What's changed over the past three weeks (since the original alert was published)?
U.S. Update
The U.S. government has issued new sanctions and broadened existing authorities, relating to:
- Trade sanctions: Prohibitions on the importation of crude oil, petroleum, coal, liquefied natural gas and related products, seafood, alcoholic beverages, and non-industrial diamonds are in place;
- Financial sanctions: Restrictions on investments in Russia have been expanded to include any sector of the Russian economy. Additionally, prohibitions on the exportation or re-exportation, sale, or supply of U.S. dollar-denominated bank notes were issued. The Office of Foreign Assets Control (OFAC) also clarified that the measures restricting U.S. financial institutions apply to any transaction involving gold related to the Central Bank of Russia; and
- Luxury goods: The exportation or re-exportation, sale, or supply of luxury goods to Russia is prohibited.
In addition, OFAC issued a determination broadening the scope of E.O. 14024, authorizing designation of individuals or entities operating in the three additional areas of the Russian economy; in particular, the aerospace, marine, and electronics sectors.
The U.S. government also has added over 400 individuals and entities to the Special Designated Nationals and Blocked Persons List (SDN). Those sanctioned since March 1, 2022 include oligarchs and prominent business executives, their family members, and their companies; malicious cyber actors related to the Russian government; banks, banking board members and chief executives, including the CEO of Sberbank; members of the Russian State Duma for recognizing the independence of the Donetsk and Luhansk regions; companies integral to the Russian defense sector, including Tactile Missiles Corporation (KTRV) and private defense contractor Kronshtadt; entities and individuals responsible for spreading Russian propaganda and disinformation; and entities and individuals connected to the Russian sanctions evasion network, such as Serniya Engineering, which is at the center of a network responsible for obfuscating Russian military and intelligence operations and procuring equipment and technology for the defense sector.
U.K. Update
The U.K. government has introduced new measures and extended those already in place, including:
- Financial restrictions: Additional restrictions have been imposed on correspondent banking relationships and a wider range of transferable securities, loans and credit arrangements are now to be covered;1
- Trade sanctions: Prohibitions already in place extended to dual-use technology and critical industry goods;2
- Transport sanctions in relation to vessels: Russian ships (and other ships specified by the secretary of state) have been prohibited from entering U.K. ports;3
- New financial sanctions: Restricting the provision of financial services involving the Central Bank, the National Wealth Fund and the Ministry of Finance for the purposes of foreign exchange reserve and assessment management;4
- Aviation and trade sanctions: It is now a criminal offence for Russian aircraft to fly over or land in the U.K. with powers having been conferred on the secretary of state and the Civil Aviation Authority (CAA) to facilitate these restrictions. The secretary of state can direct airport operators to detain Russian aircraft in U.K. airspace and the CAA may refuse, suspend or revoke permissions for Russian aircraft; and5
- Luxury goods: Other measures include a ban on the export of high-end luxury goods to Russia and higher import tariffs on key Russian goods.
More than 1,000 individuals and entities have been sanctioned since the invasion. Those sanctioned since March 1 include: banks and banking chief executives; the world's largest diamond producer, Alrosa; Chelsea FC owner Roman Abramovich; billionaire oil tycoon Eugene Shvidler; and Polina Kovaleva the stepdaughter of Russia's foreign minister, as well as companies in key industries supporting the Russian invasion: Russian railways; defense company Kronshtadt (main producer of Russian drones); and the Wagner Group (the organization reportedly tasked with assassinating Ukrainian President Zelenskyy).
The Economic Crime (Transparency and Enforcement) Act 2022 (the "Act") has also come into force. The reforms under the Act are likely to intensify sanctions enforcement, particularly as the Act has now imposed a strict civil liability test for monetary penalties. Under the Act, the Office of Financial Sanctions Implementation (OFSI) can also publicly name companies that have breached financial sanctions, but have not received a monetary penalty.
EU Update
Further entities and individuals have been listed, including: Belarusian individuals for their support of Russia; members of the Russian Federation Council; individuals supporting and benefitting from the Russian government; oligarchs; and entities that are prominent in sectors, including aviation, defense, shipping and machine building.
