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The rapidly developing situation in Ukraine has re-focused attention on the use of targeted sanctions as a disincentive or response to national aggression. Sanctions have traditionally acted as a blanket ban on any trade with those countries or entities perceived to be the most egregious. Over the last decade, sanctions have become more focused, nuanced and applicable to larger, more globally-integrated countries.
While the identification of beneficial owners/entities can be extremely complex and the penalties for non-compliance significant, the related question as to whether newly-expanded sanctions will trigger contractual provisions has become a matter of some urgency. The derivatives markets represent a unique combination of features which make them particularly vulnerable to the imposition of sanctions:
- Typically longer term than other trade types
- Valuation subject to constant fluctuation
- Subject to ongoing payment, delivery and margining obligations
- Dependent on the parties’ ability to transfer or terminate
- Frequently cross-border, impacted by a variety of legal regimes- counterparty jurisdictions, governing law of the contract, jurisdiction of collateral location, regulations applying to underlying reference entities
- Derivatives allow parties exposure to an underlying. If an element of that underlying references an entity, obligation or instrument becomes subject to sanction, legacy or future trades may be adversely affected (particularly in the circumstance of physical delivery)
A number of transactions may take place between non-sanctioned entities while referencing a sanctioned entity. For instance, two parties may transact a CDS that directly references the debt obligations of a sanctioned entity or an index of which the sanctioned entity is a constituent part. Individual sanctions may specify specified obligations or all obligations of a specified entity, and may make a distinction between pre and post- sanction debt/equity issuance.
In the context of Russian sanctions to date, authorities have exempted Reference Transactions. EU regulations authorise certain transactions involving derivative products such as IRS, cross currency swaps, CDS (except where these give the right to directly transact in a prohibited security), and derivatives used for hedging in the energy market. However, derivatives which give the right to acquire or sell a transferable security or money market instrument covered by the debt/equity prohibitions, i.e. options, futures, forwards or warrants, remain subject to prohibition. In the US, OFAC issued General License 1B10 authorizing transactions by US persons involving derivative products whose value is linked to an underlying asset that constitutes prohibited debt or prohibited equity issued by a sanctioned entity, while expressly prohibiting US persons from holding, purchasing, or selling of such underlying assets.
Conflicts of Law
Sanctions can only be issued within individual jurisdictions; absent any central co-ordination it’s unsurprising that conflicts can arise. For example Article 5 of the EU Blocking Regulation prohibits EU persons from complying with prohibitions based on prescribed US sanctions on Iran and Cuba. Such issues may occur on a more local legal level- Section 7 of the German Foreign Trade Ordinance prohibits German entities and nationals from complying with sanctions imposed by jurisdictions other than the UN, the EU and Germany if those entities have not themselves imposed sanctions against the same target. These and other examples underline that each sanction’s impact on a given trading relationship and set of transactions is highly fact-specific, but the factual context may include issues beyond the sanctions imposed by a single jurisdiction. Where Parties may consider that a conflict may apply, they should consider limiting the scope of sanction compliance solely to the extent permitted by relevant local law.
The vast majority of cross-border derivative transactions with Russian counterparties will be governed by the 1992 or 2002 ISDA. The vast majority of these will be the 2002 ISDA, though we have recently seen exceptions. Although the 2002 upgrade was partly in response to the 1998 Russian default, where Russian entities were prevented from making payments on NDFs, we shall briefly look the operation of the 2002 ISDA under circumstances where a party is prohibited from making payments to a sanctioned entity. In the event that you are unable to pay, this would constitute an Event of Default, with the non-paying party as the Defaulting Party.
However, Section 5(c)(i) of the 2002 ISDA allows that if an Illegality Event (as defined in Section 5(b)(i)) renders such payments illegal, this will not constitute an Event of Default. Slightly confusingly, for the purposes of this clause, the Party subject to payment prohibition becomes the “Affected Party”, its counterparty is designated as the “Non-Affected Party”. If payments continue to be subject to prohibition for longer than three days, either party may terminate. Section 6(e) stipulates that the Non-Affected Party will be the Determining Party in respect of the Close-Out. Section 6(e)(ii)(3) goes on to say that in the case of Illegality, the Determining Party must use commercially reasonable procedures to effect a commercially reasonable result, specifically- using mid-market transaction values in seeking mid-market quotes from third parties who will take no notice of the creditworthiness of the Determining Party. In practice, a UK firm is legally barred from making payments to a sanctioned Russian firm, the three day waiting period expires and the UK firm elects to terminate. The Russian firm, as the Non-Affected Party determines the Close-Out amount using a mid-market quotation.
Unfortunately the 2002 ISDA does not specify what a mid-market quotation is and every market only quotes bids and offers. In a situation where the market is forcibly split between foreign and domestic dealers, volatility is high and liquidity is low, it may be difficult for the Affected Party to employ their only remedy to an unfavourable determination, i.e. proving that their Non-Affected/Determining Party failed to follow commercially reasonable procedures and or that the result is commercially unreasonable.
Unless amended by the 2012 ISDA Illegality/Force Majeure Protocol, in the event of non-payment the 1995 ISDA proceeds direct to Event of Default. Even lacking these features, we end up in broadly the same place, with the difference being that the Close-Out amount is based on the sanctioned entity’s cost for replacement transactions. This is potentially an even more unfortunate situation that that envisaged above.
