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The Foreign, Commonwealth and Development Office has updated the UK's Sanctions List to include five Russian banks and a fresh clutch of Russian oligarchs, all with the aim of deterring President Vladimir Putin from intimidating Ukraine. In view of recent changes to the UK's sanctions rules, however, it is a wonder that more was not done.
On Tuesday (February 22), the UK government made its changes in accordance with the Russia (Sanctions) (EU Exit) Regulations 2019 (SI 2019/855), a piece of secondary legislation that draws its authority from the Sanctions and Anti-Money Laundering Act 2018.
The oligarchs in question are: Gennady Nikolayevich Timchenko, who owns Volga Group, the private investment group which specialises in investments in energy, transport and infrastructure; Boris Romanovich Rotenberg, who is a friend of Putin's and owns the gas pipeline construction company of SGM (StroyGazMontazh) Group alongside his brother Arkady; and Igor Rotenberg, Arkady's son; and his nephew.
Arkady and son Igor have been under US sanctions for some time — Igor since 2018. Igor is the majority shareholder in Gazprom Drilling.
The banks are: Bank Rossiya (Group ID: 14177); Black Sea Bank for Development and Reconstruction (Group ID: 14178); Joint Stock Company Genbank (Group ID: 14179); IS Bank (Group ID: 14180); and Public Joint Stock Company Promsvyazbank (Group ID: 14184).
Payment firms, on pain of criminal penalty, must find out whether they keep any accounts for these parties, freeze those accounts along with any funds that they own or control, avoid dealing with those funds unless the Office of Financial Sanctions Implementation (OFSI) has licensed them to do so, report any findings to OFSI and provide any information about frozen assets for which OFSI might ask.
The opening salvo?
The new sanctions are Prime Minister Boris Johnson's response to President Putin's announcement that Russian troops are going to enter the Ukraine's eastern breakaway provinces. VIXIO asked Daniel Hudson, a sanctions expert at the City law firm of Herbert
Smith Freehills, about the action.
"This is the first salvo. I'm not convinced that the Russian government is going to lose much sleep over it. HM government are keeping their powder dry a little bit. We don't know what their next step, alongside the UK's American and European allies, will be. I suspect that it might be a reasonably coordinated approach, or it'll be coordinated but different countries will target different people and entities or parts of the economy.
"The new people aren't officials, they're oligarchs. If you're British, you can't deal with the assets of these individuals."
VIXIO asked Hudson why no sanctioning power had ever targeted Putin.
"That is for diplomatic reasons. It's quite rare for a head of state to get designated as a sanctions target. Also, it would be relatively simple for someone like Putin to sidestep the designation by using other people's accounts and resources."
According to the revelations of the Panama Papers, the 2.6 terabytes of information that emanated from the internal database of the Panamanian law firm of Mossack Fonseca in 2016, Putin might have been doing this for a long time already. The International Consortium of Investigative Journalists, which published the leak, suspects his friends of holding assets and handling payments on his behalf through corporate vehicles.
Susannah Cogman, also a partner at Herbert Smith Freehills, echoed Hudson’s sentiments when gauging the importance of the fresh British sanctions.
"It seems like a bit of a damp squib. On the subject of the oligarchs, the key point is they are already designated by the United States. We're not taking a bold leap forward here. Most UK banks comply with US sanctions anyway. The five banks are pretty peripheral, so we're still in wait-and-see mode. HM government hasn't done itself any favours by describing this as a heavy barrage of sanctions."
Weightier sanctions in the pipeline?
If these sanctions are an opening salvo, the next wave of sanctions might emanate from the Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022, which came into force on February 10. These amend the regulations of 2019 (mentioned above) and widen the grounds upon which the UK government might decide to designate someone or something as a sanctioned entity.
Previously, the government could only designate someone if it had reasonable grounds to suspect them of being an "involved person", i.e. involved in "destabilising Ukraine" or being owned or controlled, acting on behalf of, a member of, or associated with such a person.
According to Cogman, the new regulations have extended the definition of "involved person" to include anyone who is, or has been involved in, obtaining a benefit from or supporting the government of Russia. This, she said, consisted of the following:
- Carrying on business as an entity affiliated with that government.
- Carrying on a business of economic significance to that government.
- Carrying on business in a sector of strategic significance to that government.
- Owning or controlling, or working as a director or trustee of any of the above.
As the government of Russia includes the Russian central bank, VIXIO asked Hudson whether one of the UK's next targets for sanctions might be Mir, a popular Russian payment system for electronic fund transfers organised by the Central Bank of Russia’s card payment scheme.
The lawyer replied: "It could potentially. They've broadened the designation criteria and it gives them a much broader licence to list pretty much anybody they want by viewing them as significant to the Russian government or economy, so they could decide to target institutions and corporates like that."
VIXIO asked Hudson about the US government’s recent discussions about exhorting SWIFT, the international financial messaging network, to stop dealing with Russian payments and asked him whether this emphasis on payments was a major line of attack that it might pursue in future.
The lawyer said: “This is the perception but I think that the main line of attack is to target important Russian individuals who might then, if all goes well, resent the scrutiny and put pressure on Putin or try to persuade Putin to get out of the Ukraine. The Russian government, I think, does not appear concerned about sanctions but it might be a different story for the individuals.”
The status of payments
So what is the next instalment of anti-Russian sanctions from Boris Johnson’s government? According to Cogman: “We haven't yet seen more complex sectoral sanctions — these would be even more challenging from a compliance perspective because they might come in the second wave. When the UK set up its Russian regime in 2014 [in response to the Russian invasion of Crimea] it was sectoral sanctions on banks and energy companies. The Americans call them SSI sanctions and they are sometimes called capital markets sectoral sanctions. There is not a complete ban on doing business with them but there are restrictions on loans and credit provision. Depending on what company you’re screening, there might be 15 or 30 days in which a loan might exist — it’s over in a flash.”
Cogman said that although these transactions were included in the UK sanctions regime, this was not always the case elsewhere.
“For certain restrictions, notably the supply of specified types of goods and services to Russia (e.g. certain goods used in energy projects), there are also restrictions on providing ‘financing or financial assistance’ (the EU term) or 'funds or financial services' (the UK term) relating to the supply of such goods.”
She continued: “In the EU, financial assistance does not include payment processing (as a result of a case brought by Rosneft some years ago which clarified this point), so a bank that is processing payments need not look into the underlying shipment. By contrast, in the UK after Brexit, payment processing is expressly included within ‘financial services’. This is therefore an example of where the regimes look superficially similar but there are important differences of detail. These differences make sanctions compliance very complex.”