Russian officials, diplomats and businesspersons are now unable to benefit from the EU visa policy.
Additional Russian banks have been banned from the SWIFT system and prohibitions have been introduced on: all transactions with certain state-owned enterprises; the provision of credit rating services to any Russian person or entity; and new investments in the Russian energy sector.
Measures targeting the Belarusian financial sector have also been implemented given the country's support of and involvement in the Russian invasion. Such measures have included the removal of a number of Belarusian banks from the SWIFT system, the prohibition of transactions with the Central Bank of Belarus and the listing of shares of Belarusian state-owned entities on EU trading venues; and a prohibition on providing euro banknotes to Belarus.
Further, the EU has imposed sanctions on Russian state-owned broadcasters Russia Today and Sputnik. The companies' broadcasting activities in the EU have been suspended too as a result of disinformation and information manipulation.
Have the existing sanctions made the desired impact?
U.S. Update
Thus far, sanctions imposed on the Russian economy have caused widespread inflation, a sharp increase in prices-especially of energy and food products-a steep decline in the ruble's value, extensive supply-chain and trade disruptions, and divestment from Russian operations. Many expect these trends will continue and prices of Russian commodities will continue to rise.6
Additionally, the sanctions on the Central Bank of Russia have proven to be a significant constraint on the Russian economy. Commentators speculate that Russia will be unable to shield its economy by drawing from its foreign reserves because a significant portion is held in dollars, euros, and pounds.7 Absent access to these reserves, the value of the ruble may collapse entirely; however, Russia has supported the ruble so far by selling foreign currency and liquidating bank deposits.8
Others note that the desired result of the sanctions on the Russian economy is to generate internal pressure crippling Russia's capacity to continue its incursion into Ukraine or provoke a regime change. Absent these results, and recognizing that sanctions are often imposed to achieve numerous national security and foreign policy objectives, it is difficult to determine the overall effectiveness of the sanctions.
U.K./EU Update
It remains too early to tell. However, the measures have been described as unprecedented, with Russian Foreign Minister Sergey Lavrov admitting that no one could have predicted the scale of Western sanctions, indicating that Moscow was blindsided by the transatlantic response.
Some commentators have observed that sanctions will not have the desired effect as Russia has been attempting to limit its dependence on Western economies since its annexation of Crimea in 2014. However, the ruble has fallen faster than the 1998 Russian financial crisis, even though the central bank has more than doubled interest rates.
Other commentators believe the sanctions imposed were "too little, too late" and that had they been put in place prior to Putin's invasion of Ukraine, they may have acted as a deterrent. It was, however, announced on March 29 that Russia would scale back its attacks in certain areas, including the Ukraine capital Kyiv, though whether the sanctions have played any part in that announcement is unclear.
What more can be done? What additional sanctions are still on the table?
U.S. Update
On March 17, 2022, the House of Representatives approved a bill suspending normal trade relations with Russia and Belarus. If approved by the Senate, the bill will allow the president to place higher tariffs on imports of products from Russia and Belarus and take steps to suspend Russia's participation in the World Trade Organization (WTO). The bill additionally grants the president the power to permanently impose blocking measures for human rights abuses and lowers the standard for which an individual may be sanctioned for human rights abuses by reducing "gross violations" to cover persons involved in "serious" violations.9
The suspension of normal trade with Russia could result in increased tariffs or an embargo on Russian imports. Some speculate the president could raise tariffs on Russian goods up to 32 percent upon Russia's "most favored nation" status being revoked. If Russia is removed from the WTO entirely, their trade privileges would be frozen.10
Given President Biden's recent remarks that Vladimir Putin "cannot remain in power," it is likely he will exercise the full extent of executive authority to impose further sanctions on Russia until this result is achieved.11 Of note, the recent OFAC determination with respect to E.O. 14024 expands the basis for sanctioning individuals and entities to those operating in the aerospace, marine, and electronics sectors of the Russian economy, thereby providing additional targets for U.S. sanctions going forward.12 The Biden administration may introduce additional sectoral sanctions in the mining, transportation, and financial sectors in the coming days.13
Lastly, the administration may pivot its focus to targeting Chinese companies if Chinese supply-chains are facilitating the evasion of Russian sanctions.14 News reports also indicate the Biden administration is considering secondary sanctions on countries continuing to trade with Russia in response to recent civilian executions.15
U.K./EU Update
It is expected that the U.K. will implement further sanctions, though additional details have not been provided. Some have criticized the existing restrictions, including the fact that certain banks are not yet designated, and ownership thresholds are too high. Whether the government will respond with new measures to close these gaps remains to be seen.