It should be noted that ISDA published a 2020 Guidance Note containing a number of template clauses intended to address sanctions issues. The Note includes the following in respects of ISDA MAs and CSAs:
- A sanctions-specific Additional Termination Event. This ATE would apply in cases where applied sanctions may make the reading relationship impractical or undesirable, but not strictly illegal, as well as making the non-sanctioned party the Determining Party for the Close-Out amount.
- Additional Representations placing the onus on the Counterparty to inform that sanctions have been imposed and an Event of Default if they fail to do so.
- Additional Representations to the effect that transaction under the Agreement will not be used to facilitate sanctioned activities. This would be applicable in the case of limited sanctions.
- An additional condition precedent to applicable payment and delivery obligations, intended to (a) prevent the non-sanctioned party from having to make a payment to a sanctioned entity where it is either not permitted to do so or would rather not from a credit risk perspective and (b) prevent the non-sanctioned entity from triggering a failure to pay Event of Default in circumstances where sanctions prevent payment or delivery.
- Provisions to address the risk make it unlawful or impractical to continue performance of a contract while at the same time prevent it from being able to avail itself of the close-out mechanisms, allowing the non-sanctioned entity the ability to at least crystallize the value of any termination payment upon the imposition of sanctions (even if the sanctions prevent the settlement of that payment).
- An additional provision allowing parties to transfer or novate upon the occurrence of a Sanction Termination Event.
While the above represents a comprehensive amendment toolkit that goes some way to sanction-proofing the principal ISDA documents, in our experience industry take-up was low. As a consequence, the provisions above are only likely to be of limited relevance in existing documentation, though should be considered for inclusion in the papering of new relationships.
While supervening illegality is a form of frustration, it is at least possible that the war in Ukraine may create a situation where a contract may become impossible to perform while remaining legal. For example, transactions under an English Law agreement with an English Law sanctioned entity may be frustrated for illegality, transactions with a non-sanctioned entity may be frustrated because it has become impossible to operate necessary payment systems. If frustration can be proven, the contract is terminated and future liabilities are extinguished. Frustration is rarely invoked, the bar is set high, it will not be enough that performance has merely been made more difficult or costly.
Given the difficulty of proving frustration, parties typically turn to force majeure (FM) or material adverse change (MAC). FM clauses contain a list of extraordinary events which will constitute force majeure i.e. strike, riot, epidemic, war; MAC clauses rely on the general meaning of the term. While some clauses may have lower requirements i.e. performance has become “impracticable”, FM events typically must have made performance physically or legally impossible. Both FM and MAC act to suspend obligations for the duration of the applicable event, they do not generally terminate the contract. An obligation may arise on the non-performing party to make efforts to cure the FM event. Careful note should be taken of the mechanics of invoking the clause i.e. compliance with notice requirements and of the effects when triggered. A recent case in the Commercial Court both confirmed that Russian sanctions may constitute a FM event, and addressed the scope of “reasonable endeavours” and whether this clause obliged the acceptance of non-contractual performance. In MUR Shipping BV and RTI Ltd., US sanctions prevented a charterer from paying a ship-owner in the USD contractual currency. The contract defined a FM event as something that “cannot be overcome by reasonable endeavours”. Rejecting an earlier arbitral award in favour of the charterers who substituted EUR for USD in their payments, the Court cited the early case of Bulman, concluding that “a party is not required, by the exercise of reasonable endeavours, to accept non-contractual performance”. The Court fully appreciated the far-reaching implications of sanctions and their effect on the secondary party, while upholding the primacy of contractual terms.
Other transaction types
The situation for the GMRA and the GMSLA is similar to the 1992 ISDA, both standard documentation sets contain no provision for force majeure or illegality. The effect of sanctions on the non-sanctioned party would be the same as if they had simply failed to pay. In the case of the GMRA, the sanctioned entity would be free to dispose of collateral received and request payment for the payment for the purchase of securities it had sent to the non-sanctioned party. In the likely context, selling prices will likely be low, purchases high; leading to a sub-optimal result for the non-sanctioned entity. Similarly, in cases where the non-sanctioned entity is forced to dispose of assets e.g securities issued by a sanctioned entity, sanctions will necessarily have markedly reduced the number of market participants, leading to decreased demand, likely to be reflected in price reduction.
Section 44 of the Sanctions and Anti-Money Laundering Act 2018 provides broad protection against any civil proceedings for actions undertaken “in the reasonable belief that it is in compliance with” UK sanctions. The explanatory notes clarify that the aim is to protect people from any adverse results generated by compliance. The Section applies both to positive acts and omissions or failure to perform. In the event that a contract is not frustrated by illegality or obligations suspended by a FM event, this section is likely to act as a substantial shield for non-performance as a result of sanctions. Again, note that this necessarily only applies to English Law governed contracts in the context of sanctions imposed by the UK.
Sanctions cases are highly specific as to the exact sanctions and the precise wording of contractual clauses. The doctrines of illegality and frustration may only be of limited utility, an English Law governed contract is unlikely to be illegal as a result of US sanctions. While a contract may be frustrated by illegality in the place of performance, the general rule is that illegality must applied by the contract’s governing law. FM and MAC may apply, but typically act to temporarily relieve Parties of their obligations, leaving the contract to resume when the event has ended. Each remedy sets a high bar to its application, and may not be suitable as a remedy to what promises to be a long drawn-out series of events.
