EU/UK Expand Sanctions against Russia

The full alert is available for download with footnotes here.

Over the last week, the EU and the UK have enacted and announced additional sanctions measures following the escalation of the Russia/Ukraine armed conflict. We provide an overview of the measures below:

European Union

a. Censorship against State-backed Russian information channels

The EU has suspended the distribution of State-owned outlets Russia Today and Sputnik across the EU territory. The sanctions cover all means for transmission and distribution, such as via cable, satellite, IPTV, platforms, websites and apps. All relevant licences, authorizations and distribution arrangements are suspended. These measures are directly and immediately applicable in all EU Member States.

Before the measure was imposed, several regulators in EU Member States already took action against Russian State-controlled broadcasters and channels (e.g., in Estonia, Latvia, Lithuania and Poland), while Germany prohibited broadcasting of the German-language version of Russia Today over a license issue.

b. Financial measures

The EU has adopted the following financial measures:

• Prohibition to invest or contribute to projects co-financed by the Russian Direct Investment Fund
  The EU has now prohibited investment in, or contributions to, projects co-financed by the Russian Direct Investment Fund. The competent authorities may authorize an investment or contribution in a project financed by the Russian Direct Investment Fund, after having determined that such an investment or contribution is due under contracts concluded before March 2, 2022 or ancillary contracts necessary for the execution of such contracts.
• Exclusion of seven Russian banks from the SWIFT messaging system
  The EU has prohibited the provision of specialized financial messaging services, which are used to exchange financial data (SWIFT), to seven Russian banks: Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, VNESHECONOMBANK (VEB) and VTB BANK. The measure targets banks that were already subject to sanctions by the EU and the G7 countries.

The prohibition enters into force on March 12, 2022, the tenth day after the publication in the Official Journal of the European Union, so that entities have sufficient time to implement the measure and there is a transition period to mitigate its unduly disruptive effects.

In addition to the banks listed, the prohibition applies to any legal person, entity or body established in Russia whose proprietary rights are directly or indirectly owned, for more than 50%, by the above-mentioned banks. The European Commission has declared that it may add further Russian banks “at short notice.”

The restriction on SWIFT comes after an assessment by the European Central Bank and the European Commission on their impact. SWIFT is a global financial messaging service connecting over 200 countries and with more than 11,000 participating institutions. Approximately 40 million messages are exchanged every day, which enables the transfer of trillions of euros around the world. A similar sanction has only been imposed once in the past, which was against Iranian banks prior to the JCPOA.

• Prohibition on the provision of euro-denominated banknotes to Russia
  The EU has prohibited the sale, supply, transfer or export of euro-denominated banknotes, i.e., physical currency, to Russia or to any natural or legal person or company in Russia, including the Government of Russia, Russia’s Central Bank, or for use in Russia, except if necessary for:
  • The personal use of natural persons travelling to Russia or members of their immediate families travelling with them; or
  • The official purposes of diplomatic missions, consular posts or international organizations in Russia.

• Prohibition related to the management of reserves
  The prohibition on transactions related to the management of reserves as well as of assets of the Central Bank of Russia is extended to also cover the Russian National Wealth Fund, as an “entity or body acting on behalf of, or at the direction of, the Central Bank of Russia.”
• Clarification on exceptions concerning exception deposits
  The EU prohibited the acceptance of any deposits from Russian nationals or natural persons residing in Russia, or legal persons, entities or bodies established in Russia, if the total value of deposits of the natural or legal person, entity or body per credit institution exceeds €100,000. The said prohibition does not apply to nationals of a Member State or natural persons having a temporary or permanent residence permit in a Member State. Now the EU has extended that exception to a country member of the European Economic Area, or of Switzerland (e.g., including EU banks in Switzerland).
• Clarification on exceptions concerning public financing or financial assistance
  The EU has clarified the exception for public financing or financial assistance in Russia to cover €10,000,000 per project benefiting small and medium-sized enterprises established in the Union.
• Clarification on the notion of “transferrable securities”: including crypto
  The EU has clarified the notion of “transferable securities” to include “crypto-assets,” which are negotiable on the capital market, with the exception of instruments of payment.

c. Additional Designations

Additionally, the EU imposed sanctions in the form of asset freezes on 160 individuals. The listed individuals include:

• 14 oligarchs and prominent businesspeople involved in key economic sectors providing a substantial source of revenue to the Russian Federation. The said individuals are involved in different sectors of economy, including steel, chemicals, pharmaceutical products, telecom and digital, energy, transport, technology and investments.
• 146 members of the Russian Federation Council, who ratified the ‘Treaty of Friendship, Cooperation and Mutual Assistance between the Russian Federation and the Donetsk People’s Republic’ and the ‘Treaty of Friendship, Cooperation and Mutual Assistance between the Russian Federation and the Luhansk People’s Republic.’

Altogether, EU restrictive measures against Russia now apply to a total of 862 individuals and 53 entities.

d. Maritime Navigation Restrictions

The EU has prohibited the sale, supply, transfer or export, directly or indirectly, of maritime navigation goods and technology, whether or not originating in the Union, to any natural or legal person, entity or body in Russia, for use in Russia, or for the placing on board of a vessel flying the Russian flag. The restriction includes radio communication technology.

