Recent developments on the UK’s Russia Sanctions Regime by Kartik Mittal and Stephanie Limaco

A series of new sanctions have been recently established against Russia, its entities and nationals. UK sanctions against Russian are set out in the Russia (Sanctions) (EU Exit) Regulations 2019, as amended (the “Russian Sanctions Regulations”). The Russian Sanctions Regulations have been amended six times so far this year, to progressively include new and broader sanctions.

Below are the key amendments under these regulations.

1. GENERAL CHANGES

The Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022[2] came into force on 10 February 2022 and set forth some general amendments in the Russian Sanctions Regulations to extend the UK’s designation criteria.

The designation criteria has been widened such that the UK Government can now sanction an additional type of “involved person” by name. Before this regulation entered into force, an “involved person” referred to a person involved in destabilising or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine.

Now, the term “involved person” also includes a person who is or has been involved in obtaining a benefit from or supporting the Government of Russia. This is a wide provision which could have a broader impact on who the UK Government can sanction.

Being “involved in obtaining a benefit from or supporting the Government of Russia” means:

1. Carrying on business as a Government of Russia-affiliated entity.
2. Carrying on business of economic significance to the Government of Russia.
3. Carrying on business in the Russian chemicals, construction, defence, electronics, energy, extractives, financial services, information, communications and digital technologies and transport sectors.
4. A person owning or controlling or working as a director, trustee or equivalent of one of these persons.

It should be noted that the direct and indirect ownership or control are covered by this designation criteria.

A “Government of Russia-affiliated entity” includes an entity that:

1. Is owed or controlled by the Government of Russia,
2. In which the Government of Russia has the power to appoint or remove members of the board of directors,
3. Receives, or has received, financing from the Russian Direct Investment Fund or the National Wealth Fund, or
4. Otherwise obtains a material benefit (including financial) from the Government of Russia.

The fact that an entity may fall within the designation criteria (for instance, because it operates in the Russian construction or energy sector) does not mean that it will be designated. However, UK entities and individuals should be aware of this increased sanctions risk and consider them when conducting due diligence checks and dealing with said persons, entities, or sectors.

2. FINANCIAL SANCTIONS

Further financial sanctions have been established against Russia pursuant to the Russia (Sanctions) (EU Exit) (Amendment) (No. 2) Regulations 2022[3] and the Russia (Sanctions) (EU Exit) (Amendment) (No. 5) Regulations 2022.[4] These new financial sanctions include prohibitions to deal with certain transferable securities or money-market instruments, to grant or issue certain loans or credits (named “Category 1”, “Category 2”, “Category 3” and “Category 4” loans), to establish or continue certain correspondent banking relationships or to process some sterling payments, and to provide financial services for the purpose of foreign exchange reserve and asset management to certain persons.

These changes are described in more detail below.

Changes under the Russia (Sanctions) (EU Exit) (Amendment) (No. 2) Regulations 2022

This regulation set forth the following amendments:

1. Transferable securities or money-market instruments: This regulation prohibits the dealing with transferable securities or money-market instruments issued on or after 1^st March 2022, by the following persons.

1. An entity incorporated or constituted in the UK (“UK Entity”)[1] that is owned by Sberbank, VTB Bank, Gazprombank, Vnesheconombank, Rosselkhozbank, OPK Oboronprom, United Aircraft Corporation, Uralvagonzavod, Rosneft, Transneft and Gazprom Neft (“Schedule 2 Entities”); or an entity acting on its behalf or at its direction, if the maturity of the instrument exceeds 30 days.
2. A “person connected with Russia” with certain exceptions.[2] As per these exceptions, the prohibition basically covers the securities or instruments issued by an entity which on 1^st March 2022 was domiciled in Russia, but not branches or subsidiaries of a non-Russian entity (wherever located, even if in Russia). This prohibition also does not apply to Schedule 2 Entities.
3. Entities owned by a person described in (ii).
4. Entities acting on behalf or at the direction of a person mentioned in (ii) or (iii).
5. The Government of Russia.

For the purposes of the financial, trade and shipping sanctions’ regulations, a person “connected with Russia” means:

• An individual or a group of individuals who are ordinarily resident in Russia or located in Russia; or,
• An entity which is incorporated or constituted in Russia or is domiciled in Russia.

2. Loans or credits: The regulation extends the restrictions on issuing loans or credit, and now includes four categories of loans that are prohibited:

1. Category 1 Loan: This is a loan or credit, with a maturity exceeding 30 days, made or granted after 31 December 2020 to:

1. A Schedule 2 Entity,
2. A non-UK Entity owned by a Schedule 2 Entity.
3. A person acting on behalf or at the direction of any of them.