The situation is changing on a daily basis, this rapidly shifting dynamic requires preparation to anticipate a range of potentially adverse events. Review of existing contracts and careful consideration to the drafting of future clauses should be regarded as a vital risk-mitigant. Parties who may be affected by sanctions imposed by either “side” should as a minimum:
- Review relevant contracts to determine available rights and remedies. In the event of a dispute, the court will assess the extent to which each party has availed itself of all possible means to ensure good faith performance.
- Review the governing law of relevant contracts and assess the extent to which all applicable sanctions are imposed or negated.
- Review dispute resolution clauses and the governing law of the location in which any such hearings may be held.
- Review KYC and AML procedures to ensure they are able to detect and prevent sanctions exposure
- Review exposure to other potentially affected regions e.g. Black Sea shipping countries such as Turkey, Bulgaria Romania
We have created an overview of the sanctions imposed to date by Australia, the EU, the UK and the US:
Australian sanctions to date
Financial sanctions and travel bans:
- targeted financial sanctions on eight members of the Russian Federation’s security council – a body that is chaired by Putin and has 12 permanent members including the foreign minister Sergei Lavrov
- 8 persons who are members of Russia’s National Security Council
- 25 persons and entities responsible for formulating and executing security-related policies and providing weapons and strategic advice
- 4 banking entities assisting the financing of Russian activity in the Russian-occupied territory of Crimea, and which are responsible for, or complicit in, the threat to the sovereignty and territorial integrity of Ukraine
- 339 persons who are all Members of the State Duma of the Federal Assembly of the Russian Federation
- 13 persons and entities with close links to the Belarusian Armed Forces or Russian military, or that provide software that supports the use of surveillance and facial recognition technology for the identification, apprehension, and persecution of protestors by the Belarusian and Russian governments
- 5 persons holding senior positions in the Russian Government, including the current President and Foreign Minister of the Russian Federation
- 7 Russian banks or investment funds, including the Central Bank of the Russian Federation and an export credit agency
- Australian individuals and entities will be banned from doing business with Rossiya Bank, Promsvyazbank, IS Bank, Genbank and the Black Sea Bank for Development and Reconstruction (This is in addition to restrictions on Australians investing in the Russian state development bank VEB)
- Removal of selected Russian banks from the SWIFT global payments messaging system.
It is prohibited to deal with financial instruments issued by, or providing loans or credit to:
- specified publicly‐owned or controlled Russian banks
- specified Russian companies predominantly engaged in activities relating to military equipment or services
- specified publicly‐owned or controlled Russian companies involved in the sale or transport of crude oil or petroleum products
- Majority owned subsidiaries or entities acting as agents for any of the above.
EU sanctions to date
On 31 July 2014, the Council adopted Regulation (EU) No 833/2014 which gives effect to measures provided for in Council Decision 2014/512/CFSP. On 15 March 2022, the Council adopted Decision (CFSP) 2022/430, amending Decision 2014/512/CFSP concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine. Decision (CFSP) 2022/430 prohibits all transactions with certain state-owned companies which are already subject to refinancing restrictions, as well as the provision of credit rating services and bans access to any subscription services in relation to credit rating activities to Russian clients. Regulation 2022/428 was adopted by the EU on 15 March 2022 amending Regulation 833/2014.
- first set of restrictive measures against 21 Russian and Ukrainian officials responsible for actions threatening Ukraine’s territorial integrity
- Following the annexation of Crimea and Sevastopol to the Russian Federation, 12 names were added to the list of Russian and Crimean officials subject to EU travel bans and asset freezes.
- The Council widened the legal basis for EU restrictive measures making it possible to target entities which materially or financially support actions against Ukraine. (an asset freeze on entities which materially or financially support actions against Ukraine’s territorial integrity, sovereignty and independence)
- In order to restrict Russia’s access to EU capital markets, EU nationals and companies may no more buy or sell new bonds, equity or similar financial instruments with a maturity exceeding 90 days, issued by major state-owned Russian banks, development banks, their subsidiaries outside the EU and those acting on their behalf. Services related to the issuing of such financial instruments, e.g. brokering, are also prohibited
- An asset freeze and an EU travel ban were imposed to 13 persons and five entities involved in action against Ukraine’s territorial integrity. This decision brought the total of persons subject to EU sanctions over Ukraine’s territorial integrity to 132 and the number of entities under EU asset freeze to 28
- targeted sanctions against the 351 members of the Russian State Duma and an additional 27 individuals, restrictions on economic relations with the non-government controlled areas of Donetsk and Luhansk oblasts, and restrictions on Russia’s access the EU’s capital and financial markets and services
- Introduce a sectoral prohibition to finance the Russian Federation, its government and Central Bank.
- EU has decided to freeze the assets of Vladimir Putin, President of the Russian Federation, and of Sergey Lavrov, Minister for Foreign Affairs of the Russian Federation. In addition, it has imposed restrictive measures on the members of the National Security Council of the Russian Federation and on the remaining members of the Russian State Duma
- new sanctions on additional 26 persons and one entity (now apply to a total of 680 individuals and 53 entities, include an asset freeze and a prohibition from making funds available to the listed individuals and entities)
- Restrictive measures on 14 oligarchs and prominent businesspeople involved in key economic sectors providing a substantial source of revenue to the Russian Federation and 146 members of the Russian Federation Council (EU restrictive measures now apply to a total of 862 individuals and 53 entities)
- cutting Russian access to the most important capital markets
- prohibits the listing and provision of services in relation to shares of Russian state-owned entities on EU trading venues
- The Council endorsed a fourth package of sanctions against Russia. Sanctions included prohibition on transactions with certain state-owned enterprises and expands the list of persons connected to Russia’s defense and industrial base, on whom tighter export restrictions are imposed regarding dual-use goods and goods and technology, which might contribute to Russia’s technological enhancement of its defense and security sector.