In addition, the EU has prohibited technical and financial assistance, brokering services or other services related to maritime goods and technology. The only exception to this prohibition is for supply of maritime goods of non-military use intended for humanitarian purposes, health emergencies, urgent prevention or the mitigation of an event. In addition, national competent authorities may authorize the supply and sale of maritime goods and technology intended for maritime safety. When an authorization is granted, the national competent authority shall inform other Member States and the Commission within two weeks of the authorization.

The EU has also imposed a prohibition to purchase sell, provide investment services for or assist with the issuance of transferable securities and money-market instruments issued after April 12, 2022 by the Russian State-owned enterprise “Russian Maritime Register of Shipping.”

• Other recent measures
  The above measures follow prior restrictions adopted under Council Decision (CFSP) 2022/335 of February 28, 2022 which prohibited transactions with the Central Bank of Russia as well as closure of EU space to Russian aircrafts. Candidate countries including North Macedonia, Montenegro and Albania, potential candidate Bosnia and Herzegovina, EFTA countries Iceland, Liechtenstein and Norway, members of the European Economic Area, as well as Ukraine aligned themselves with this Council Decision as well as with other EU sanctions. The European Union has also suspended cooperation with Russia on research and innovation. Accordingly, the Commission will not conclude any new contracts or any new agreements with Russian organizations under the EU Horizon Europe programme. Furthermore, the Commission is suspending payments to Russian entities under existing contracts.
  The EU has also updated the list in Council Regulation (EU) No 208/2014 of March 5, 2014 concerning restrictive measures directed against certain persons, entities and bodies responsible for the misappropriation of Ukrainian State funds, and persons responsible for human rights violations in Ukraine. In addition to designating individuals/entities (part A of Annex I), the list also informs on how the rights of defense of designated individuals have been respected and whether they obtained effective judicial protection (part B of Annex I)
  
• Coming measures?
  The EU Council will hold an informal meeting with heads of State or Government in Versailles (France) on March 10-11, 2022. Another meeting is scheduled for March 23, 2022. In the invitation letter by Vice-President Charles Michel to the members of the Council, it was announced that the focus of the discussion will be on topics including reduction on energy dependency, including Russian gas, oil and coal. Therefore, it is possible that EU leaders will discuss new rounds of sanctions.
• Sanctions mechanisms
  The European Commission has recently launched a sanctions whistleblower tool under which individuals and entities around the world (not necessarily in the EU) can report “past, current or planned” infringements of any of the 40 EU sanctions programs. The tool which was announced in January 2021 ensures the confidentiality of the whistleblower. If the Commission considers that the whistleblower’s information is credible, it shares an anonymized report with the national competent authorities in charge of the enforcement of EU sanctions. The Commission has also published a Q&A concerning basic sanctions questions in view of the rapid developments in the field and their expansive effects.

United Kingdom

The United Kingdom has also implemented a number of measures related to the Ukrainian conflict:

a. Announcement of an oil embargo

On March 8, 2022, the UK announced that it will be phasing out imports of oil from Russia by the end of 2022, at which point there will be a complete prohibition on the importation of Russian oil and oil products into the UK. This transition period is to allow parties to adjust their supply chains. The UK Government is establishing a Taskforce on Oil to find alternative sources of supply. Russian imports account for 8% of total UK oil demand. Although the UK is not dependent on Russia’s natural gas (representing 4% of total supply), the UK Government announced that it is setting up an energy strategy to reduce dependence on this supply further.

b. New designations

On March 3, 2022, the UK added two oligarchs (Alisher Usmanov and Igor Shuvalov – estimated to be worth a combined $19 billion) to its sanctions list. Both are reported to have significant assets in the UK. On March 10, 2022, the UK added Roman Abramovich, Igor Sechin, Oleg Deripaska, Dmitri Lebedev, Alexei Miller, Andrei Kostin and Nikolai Tokarev to the sanctions list and these individuals are also now subject to an asset freeze and travel ban.

Pursuant to the latter announcement, all funds and economic resources owned or controlled directly or indirectly by Mr. Abramovich are subject to asset freeze restrictions, including Chelsea Football Club. However, OFSI has issued a General License to the club to ensure its football activities remain unaffected. The main permissions granted by the General License include, though are not limited to, continuation of the team’s participation in football matches, running of security, catering, stewarding costs, renumeration, allowances and pensions of all club employees and payment in relation to loan and sale arrangement of players made prior to the designation. Fans are permitted to attend a match but only if they have an existing ticket and broadcasters are allowed to broadcast club activities under pre-existing arrangements.

