US, UK, and EU Impose Further Sanctions on Russia

Key Takeaways as of 28 February 2022

• As the situation regarding the Russian incursion into Ukraine continues to escalate on a day-to-day and hour-to-hour basis, the U.S., U.K., and EU have taken the lead in imposing broad new economic sanctions targeting core aspects of the Russian economy and financial system.
• U.S. sanctions include:
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    • Blocking measures imposed on various individuals and entities;
    • Restrictions on new investment in certain regions of Ukraine;
    • Import/export restrictions involving certain regions of Ukraine;
    • Restrictions on the secondary market for bonds issued by various Russian entities;
    • Restrictions on U.S. financial institutions for maintenance of correspondent accounts and processing transactions of certain Russian foreign financial institutions;
    • Restrictions on dealings in new debt of certain Russian entities; and
    • Restrictions on transactions involving the Central Bank of Russia, the Russian National Wealth Fund, and the Russian Ministry of Finance.
• U.K. sanctions include:
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    • Restrictions on various Russian entities such as banks and defence companies;
    • Restrictions on U.K. persons undertaking financial transactions involving the Central Bank of Russia, the Russian National Wealth Fund, and Russia’s Ministry of Finance;
    • Restrictions on Russian companies from raising funds or borrowing money on U.K. markets;
    • Export controls on high-tech items; and
    • Limits on deposits from Russian nationals in U.K. bank accounts.
• EU sanctions include:
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    • Restrictions on various Russian individuals and entities including members of the Russian parliament and banks;
    • Restrictions on the use of European airspace by Russian controlled aircrafts;
    • Restrictions on transactions with the Central Bank of Russia; and
    • Restrictions on deposits over 100,000 EUR from Russian nationals or natural persons residing in Russia.
• Of note, on 26 February 2022, the U.S., U.K., the EU and other countries agreed to remove several major Russian banks from the SWIFT system.
• Separately, the British government has announced that it will bring the much-delayed Economic Crime Bill before Parliament on 1 March 2022. Once enacted, that new law will include enhanced powers for the U.K.’s financial sanctions enforcement agency, OFSI.

Following last week’s invasion of Ukraine by Russian forces, world leaders, including those from the U.S., U.K., and EU reacted swiftly, imposing broad new economic sanctions that impact a wide range of individuals, entities, transactions, and geographic regions. While these sanctions are designed to target the Russian economy and Russia’s ability to access of the global financial system, the inherent breadth of such sanctions will have far-reaching implications beyond the parties directly targeted. Entities with ongoing business involving either Russia or Ukraine should carefully and regularly monitor the status of existing sanctions regulations and designations, which are subject to rapid change.

U.S. Sanctions^[1]

New Executive Order and Sanctions Against Contested Regions

On 21 February 2022, President Biden signed Executive Order (“E.O.”) 14065 that provides for both blocking sanctions and restrictions on certain transactions. Specifically, E.O. 14065 prohibits U.S. persons from any new investment in, imports from, or exports to the so-called Donetsk People’s Republic and the Luhansk People’s Republic regions of Ukraine (the “covered regions”). U.S. persons are prohibited from otherwise facilitating any such transactions by foreign persons. E.O. 14065 also provides for blocking measures against persons who operate in the covered regions. At this time, no persons have been designated pursuant to E.O. 14065 but, given the fluidity of the situation in Ukraine and the U.S. government’s response to the conflict, that could change at any time. These restrictions are reminiscent of the sanctions that were imposed following Russia’s attempted annex of the disputed Crimea region of Ukraine, which are still in effect today.

Sanctions Restricting U.S. Financial Institutions

On 22 February 2022, the U.S. Department of Treasury's Office of Foreign Assets Control ("OFAC") issued Directive 1A under E.O. 14024 to replace the previously issued Directive 1 (which was issued on 15 April 2021). Directive 1A adds a new restriction prohibiting U.S. financial institutions from participating in the secondary market for ruble or non-ruble denominated bonds issued after 1 March 2022 by the Central Bank of Russia, the Russian National Wealth Fund, or the Russian Ministry of Finance.