- introduces new measures which significantly limit the financial inflows from Russia to the EU by prohibiting the acceptance of deposits exceeding certain values from Russian nationals or residents, the holding of accounts of Russian clients by the EU Central Securities Depositories, as well as the selling of euro-denominated securities to Russian clients
- Sanctions will target 70% of the Russian banking market, and key state-owned companies, including in the field of defence. They will increase Russia’s borrowing costs, raise inflation and gradually erode Russia’s industrial base
- a ban on transactions with the Russian Central Bank
- EU has excluded seven Russian banks from SWIFT (Bank Otkritie, Novikombank, Promsvyazbank, Rossiya Bank, Sovcombank, Vnesheconombank (VEB), and VTB Bank) this will also apply to any legal person, entity or body established in Russia whose proprietary rights are directly or indirectly owned for more than 50% by the above-mentioned banks
- Ban on investing, participating or otherwise contributing to future projects co-financed by the Russian Direct Investment Fund
- Ban on selling, supplying, transferring or exporting euro banknotes to Russia or to any natural or legal person or entity in Russia
- measures targeting the Belarusian financial sector: restrict the provision of specialised financial messaging services (SWIFT) to three Belarusian banks, prohibit transactions with the Central Bank of Belarus, prohibit the provision of euro-denominated banknotes to Belarus, prohibit the listing and provision of services in relation to shares of Belarusian state-owned entities on EU trading venues
- a ban 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
- it is prohibited to grant or be part of any arrangement to grant any new loan or credit or otherwise provide financing, including equity capital, to any legal person, entity or body incorporated or constituted under the law of Russia or any other third country and operating in the energy sector in Russia, or for the documented purpose of financing such a legal person, entity or body
- it is prohibited to directly or indirectly purchase, sell, provide investment services for or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments with a maturity exceeding 90 days, issued after 1 August 2014 to 12 September 2014, or with a maturity exceeding 30 days, issued after 12 September 2014 to 12 April 2022 or any transferable securities and money market instruments issued after 12 April 2022
- it is prohibited to provide public financing or financial assistance for trade with, or investment in, Russia
The EU is cutting Russia’s access to capital markets of the EU, increasing borrowing costs for the sanctioned entities and gradually eroding Russia’s industrial base by:
- prohibiting any form of lending to and buying of securities issued by certain Russian banks and government (including the Central Bank)
- imposing a full asset freeze and financing ban on three Russian banks
- a full prohibition of any transactions with certain Russian State-owned enterprises across different sectors – the Kremlin’s military-industrial complex
- clarifying that crypto assets fall under the scope of “transferable securities”
- a ban on the rating of Russia and Russian companies by EU credit rating agencies and the provision of rating services to Russian clients
- targeting the Russian elite by banning their big deposits in EU banks
The EU is also blocking Russia’s EU-held foreign exchange reserves by:
- agreeing to exclude key Russian banks from the SWIFT system, the world’s dominant financial messaging system
- Prohibiting investing in projects co-financed by the Russian Direct Investment Fund. The provision of euro-denominated banknotes to Russia has also been prohibited.
70% of the Russian banking system (in assets), government and key state-owned companies, will no longer be able to refinance in EU capital markets
- EU firms are still allowed to trade on Russian exchanges as long as the trading does not concern securities or derivatives issued by the Russian State, the Russian Central Bank, the banks or state-owned enterprises subject to a financing ban pursuant to Article 5(1) to Article 5(4) of Council Regulation 833/2014, as amended by Council Regulation 2022/328 of 25 February 2022. Trading in financial instruments issued before the relevant dates indicated in Article 5(1) to Article 5(4) are possible
- EU sanctions do not impose any impediments to receive income payments, dividend payments or principal repayments of existing securities from Russian issuers. The restrictive measures imposed by the EU in Council Regulation 833/2014 in relation to purchases of the securities issued by the Russian State, certain banks and corporations apply to purchases of securities issued after a certain date (i.e. 9 March 2022 for securities issued by the Russian State or the Russian Central bank)
- For an existing derivative contract (e.g. an interest rate swap) subject to daily margining requirements, non-designated entities are entitled to receive collateral that is contractually due even if the counterparty is a designated entity.
UK sanctions to date
Sanctions have been imposed on Russian entities by the EU, US, Australia and the UK. Russia has itself recently imposed a series of countermeasure sanctions . Each jurisdiction is specific and as noted above there may be areas in which they conflict.
List of Sanctions the UK Government has imposed on Russia
UK sanctions against Russia have been in place since 2014 when Russia previously invaded Ukraine and captured Crimea and have subsequently been strengthened following the Salisbury poisonings in 2018. As the relationship between the UK and Russia further deteriorated following the poisonings, Russian persons and entities have been added to the UK’s list of financial sanctions targets in 2018, 2020 and 2021.