2. Category 2 Loan: A loan or credit with a maturity exceeding 30 days, made or granted on or after 1^st March 2022 to an entity which is a UK Entity owned by a Schedule 2 Entity.
3. Category 3 Loan: A loan or credit with a maturity exceeding 30 days, made or granted on or after 1^st March 2022 to an entity which is connected with Russia or owned by a person connected with Russia, or, to an entity acting on behalf or at the direction of any of these entities.
4. Category 4 Loan: Loan or credit made or granted to the Government of Russia, made or granted on or after 1^st March 2022.

3. Corresponding banking relationships: A UK credit or financial institution must not:

1. Establish or continue a correspondent banking relationship with; or,
2. Process a sterling payment to, from or via:

a designated person, or a credit or financial institution which is owned or controlled by a designated person.

Certain exceptions related to humanitarian measures, basic needs, legal services, prior obligations and diplomatic missions are included.

Changes under the Russia (Sanctions) (EU Exit) (Amendment) (No. 5) Regulations 2022[3]

This regulation he Russian Federation’s Central Bank, National Wealth Fund and Ministry of Finance. The prohibition also extends to the provision of these services to

Changes in the Consolidated List of Financial Sanctions Targets

Among the entities and individuals recently added to the Consolidated List of Financial Sanctions Targets in the UK are:

• Entities such as VTB Bank, United Aircraft Corporation, Sberbank, Bank Otkritie Financial Corporation, Bank Rossiya, IS Bank, Genbank, JSC 558 Aircraft Repair Plant, PJSC Sovcombank, United Shipbuilding Corporation, Promsvyazbank, the Russian Direct Investment Fund, Rostec, Tactical Missiles Corporation and Vnesheconombank.
• Individuals such as Mr Denis Bortnikov (Deputy President and Chairman of VTB Bank), Mr Kirill Dmitriev (CEO of the Russian Direct Investment Fund), Mr Petr Fradkov (CEO of Promsvyazbank), Mr Yuri Slyusar (General Director of PJSC United Aircraft Corporation), Mr Gennadiy Timchenko (Shareholder in Bank “Rossiya”), Mr Alisher Usmanov and Oleg Deripaska.

1. TRADE SANCTIONS

New trade sanctions have been established against Russia by the Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2022[5] and the Russia (Sanctions) (EU Exit) (Amendment) (No. 6) Regulations 2022[6]. These regulations extend the current trade restrictions to “critical-industry” goods and technology, dual-use goods and technology and aviation and space goods and technology.

In this regard, in addition to the prohibitions on military goods and technology, now there are restrictions on the export, supply or deliver, or transfer of the goods and technology mentioned in the paragraph above to, or for use in, Russia. It is also prohibited to make these goods or technology available to, or provide technical assistance related to them to, a person connected with Russia or for use in Russia. The provision of certain financial services and funds, and of certain brokering services, related to these goods or technology is also prohibited.

Regarding aviation and space goods and technology, there is an additional prohibition to provide insurance or reinsurance services relating to them to a person connected with Russia or for use in Russia.

Critical-industry goods and technology include certain electronics, computers, telecommunication equipment, information security, sensors and lasers, navigation and avionics equipment, marine systems and aerospace and propulsion equipment, as well as related software and technologies.

The regulation establishes exceptions in relation to personal effects, goods for diplomatic purposes, consumer communication devices and software updates for civilian use, emergencies, among others.

2. SHIPPING SANCTIONS

The Russia (Sanctions) (EU Exit) (Amendment) (No. 4) Regulations 2022[7] prohibits the access or enter to a port in the United Kingdom to the following ships:

1. A ship owned, controlled, chartered or operated by a designated person,
2. A ship owned, controlled, chartered or operated by persons connected with Russia, [8]
3. A ship flying the flag of Russia,
4. A ship registered in Russia, or
5. A specified ship.

The Secretary of State can issue a detection direction to the ships mentioned above.

The registration of ships owned, controlled, chartered or operated by designated persons; or persons connected with Russia is prohibited, and the Secretary of State can terminate the registration of those ships (as well as specified ships).

3. AIRCRAFT SANCTIONS

The Russia (Sanctions) (EU Exit) (Amendment) (No. 6) Regulations 2022 bans a Russian aircraft to overfly or land in the UK. A Russian aircraft is an aircraft owned, chartered or operated by a designated person or a person connected with Russia, or registered in Russia.

Air traffic controls can direct the operator or pilots of a Russian aircraft to not enter the airspace over the UK or to leave the airspace over the UK by a specific route. Airport operators may direct the operator or pilot of a Russian aircraft not to take off from, or require the aircraft to take off from, or not to land at, an airport the operator manages. The Secretary of State can even direct an airport operator to secure the detention or movement of a Russian aircraft.[9]

Certain exceptions are included, aimed to avoid endangering people or the safety of the aircraft (or another aircrafts).

4. GENERAL LICENSES

A number of general licenses have been recently issued.[10] These allow anyone to perform or undertake activities which would otherwise be prohibited by the Russian Sanctions Regulations. Persons and entities acting in accordance with a general license do not need to apply for a specific license in order to conduct the activities covered by the license.