U.K. Foreign Secretary Liz Truss has said that sanctions on Russia should end only after the country's withdrawal from Ukraine and that the U.K. "will keep tightening the screw on the Russian economy" with there being "no let-up."
What measures should companies take to mitigate compliance risks with customers, employees, and business partners?
U.S. Update
With the breadth of the implementation of the world's sanctions regimes targeting Russia, companies should implement enhanced diligence standards before transacting with anyone in Russia or entities who are known to do business in/with Russia. While for some, total divestiture of Russian operations is not an option, it is something that should be considered. Entities who continue to operate in Russia must be sure that those operations do not violate U.S. (U.K./EU) sanctions and must be aware of the secondary sanctions risks associated with ongoing Russian operations. As part of enhanced diligence, companies must take the time to discover ultimate beneficial ownership of their customers, clients, and business partners, and must ensure, through representations and warranties, that they do not engage in transactions that could meet the requirements of facilitation under U.S. law or otherwise violate Russian sanctions.
U.K./EU Update
There is not a one-size-fits-all approach to mitigating compliance risk that can (or should) be taken. Instead, measures should be proportionate to the level of risk.
However, there are some key measures that all companies should consider:
- Implement written policies and procedures: In broad terms, this should set out how sanctions apply to the company, what processes and controls have been implemented so as to ensure compliance, and the consequences of non-compliance;
- Due diligence: This should be conducted before entering into any contractual arrangements with counterparties, so as to ensure that the company knows who it's dealing with. This may include a background check to verify identity, as well as identification of UBOs. Supply chain information, or key trade and business partners, should also be sought;
- Consolidated sanctions lists: All data relating to the relevant customer, supplier, employee, transaction or account should be compared against sanctions lists, including those published by OFSI (U.K.), OFAC (U.S.), the EU and the UN; and
- Training and communication of policies and procedures: Employees should receive regular and adequate training on internal sanctions policies and procedures, including training on the underlying legal and regulatory requirements, and any role-specific information or individual obligations.
Footnotes
1. The Russia (Sanctions) (EU Exit) (Amendment) (No.2) Regulations 2022
2. The Russia (Sanctions) (EU Exit) (Amendment) (No.3) Regulations 2022
3. The Russia (Sanctions) (EU Exit) (Amendment) (No.4) Regulations 2022
4. The Russia (Sanctions) (EU Exit) (Amendment) (No.5) Regulations 2022
5. The Russia (Sanctions) (EU Exit) (Amendment) (No.6) Regulations 2022
6. https://www.cbsnews.com/news/russia-sanctions-ukraine-invasion-60-minutes-2022-03-20/
7. https://www2.deloitte.com/us/en/insights/economy/global-economic-impact-of-sanctions-on-russia.html
8. https://home.treasury.gov/system/files/126/russia_harmful_determination_20220331.pdf
9. H.R. 7108, 117th Cong. (2022). https://www.congress.gov/bill/117th-congress/house-bill/7108
10. https://www.politico.eu/article/remove-russia-trade-privilege-what-need-know/
12. https://home.treasury.gov/system/files/126/russia_harmful_determination_20220331.pdf
13. https://www.washingtonpost.com/us-policy/2022/04/03/bucha-sanctions-russia-biden/
15. https://www.washingtonpost.com/us-policy/2022/04/03/bucha-sanctions-russia-biden/
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