The UK consolidated sanctions against Russia following Brexit with the introduction of the “Russia (Sanctions) (EU Exit) Regulations 2019” (the Russia Regulations), which now encompass not just asset freezes targeting individuals and companies, but also broader “sectoral” sanctions targeting key areas of the Russian economy, such as capital markets, military technology and the supply of energy. The new sanctions framework will take the form of secondary legislation issued under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), the umbrella legislation which underpins the UK’s financial sanctions programme. The secondary legislation will broaden the scope of the Russia Regulations, bypassing the need for any direct link between sanctions designations and Russian policy in Ukraine.
The regulations will be drafted broadly, capturing any individual or entity which “is linked to the Russian state, engages in business of economic significance to the Russian state, or operates in a sector of strategic significance to the Russian state”. The UK Foreign Office has set out the new measures termed the Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022, which amend the Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia Regulations).
1. Global Human Rights Sanctions
- 34 designated persons
- The Global Human Rights Sanctions Regulations 2020;
- The regulations apply to those who “facilitate, incite, promote, or support” abuses, as well as those deemed to “financially profit” from human rights violations.
- The regulations allow vast scope to be applied in the event of acts by the Russian Government that are deemed to represent violations of human rights – the right to life and the right not to be subject to torture, degrading treatment or punishment.
2. Global anti-corruption sanctions
- 14 designated persons
- The Global Anti-Corruption Sanctions Regulations 2021 authorise asset freezes, restrictions and travel bans for individuals and companies implicated in “serious corruption”.
- The first designations under the regulations set the geopolitical tone, encompassing numerous Russian persons believed to have misappropriated state assets.
- The regulations allow the UK Government capacious potential capacity to designate key figures within the Russian economy and Russian politics. In the week beginning 24 January 2022, the UK Foreign Secretary was questioned about the possibility of designating President Putin directly, which she did not rule out.
- In April 2021, 12 Russian nationals were sanctioned under the UK’s new Global anti-corruption sanctions regime for their role in the serious corruption uncovered by Sergei Magnitsky.
3. Cyber security sanctions regime
- 8 designated persons.
- In 2020, the UK also transposed the EU’s existing thematic sanctions regarding cyber- security into national legislation, through the “Cyber (Sanctions) (EU Exit) Regulations 2020”.
- The regulations allow the UK Government to designate those “who are, or are considering, conducting or directing relevant cyber activity from a UK or international perspective”.
- The majority of the persons currently designated under the regulations are Russian, and the list includes multiple groupings within the “GRU” – Russia’s foreign military intelligence agency, which the UK Government blames for a spate of cyber-attacks since 2015.
4. Chemical weapons sanctions regime
- 17 designated persons
- In January 2019, EU foreign ministers, including the UK Foreign Secretary, imposed sanctions on the leadership of the Russian military intelligence organisation, the GRU, and the two GRU operatives charged with carrying out a nerve agent attack in Salisbury in 2018.
- A further 13 Russian nationals have been sanctioned under the UK’s autonomous chemical weapons sanctions regime, for their involvement in the Novichok attack on Russian opposition figure, Alexei Navalny, in August 2020.
The first wave of UK sanctions against Russia constituted travel bans and asset freeze on five Russian banks and three Russian oligarchs (Gennady Timchenko, Boris Rotenberg, and Igor Rotenberg). Following these designations, 186 individuals and 58 entities were subject to financial sanctions under the Russia regime.
On 25 February 2022, the Government sanctioned President Putin and Russian Foreign Minister, Sergey Lavrov, who are now subject to an asset freeze. The UK has sanctioned seven Russian billionaires and imposed sanctions on 386 members of the Russian parliament.
Asset freeze and making available provisions
The Regulations impose financial sanctions through a targeted asset freeze on designated persons and prohibitions on making funds or economic resources available. This involves the freezing of funds and economic resources (non-monetary assets, such as property or vehicles) of designated persons and ensuring that funds and economic resources are not made available to or for the benefit of designated persons, either directly or indirectly.
Other financial and investment restrictions
They prohibit dealing with, directly or indirectly, a transferable security or money market instrument if it has a maturity exceeding 30 days and was issued after:
- 1 August 2014 by Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB), Rosselkhozbank, and an entity incorporated or constituted in a country other than the UK which is owned directly or indirectly by one or more of the banks listed above.
- 12 September 2014 by OPK Oboronprom, United Aircraft Corporation, Uralvagonzavod, Rosneft, Transneft, Gazprom Neft, or an entity incorporated or constituted in a country other than the UK which is owned, directly or indirectly, by one of these entities.
- 0:01 on 1 March 2022, if it was issued by a person other than an individual which is incorporated and constituted under the law of the UK and owned by a person falling within Schedule 2 or a person other than an individual acting on behalf or at the direction of 1 and 2 above.
- 0:01 on 1 March 2022 by or on behalf of a person connected with Russia.
- 0:01am on 1 March 2022, by or on behalf of the government of Russia (which includes the Central Bank of the Russian Federation).
Loan and credit arrangements
You must not, directly or indirectly, grant, or enter into any arrangement to grant a new loan or credit with a maturity exceeding 30 days (a category 1 loan) to Sberbank, VTB Bank, Gazprombank, Vnesheconombank (VEB), Rosselkhozbank, OPK Oboronprom, United Aircraft Corporation, Uralvagonzavod, Rosneft, Transneft, Gazprom Neft, and an entity incorporated or constituted in a country other than the UK which is owned by one of the abovementioned entities, or an entity acting on behalf or at the direction of one of the above entities.