In addition, the UK Foreign Secretary office has announced the establishment of an Oligarch Taskforce that connects ministers and officials from departments including the Home Office, HM Treasury, Department for Business Energy and Industrial Strategy, Department for Levelling Up, Housing and Communities, and the National Crime Agency. The coordinated actions of this group will help to identify oligarch assets within the UK and build cases for sanctions.

c. Announcement of prohibition on UK-based insurance and reinsurance providers from transacting with Russian entities in the aviation or space industries

The UK Government announced that Russian companies in the aviation or space industry will be prevented from making use of UK-based insurance or reinsurance services directly or indirectly. This measure prevents Russia from accessing Lloyds and London Market, as the UK is a leader in the global insurance market.

d. New Economic Crime Bill

In response to the military conflict in Ukraine, the UK is fast-tracking the Economic Crime (Transparency and Enforcement) Bill. Among other reforms such as significantly expanding the public disclosures required from foreign holders of UK assets, the Bill amends financial sanctions legislation, including the monetary penalty legal test and information sharing powers to help deter and prevent breaches of financial sanctions. Specifically, the Bill:

• provides that civil monetary penalties can be applied to persons for breaches of financial sanctions with no requirement for OFSI to prove that the person had knowledge or reasonable cause to suspect their activity breached sanctions;
• allows other officials (not necessarily the Economic Secretary to the Treasury) to conduct administrative reviews of financial sanctions monetary penalties;
• increases enforcement transparency as OFSI is allowed to publish notices detailing violations by persons of financial sanctions in cases where it has decided not to impose a penalty; and
• enables amendments that extend relevant information sharing powers in individual Sanctions Act regulations. Other government departments, agencies and relevant bodies will now be authorized to share information proactively with the Treasury to facilitate OFSI’s functions.

The Bill has passed through the House of Commons and is currently at the House of Lords, where it had first reading debate on March 7, 2022. On that day, the House of Commons made some amendments to the Bill, including: (i) removing the requirement that a designation is appropriate having regard to the “likely significant effects” of the designation on that person; and (ii) establishing an “urgent procedure” for sanctioning a person for 56 days even if there is no reasonable ground to suspect the person was engaged in a “sanctionable conduct” but was subject to a similar sanction by the U.S., EU, Australia, Canada or other specified country. After the 56-day period the Minister needs to certify the person is involved in a sanctionable conduct or otherwise the designation will expire. It is hoped that the Bill, coming into force next week, will help significantly simplify the process of imposing sanctions on individuals and align the UK’s designated list with that of its allies.

e. General Licenses issued allowing wind-down of activities with Russian banks

OFSI has published two General Licenses (“GL”) related to its Russia sanctions program:

• GL-referenced INT/2022/1295476 authorizes the wind-down of transactions involving various designated banks until April 3, 2022 (Bank Otkritie, Promsvyazbank, Bank Rossiya, Sovcombank, Vnesheconombank (VEB) and their subsidiaries, or JSCB Novikombank, including the closing out of any positions).
• GL-referenced INT/2022/1298776 similarly authorizes the wind-down of businesses with Sberbank until April 3, 2022.

The GL-referenced INT/2022/1272278 concerning the wind-down of transactions with Russian bank VTB has been amended to expand the definition of subsidiary to any entity owned or controlled by VTB.

f. Other recent measures

On March 8, 2022, a further regulation was added to the UK’s Russia Sanctions regime. The scope of this focuses primarily on the aviation sector and has now expanded the restrictions to include a prohibition on the provision of insurance and reinsurance services to aviation and space goods as well as aviation and space technology. The provision specifically prohibits the direct or indirect provision of such services to: (i) a person connected with Russia (which includes any legal person incorporated or formed in Russia), or (ii) for use of these services in Russia.

The Export Control Joint Unit has published a General License allowing for a time-limited license for certain insurance and reinsurance services relating to aviation, space goods and space technology. A party seeking to rely on the license must register within 30 days of their first use of the license.

Following on from Russian aircraft being prohibited from flying over UK airspace or landing in the UK, UK air traffic controllers are now empowered to prevent a Russian aircraft from entering UK airspace and command that they leave via a specific route. In the event of a contravention of the new provisions, UK air operators are empowered to take such steps as are reasonably practicable to detain a Russian aircraft. The Civil Aviation Authority (“CAA”) is now authorized to refuse to register an aircraft if it is found that it is a relevant aircraft and the Secretary of State may direct the CAA to revoke the registration of an already-registered relevant aircraft.

Failure to comply with the new provisions regarding the movement of aircraft is a criminal offence and this includes any contravention of the above by the airport operator, without a reasonable excuse, or any other person to whom a direction is given, namely the operator or pilot of a Russian aircraft.

g. Russia Sanctions Guidance

OFSI has published Russia financial sanctions guidance to facilitate compliance in light of the latest legislative changes. Specifically, the guidance explains prohibitions and requirements for the financial, trade, aircraft, shipping and immigration sanctions included in the regulations.

The scope and complexity of the latest sanctions imposed against Russia underscore the critical nature of evaluating business operations in Russia and establishing an appropriate compliance program. Curtis, Mallet-Prevost, Colt & Mosle LLP is currently monitoring the developments on sanctions across the globe.

Attorney advertising. The material contained in this Client Alert is only a general review of the subjects covered and does not constitute legal advice. No legal or business decision should be based on its contents.