On 24 February 2022, OFAC issued Directive 2 under E.O. 14024. Directive 2 prohibits U.S. financial institutions from (a) opening or maintaining a correspondent account on behalf of certain identified foreign financial institutions; and (b) processing transactions involving certain identified foreign financial institutions. These measures, for now, target Russia’s largest financial institution, Sberbank, and 25 of its subsidiaries.

Dealings in New Equity or New Debt

OFAC also issued Directive 3 under E.O. 14024 which prohibits U.S. persons from any dealings in new equity or new debt of longer than 14 days maturity of certain identified entities. OFAC interprets the term “debt” very broadly to include, among other things, accounts receivable.

Transactions involving the Central Bank of Russia, the Russian National Wealth Fund, and Russia’s Ministry of Finance

In yet another directive under E.O. 14024, Directive 4, that was issued on 28 February 2022, the U.S. has prohibited US persons from transacting with the Central Bank of Russia, the Russian National Wealth Fund, and Russia’s Ministry of Finance. According to OFAC, these measures were implemented specifically to prevent Russia from using its international reserves in any manner that would undermine U.S. sanctions against Russia, including any attempt by Russia to prop up the quickly depreciating ruble.

While OFAC has issued numerous general licenses in recent days to allow individuals and entities to unwind their business ties with Russia (and lessen the immediate impact of these sanctions on unintended third parties), the sanctions issued to date are broad and should be carefully assessed. Moreover, it is telling that in the span of a nine-day period, OFAC has issued four separate rounds of sanctions. This speaks to the rapidly evolving nature of the situation, which should be carefully monitored as OFAC continues to release new sanctions and guidance several times per day.

U.K. Sanctions

The U.K.’s key statutory instrument on sanctions against Russia is The Russia (Sanctions) (EU Exit) Regulations 2019^[2] (“Regulations”), as amended on 10 February 2022 through the Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022 (“Amendments”).^[3]

The Amendments expand the scope of sanctions to target any individual or entity involved in obtaining a benefit from or supporting the Government of Russia. The Regulations and the Amendments have a deliberately broad scope and apply to any designated individual; any designated entities; and anyone with direct or indirect interest in designated entities. In terms of targets, these include entities affiliated with the Russian government and, crucially, entities conducting business either “of economic significance to the Government of Russia” or “in a sector of strategic significance to the Government of Russia”. The Amendments do not define economic significance but, the Explanatory Memorandum indicates that the U.K. Secretary of State will consider a range of evidence to assess whether there are “reasonable grounds to suspect” that a person is conducting business of “economic significance to the Government of Russia”.^[4] The Amendments define such strategically significant businesses as those within the Russian chemicals, construction, defence, electronics, energy, extractives, financial services, information communications and digital technology, and transport sectors.^[5]

U.K. sanctions include powers such as the freezing of assets, the prohibition of making funds or resources available to designated individuals or entities, the prohibition of processing of payments, and immigration restrictions (commonly known as travel bans).

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  • So far, the U.K. has designated several individuals and entities, including certain banks, across two tranches. In the first tranche of designations, the U.K. sanctioned: five Russian banks (Rossiya, IS Bank, Promsvyazbank, JSC Genbank, and JSC Black Sea Bank for Development and Reconstruction); and several individuals, including Gennady Timchenko, Boris Rotenberg and Igor Rotenberg. In the second tranche of designations, the U.K. targeted VTB Bank, Rostec (biggest Russian defence company), and individuals such as Kirill Shamalov (Russia’s youngest billionaire) and Petr Fradkov (head of Promsvyazbank, an entity targeted in the first tranche). The entries target both banking institutions and companies active in the defence sector.

The U.K.’s second tranche of designations is a prelude to a more robust approach to sanctions, that has been adumbrated in comments by U.K. government officials. The Prime Minister announced plans to stop Russian banks from accessing Sterling and clearing payments through the U.K., limit the deposits that Russian nationals can have in U.K. bank accounts, and impose asset freezes on more entities and individuals.[6] Russian airline Aeroflot has had its foreign carrier permit suspended by the Civil Aviation Authority.^[7]

In a largely symbolic move, both the U.K. and the EU jointly announced plans to sanction President Putin and Foreign Minister Sergei Lavrov. The U.K. affected this by issuing an OFSI Notice on 25 February 2022.