After 0:01 on 1 March 2022, you must not directly or indirectly, grant, or enter into any arrangement to grant any loan or credit with a maturity exceeding 30 days (a category 2 loan) to an entity which is incorporated or constituted under the law of the UK and owned by an entity listed under Schedule 2.
After 0:01 on 1 March 2022, you must not directly or indirectly, grant any loan or credit (a category 3 loan) to a person other than an individual, connected with Russia and the government of Russia.
Correspondent banking relationships and sterling payments
Restrictions on correspondent banking relationships and processing sterling payments are new. A UK credit or financial institution must not establish or continue a correspondent banking relationship with DPs under the Russian sanctions regime, a UK credit or financial institution which is owned or controlled directly or indirectly by a DP, a non-UK credit or financial institution which is owned or controlled directly or indirectly by a DP.
A UK credit or financial institution is also prohibited from processing a sterling payment to, from or via a designated person, or a credit or financial institution which is owned or controlled directly or indirectly by the designated person, if it has reasonable cause to suspect that the payment is to, from or via a designated person.
Investments in relation to Crimea
Under the Regulations, it is prohibited to directly or indirectly, extend a participation, or acquire any ownership interest, in land located in Crimea. The same restrictions also apply when it comes to acquiring any ownership interest in an entity which has a place of business located in Crimea.
There is also a prohibition on granting any loan or credit to a relevant entity. It is prohibited to establish a joint venture in Crimea or with a relevant entity. It is also prohibited to provide any investment services directly related to any of the activities listed above.
Provision of financial services for the purpose of foreign exchange reserve and asset management
The Regulations prohibit a UK individual or entity from providing financial services for the purpose of foreign exchange reserve and asset management to the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, the Ministry of Finance of the Russian Federation, a person owned or controlled directly or indirectly by any of the persons above; or a person acting on behalf of or at the direction of any of the persons above.
This includes money market instruments (including cheques, bills and certificates of deposit); foreign exchange; derivative products (including futures and options); exchange rate and interest rate instruments (including products such as swaps and forward rate agreements); transferable securities; other negotiable instruments and financial assets (including bullion); and special drawing rights.
Derivatives which give the right to acquire or sell a transferable security or money market instrument covered by the regulations, such as options, futures, forwards or warrants, irrespective of how they are traded (on exchange or over-the-counter (OTC)) are covered by prohibitions set out in the regulations. Certain other derivatives, such as interest rate swaps and cross currency swaps, are not covered by the prohibitions set out in the regulations, nor credit default swaps (except where these give the right to acquire or sell a transferable security).
Derivatives used for hedging purposes in the energy market are also not covered.
Dealing with securities and money market instruments
Under existing sanctions, it was already a criminal offence to deal in “transferable securities” or “money market instruments” issued by any of 11 specific Russian entities or by a non-UK undertaking “owned” by any of those entities. With effect from 1 March 2022, this restriction has been extended. It is now a criminal offence to deal (directly or indirectly) in transferable securities issued on or after 1 March 2022 by any of the following persons:
- Sberbank, VTB, Gazprombank, VEB, Rosselkhozbank, OPK Oboronprom, United Aircraft Corporation, Uralvagonzavod, Rosneft, Transneft, Gazprom Neft.
- Any other person who is “connected with Russia”, unless that person is, on 1 March 2022, either an entity domiciled outside Russia or a branch or subsidiary of an entity domiciled outside Russia.
- Any undertaking in which anyone in either of the categories above holds (directly or indirectly) more than 50% of the shares or voting rights. Any undertaking acting on behalf of, or at the direction of, anyone described above. This is a wide provision designed to capture nominees that act for persons connected with Russia.
- The Government of Russia.
Other UK sanctions
Other UK sanctions include:
- Major Russian banks excluded from the UK financial system.
- All Russian banks have had their assets frozen
- The Russian state and major companies are not be able to raise finance or borrow money in the UK.
- A limit placed on deposits Russians can make at UK banks.
The UK Government has the power to grant licences setting out circumstances in which certain restrictions do not apply. It has already granted a number of licences to this effect.
Licensing for financial sanctions
Where a person is designated for the purposes of asset freeze measures and making available provisions contained in the Regulations, the designated person or representative (on their behalf) may apply for a licence from OFSI to use their funds or economic resources (non-monetary assets, such as property or vehicles).
Purposes pursuant to which, or for which activities, OFSI may grant an individual licence include basic needs, reasonable professional fees for or reasonable expenses associated with the provision of legal services, reasonable fees or service charges arising from the routine holding or maintenance of frozen funds or economic resources, extraordinary expenses, pre-existing judicial decisions etc., extraordinary situations, prior obligations, diplomatic missions and consular posts, humanitarian assistance activities, medical goods and services, production or distribution of food.
Securities, loans and credits
The following licensing grounds, set out in Part 1A of Schedule 5, apply to loans and credit:
- humanitarian assistance activities.
- medical goods and services
- production or distribution of food
- diplomatic missions and consular posts
- space activities
- extraordinary situations.
