The USA announced the last major change to the structure of the Russian-Ukrainian sanctions regimes, prompted by the shooting down of Malaysia Airlines MH17 over Ukraine in July 2014, in September 2014. Since then, a number of updates and additions have been made by the USA, the EU and, more recently, the UK under the 2019 Russia (Sanctions) (EU exit) Regulations. These can be summarised as:
As tensions ebb and flow over the build up of Russian military assets on the borders of Ukraine, the western allies seek to agree a package of sanctions measures that could be imposed as a proportionate, but swift, response to any incursion. At the same time, the business world is seeking to assess and plan for the likely commercial impact of any incursion and subsequent sanctions.
In the UK, The Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022 were passed on 10th February 2022, which widen significantly the designation criteria for sanctions to include those (i) destabilising/undermining Ukraine; or (ii) obtaining benefit from or supporting the Government of Russia.
Each of the USA, the EU and the UK have differing economic exposures and interests to balance. Each will be reluctant to “hurt” itself economically more than it “hurts” Russia and each will be looking to ensure the inevitable economic impact is shared equally. In addition, the EU has the added challenge of balancing the differing domestic interests of its 27 members. So, although they are likely to be complimentary, it seems equally likely that, the US and EU sanctions regimes will not be identical (although it is predicted the UK will follow the US regime more closely). This, combined with the need to keep the negotiations very much “under wraps” makes an accurate prediction of the likely sanctions a challenge for business. However, the extra territorial impact of US sanctions (as demonstrated by the Iranian sanctions regime) means that, at least as far as financial restrictions are concerned, we can take some guidance from what is being proposed in the USA.
It seems likely that there will be a general shift to the specially designated parties regimes of those entities and individuals that have to date, under the current regime, only been largely impacted by the ‘sectoral’ sanctions. Targets are likely to be those within the energy, banking (e.g. Sberbank, VTB, Gazprombank, Alfa-Bank and the Russian Direct Investment Fund) and high tech sectors as well as oligarchs with close links to Putin.
This shift from restrictions on the ability to raise debt and equity to the assets freeze regimes will be a significant change for financial institutions and businesses to implement and adapt to. It is important to remember that as a general rule, it is not just the listed individuals and entities that are “caught” but also entities they “control”.
Banning Russian banks from the SWIFT system is a possibility being discussed by some. Iran was banned from SWIFT in 2012 but, when Russia annexed Crimea in 2014, the EU did not secure sufficient support for such a sanction. There is also a view that other restrictions on the Russian banking sector are likely to be just as effective, so this seems likely to be considered an ultimate sanction.
The ‘sectoral’ sanctions regime is likely also to be expanded to prohibit export to Russia of key high tech components with US, EU and UK content.
Equally, exports from Russia are likely to be targeted. Current contracts may be allowed to continue to run for a limited period but given the likely payment challenges, it seems unwise to rely on this.
For businesses with direct Russian exposure, the impact of this new sanctions regime will be obvious. However, even those businesses that are reasonably confident their Russian exposure is minimal need to review the likely impact. The pricing impact on commodities that Russia exports such as gas, oil, coal, wheat, grain, nickel, platinum and palladium will be significant, as was the case for aluminium when in 2018 the US imposed sanctions on Rusal.
In addition to this pricing impact, there will be an enhanced risk of inadvertently becoming involved in trades designed to circumvent the new restrictions. The penalties are significant and increased diligence and scepticism of new trading patterns and opportunities would be advisable.
Although politically difficult to express, it seems likely that the scope, speed of implementation and enforcement of any sanctions introduced by the western allies will be dictated by the scale of events on the ground. However, reviewing exposure and preparing for the impact of the likely sanctions outlined above should help businesses limit the financial impact of such sanctions.