", which authorises until 24 June 2022 the processing of sterling payments between UK credit and/or financial institutions and Sberbank (and connected entities) for the purposes of making Relevant Energy Products available for use in the UK.

• "Russian Banks - UK subsidiaries - Basic needs, routine holding and maintenance and the payment of legal fees" which allows VTB Capital and its UK subsidiaries to make payments for its basic operational needs, reasonable fees or service charges arising from routine holding and maintenance of its frozen funds and economic resources, and for the provision of legal services.

• "Russia: Regulatory Authorities - Prudential Supervision or Financial Stability" which allows the Financial Conduct Authority, the Financial Services Compensation Scheme, the Prudential Regulation Authority, or the Bank of England to do anything with regard to VTB Capital and its UK subsidiaries in exercising their functions including as they relate to prudential supervision, or protecting, maintaining or enhancing the stability of the UK financial system.

Further measures expected but not yet in force

Some sanctions have been announced but are not yet effective. These include the following measures:

• Asset freezes in respect of other major Russian banks (this may include Sberbank and Gazprom Bank).

• Certain Russian banks (as yet unidentified) will be cut out of SWIFT, in co-ordination with the EU and US. 

• More than 100 individuals and entities will be added to the consolidated list, leading to the freezing of their assets. The particular entities and individuals have not been named, except to the extent they overlap with those already added, but will include all major manufacturers supporting the Russian military. Liz Truss has announced that the Government has a 'hit list' of oligarchs it is working its way through.

• Further asset freezes in respect to 571 members of the Duma and Federation Council who sanctioned the invasion of Ukraine.

• Extension of financial and trade measures applying to Crimea to the Donetsk People's Republic ("DNR") and Luhansk People's Republic ("LNR") regions of Ukraine.

• Further financial sanctions will be extended to Belarus for its role in the assault on Ukraine.

Other expected related measures include:

• Measures to limit the sale of citizenship, so called 'golden passports', that let wealthy Russians connected to the Russian government become citizens of the UK and gain access to its financial system.

• The launching, together with the EU, US and Canada, of a transatlantic task force that will ensure the effective implementation of financial sanctions and increased coordination against disinformation and other forms of hybrid warfare.

• A cap, reportedly at £50,000, on the amount of money Russian nationals can deposit into UK bank accounts.

• The passing of the Economic Crime Bill, summarised in more detail below.

The Economic Crime Bill

The long-awaited Economic Crime Bill was published on 28 February 2022, and will be debated in Parliament this week. The draft legislation was initially drawn up in 2018 but was subsequently put on hold to the frustration of anti-corruption campaigners. The bill is designed to target the flow of 'dirty money' into the UK in a fresh rebuke to Russia following the invasion of Ukraine.

It includes a number of proposed reforms including:

• a new register requiring overseas companies and individuals to declare the beneficial owners of all property bought in England in Wales over the past 20 years;

• proposals to reduce the financial liability for the NCA and other enforcement authorities pursuing UWOs, they will be not be liable for the associated costs where orders are refused unless they have behaved unreasonably or dishonestly;

• the creation of a "Kleptocracy Unit" within the National Crime Agency to target sanctions evasion in the UK; and

• a proposal for civil sanctions breaches to be treated as matters of strict liability; penalties of up to £1,000,000 or 50% of the estimated value of the funds or resources (whichever is the greater) could be imposed without the need to demonstrate that the person in breach knew or had reasonable cause to suspect that they were in breach / had failed to comply with their obligations. In turn, this should make it easier for OFSI to impose significant fines.  

Ministers also published a white paper on 28 February setting out the medium-term proposals for reforms of Companies House to insist applicants provide more details of their identity when trying to set companies up and digitalised the filing process for small companies. These reforms will be legislated for in a second economic crime bill, which is set to propose greater government powers to seize crypto assets in order to tackle the growing threat of money laundering via online currencies.

EU measures

Broadly similar measures have been imposed in the EU as in the UK. A co-ordinated approach is being taken, together with the US, though there is not a complete overlap in the restrictions imposed.

Key differences include that the EU has:

• applied asset freezes in respect of a greater number of individuals accused of supporting, implementing or benefiting from actions that undermine the territorial integrity, sovereignty, independence and stability of Ukraine, supporting Russia's recognition of the Donetsk and Luhansk regions or of having facilitated Russia's military action from Belarus;

• extended investment ban and new loan restrictions to the Russian Central Bank and other named Russian state entities;

• already implemented trade and other activity-based restrictions in respect of the DNR and LNR regions;

• prohibited the listing and provision of services in relation to shares of Russian state-owned entities on EU trading venues; 

• introduced a ban on Russian deposits above €100,000 in EU banks, on Russian accounts held by EU central securities depositories and on selling euro-denominated securities to Russian clients;

• from 12 March 2022, the provision of SWIFT services to seven Russian banks is prohibited: Bank Otkritie, Novikombank, Promsvyazbank, Bank Rossiya, Sovcombank, Vnesheconombank (VEB) and VTB Bank; as well as to any entity established in Russia and owned (directly or indirectly) by more than 50% by one of those entities;

• a prohibition on the sale supply, transfer or export of euro banknotes to Russia or to any person/entity in Russia (including the Russian Government), or for use in Russia (there are some exceptions related to personal use for those people travelling to Russia and diplomatic mission are available);

• a prohibition on the investment, participation or contribution to projects co-financed by the Russian Direct Investment Fund (RDIF), except where these activities are due under contracts concluded before 2 March 2022; and

• Restrictions on six Russian state-owned media outlets including a prohibition on broadcasting by any means (i.e. cable, satellite, IP-TV, internet service providers, internet video-sharing platforms or apps) and a suspension of broadcasting licences of six media outlets.