Correspondent banking relationships
Where a person is designated for the purposes of correspondent banking and sterling clearing prohibitions contained in the Regulations, a person or representative (on their behalf) may apply for a licence from OFSI to allow sterling payments to, from or via a designated person by the designated person. Purposes pursuant to which, or for which activities, OFSI may grant an individual licence include basic needs – including for the provision of insolvency services, legal services, financial regulation, and extraordinary situations.
A person or representative (on their behalf) may apply for a licence from OFSI to allow sterling payments to, from or via a designated person. Purposes pursuant to which, or for which activities, OFSI may grant an individual licence include humanitarian assistance activities, medical goods and services, production or distribution of food, diplomatic missions and consular posts, and space activities.
Foreign exchange reserve and asset management
A person or representative (on their behalf) may apply for a licence from OFSI to allow provision of financial services for the purposes of foreign exchange reserve and asset management to the Central Bank of the Russian Federation; the National Wealth Fund of the Russian Federation or the Ministry of Finance of the Russian Federation. Purposes pursuant to which, or for which activities. OFSI may grant an individual licence include humanitarian assistance activity, financial regulation, financial stability, safety and soundness of a firm, or extraordinary situation.
Investment in Crimea
Licence applications can also be made to OFSI for acts that would otherwise be prohibited under regulation 18 (investments in relation to Crimea) on these 3 grounds:
- consular posts
- medical and educational purposes
- health and the environment
Under the Sanctions and Anti-Money Laundering Act (2018), HMT may grant general licences under any autonomous UK sanctions regime
Recent General Licences:
- Under General Licence INT/2022/1277777, trading in transferable securities and money market instruments was permitted, and category 1, 2 and 3 loans were able to be made, until 11:59 p.m. on 8 March 2022.
- Under General Licence INT/2022/1295476, the restrictions on dealing with transferable securities and money market instruments, on loans and credit arrangements, and on correspondent banking relationships and sterling payments, do not apply to action taken between 4 March 2022 and 3 April 2022 which is reasonably necessary to wind down a transaction (including to close out a position) involving certain named entities (Bank Okritie, Promsvyazbank, Bank Rossiya, Sovcombank, VEB, any entity owned or controlled by any of the mentioned entities, and JSCB Novikombank).
- Under General Licence INT/2022/1272278, a similar position applies to action taken between 25 February 2022 and 27 March 2022 which is reasonably necessary to wind down a transaction (including to close out a position) involving VTB Bank or an entity owned or controlled by it.
- Under General Licences INT/2022/1277778 and INT/2022/1277877, correspondent banking relationships with Sberbank may continue until 11:59 p.m. on 31 March 2022 or (for certain energy-related payments) until 24 June 2022.
- Under General Licence INT/2022/1298776, the restrictions on foreign exchange reserve and asset management services do not apply between 4 March 2022 and 3 April 2022 if provided for the purpose of winding down activity with Sberbank or an entity owned or controlled by it.
US sanctions to date
The US has responded to the conflict in Ukraine with the following sanctions measures:
Sanctioned oligarchs and powerful Russian elites have used family members to move assets and to conceal their immense wealth. The following designations target influential Russians in Putin’s inner circle and in elite positions of power within the Russian state, e.g.:
- Sergei Sergeevich Ivanov, son of Sergei Borisovich Ivanov (OFAC redesignated Sergei B. Ivanov and designated his son Sergei S. Ivanov pursuant to E.O. 14024 for being or having been leaders, officials, senior executive officers, or members of the board of directors of the GoR.)
- Andrey Patrushev, son of Nikolai Platonovich Patrushev (Secretary of the Russian Federation Security Council and is reported to be a longtime close associate of Putin)
- Ivan Igorevich Sechin, son of Igor Ivanovich Sechin (the Chief Executive Officer (CEO), Chairman of the Management Board, and Deputy Chairman of the Board of Directors of Rosneft, one of the world’s largest publicly traded oil companies.)
- Alexander Aleksandrovich Vedyakhin (First Deputy Chairman of the Executive Board of Sberbank)
- Fully blocked the assets of 19 oligarchs and 47 family members
- OFAC also announced its designation of “key enablers” of the Russian invasion of Ukraine. These designations include dozens of Russian defense companies, 328 members of the Russian State Duma, as well as the head of Sberbank, Russia’s largest financial institution. This action by OFAC brings US sanction more closely in line with measure taken by the European Union, United Kingdom, and Canada
- OFAC designated The State Duma of the Federal Assembly of the Russian Federation and 328 of its members for their support of President Putin’s invasion of Ukraine.
- OFAC also designated Herman Gref, the head of Sberbank and a known ally of Putin
- Prohibited new investment in the DNR and LPR regions, importation into the US of goods, services, or technology from the DNR or LPR regions; exportation, reexportation, sale or supply from a U.S. person of goods, services, or technology to the DNR or LPR regions; and facilitation of the above transactions conducted by non-U.S. persons (Executive Order 14065);
- OFAC added VEB and PSB and 42 subsidiaries, five vessels, and three individuals to the SDN List
- Extended the prior primary market sovereign debt prohibitions to cover participation of U.S. financial institutions in the secondary market for bonds (ruble or non-ruble denominated) issued after March 1, 2022 by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation. (Russia-related Directive 1A under Executive Order 14024)
- Blocking sanctions on Nord Stream 2 AG and its CEO, Matthias Warnig. That action, in concert with the German declaration that it would cease certification, effectively prevents Nord Stream 2 from becoming operational
- OFAC blocked four Russian financial institutions – VTB Bank, Otkritie, Novikom, and Sovcombank.