The U.K. Foreign Secretary has announced plans for restrictions on trade and export controls. She has also explained that secondary legislation will impose measures to prevent Russian companies from issuing securities in the U.K. and export controls will see the prohibition of the export of critical components and equipment in strategically important sectors such as telecommunications.^[8]

EU Sanctions

The key instrument for EU sanctions against Russia is the Council Regulation (EU) No 269/2014 of 17 March 2014 (the “2014 Regulation”)^[9] and the Council Decision 2014/145/CFSP (the “Council Decision”).^[10] Article 2 of the 2014 Regulation provides that Member States shall take measures, so that all funds and economic resources belonging to/owned/held or controlled by any designated natural or legal persons, entities or bodies associated with them as listed in Annex 1 of the 2014 Regulation, will be frozen.

The EU’s first tranche of designations occurred on 21 February, and by 23 February, the EU sanctions package included: the members of the Russian parliament that voted to recognise the breakaway territories in Ukraine; executives of entities such as the Rossiya Bank and VTB Bank; and entities such as the Internet Research Agency and Promsvyazbank. A further rolling second tranche began implementation on 24 February that, inter alia, targeted the energy and transportation sectors, and banned the shipment of dual use goods to Russia. This second tranche therefore targets 70% of Russia’s banking market, limits Russia’s access to technology, bars designated Russian state-owned companies from listing on European stock exchanges and limits Russian nationals from making large deposits in EU banks. 

On 26 February, the EU, the U.K., the U.S., and Canada issued a joint statement to announce a transatlantic task force for the implementation of financial sanctions, and committed to preventing the Russian Central Bank from deploying its reserves in ways that undermine sanctions.^[11] On 27 February 2022, these countries agreed to remove several major Russian banks from the SWIFT system. 

The first tranche of sanctions by both the U.K. and the EU had limited scope, as states reacted to rapidly unfolding events and the collapse of diplomatic discussions. However, it is evident from the rolling second tranches of U.K. and EU sanctions, that there is increased focus on both high net-worth individuals and companies that are associated in any way with the Russian Government, especially in the U.K. There is also overlap between designations under the U.K. and the EU regimes (e.g. in the case of Rossiya bank), which will increase as more measures are implemented.

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[1] This note focuses on the imposition of sanctions by the Department of Treasury’s Office of Foreign Assets Control but it is worth noting that the U.S. Department of Commerce also has imposed significant new export restrictions involving Russia, including new license requirements and policies.

[2] The Russia (Sanctions) (EU Exit) Regulations 2019, available here: https://www.legislation.gov.uk/uksi/2019/855/made

[3] Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022 (“Amendments”) available here: https://www.legislation.gov.uk/uksi/2022/123/regulation/3/made

[4] Explanatory Memorandum to the Amendments, s. 7.5

[5] Reg 3(7) of the Amendments

[6] PM statement to the House of Commons on 24 February 2022, available here: https://www.gov.uk/government/speeches/pm-statement-to-the-house-of-commons-on-ukraine-24-february-2022

[7] CAA Statement on Aeroflot, dated 24 February 2022, available here: https://www.caa.co.uk/news/uk-civil-aviation-authority-statement-aeroflot-russian-airlines/

[8] Foreign and Commonwealth Development Office press release, dated 24 February 2022, available here: https://www.gov.uk/government/news/foreign-secretary-imposes-uks-most-punishing-sanctions-to-inflict-maximum-and-lasting-pain-on-russia

[9] Council Regulation (EU) No 269/2014, dated 17 March 2014, available here: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0269&from=EN

[10] Council Decision 2014/145/CFSP, dated 17 March 2014, available here: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014D0145&qid=1644788251930&from=EN

[11] EU Commission press release dated 26 February 2022, available here: https://ec.europa.eu/commission/presscorner/detail/en/statement_22_1423