- Blocking sanctions on seven Russian “elites” and two real estate companies owned by a concurrently sanctioned VTB Bank executive (Executive Order 14024)
- Correspondent account and payable-through account (CAPTA) sanctions and rejection sanctions on Sberbank, the largest Russian financial institution by assets. These sanctions do not block Sberbank, but prohibit U.S. financial institutions from maintaining or opening accounts, as well as processing transactions for the bank and its non-U.S. financial institution subsidiaries as of March 26, 2022
- New debt and new equity sanctions on a number of Russian entities, which similarly to existing restrictions under Directive 1 of Executive Order 13662, as amended, prohibit U.S. persons from dealings in new debt of longer than 14 days maturity or new equity of entities issued on or after March 26, 2022
- Further targeted sanctions against Russia, namely through removing Russian banks from the SWIFT banking system and imposing restrictive measures on the Russian Central Bank.
- Banning the import of Russian crude oil and other petroleum, coal, and liquefied natural gas. The EO expands upon the scope of the national emergency declared in EO 14024 and extended in EO 14039. The order prohibits new U.S. investment in Russia’s energy sector, Americans from financing or enabling foreign companies that are investing to produce energy in Russia, any transaction that evades or avoids the prohibitions set forth in the order
- President Biden issued Executive Order (EO) 14068. The EO prohibited new investment in any sector of the Russian economy as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, by a US person, wherever located; the exportation, reexportation, sale, or supply, directly or indirectly, from the US, or by a US person, wherever located, of US dollar-denominated banknotes to the Government of the Russian Federation or any person located in Russia, and any approval, financing, facilitation, or guarantee by a US person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited by this section if performed by a US person or within the US.
- US Secretary of State Anthony Blinken announced further actions against Russia on Monday, including barring Russian financial institutions — such as the Russian Central Bank –from making transactions in American dollars
- The US also imposed sanctions on the state-owned Russian Direct Investment Fund, calling it a “known slush fund” for Putin and his inner circle Russia will no longer be able to access the funds it keeps in US dollars
Major Economic Sanctions:
Targeting Russia’s Two Largest Financial Institutions:
Correspondent and Payable-Through Account Sanctions on Sberbank:
- Within 30 days, OFAC is requiring all U.S. financial institutions to close any Sberbank correspondent or payable-through accounts and to reject any future transactions involving Sberbank or its foreign financial institution subsidiaries. Payments that Sberbank attempts to process in U.S. dollars for its clients — with examples ranging from to technology to transportation — will be disrupted and rejected once the payment hits a U.S. financial institution
- To implement sanctions on Sberbank, OFAC issued Directive 2 under E.O. 14024, “Prohibitions Related to Correspondent or Payable-Through Accounts and Processing of Transactions Involving Certain Foreign Financial Institutions” (the “Russia-related CAPTA Directive”).
- Pursuant to Directive 2 under E.O. 14024, Sberbank and 25 Sberbank foreign financial institution subsidiaries that are 50 percent or more owned, directly or indirectly, by Sberbank were identified in Annex 1 to the Russia-related CAPTA Directive
- The prohibitions of the Russia-related CAPTA Directive take effect beginning at 12:01 a.m. eastern daylight time on March 26, 2022. Accordingly, by 12:01 a.m. eastern daylight time on March 26, 2022, U.S. financial institutions must have closed any correspondent or payable-through account maintained for Sberbank all other entities listed in Annex 1 to the Russia-related CAPTA Directive, and all foreign financial institutions owned 50 percent or more by the foregoing.
Full Blocking Sanctions on VTB:
- assets held in U.S. financial institutions will be instantly frozen and inaccessible to the Kremlin
- VTB Bank was designated pursuant to E.O. 14024 for being owned or controlled by, or for having acted or purported to act for or on behalf of, directly or indirectly, the GoR, and for operating or having operated in the financial services sector of the Russian Federation economy. In addition, 20 VTB Bank subsidiaries were designated pursuant to E.O. 14024 for being owned or controlled by, directly or indirectly, VTB Bank.
Blocking Other Major Financial Institutions:
- Blocking sanctions on three additional major Russian financial institutions: Otkritie, Novikom, and Sovcom.
- These designations further restrict the Russian financial services sector and greatly diminish the ability of other critical Russian economic sectors from accessing global markets, attracting investment, and utilizing the U.S. dollar.
- 12 Otkritie subsidiaries were designated today pursuant to E.O. 14024 for being owned or controlled by, or for having acted or purported to act for or on behalf of, directly or indirectly, Otkritie.
- 22 Sovcombank subsidiaries were designated today pursuant to E.O. 14024 for being owned or controlled by, or for having acted or purported to act for or on behalf of, directly or indirectly, Sovcombank.
- Novikombank’s parent company, Rostec, remains subject to certain debt-related restrictions pursuant to Directive 3 under E.O. 13662.
Debt and Prohibitions against Major State-Owned and Private Entities
- Prohibit transactions and dealings by U.S. persons or within the United States in new debt of longer than 14 days maturity and new equity of Russian state-owned enterprises, entities that operate in the financial services sector of the Russian Federation economy, and other entities determined to be subject to the prohibitions in this directive.