First Tranche of Sanctions on Russia in Relation to Ukraine
Legal Development 22 February 2022 22 February 2022
Russia’s decision on 21 February 2022 to recognise the Donetsk and Luhansk regions of eastern Ukraine (the Covered Regions) as independent states, has prompted the US, UK, and, potentially, the EU to respond with the imposition of a first tranche of financial and trade sanctions. In this post, we consider the measures that have been imposed.
The US has imposed sanctions concerning the Covered Regions through an Executive Order issued on 21 February (the “EO”). The EO expands the scope of the national emergency declared by the US in prior Ukraine-related Executive Orders by effectively banning trade between the US and the Covered Regions, similar to US sanctions applicable to Crimea since 2014. The EO prohibit:
- The direct or indirect importation into the US of goods, services or technology from the Covered Regions;
- The direct or indirect exportation from the US or by a US Person (including US citizens and companies) of goods services or technology to the Covered Regions;
- US Persons from making any new investment in the Covered Regions; and
- Approval, financing, facilitation or guarantee by a US Person of a transaction by a non-US Person, where the transaction would be prohibited if performed by a US Person with respect to the Covered Regions.
A number of General Licences have been issued that permit certain transactions regarding the Covered Regions that are otherwise prohibited under the Executive Order.
The Executive Order also authorizes OFAC to designate as SDNs persons which operate in the Covered Region or who provide ‘material support’ to SDNs designated under the Executive Order.
On 22 February 2022, the UK enacted a “first barrage” of sanctions and threatened the imposition of further sanctions should the situation escalated further. In this “first barrage”, the following Russian banks and individuals were designated as asset freeze targets:
- Bank Rossiya
- Black Sea Bank for Development And Reconstruction
- Joint Stock Company Genbank
- IS Bank
- PJSC Promsvyazbank
- Gennadiy Nikolayevich Timchenko
- Boris Romanovich Rotenberg
- Igor Arkadyevich Rotenberg
What this means is that it is prohibited for persons subject to UK sanctions laws and regulations to make ‘funds’ or ‘economic resources’ available to these designated persons, and also to entities owned or controlled by these designated persons.
As the three newly designated individuals are already designated as SDNs, we anticipate that the additional practical impact of this further designation is likely to be limited.
In a statement by the Presidents of the European Commission and the European Council on 22 February, it was announced that a first package of sanctions would be tabled to the appropriate European bodies.
This package is understood to contain proposals to target:
- Those persons who were alleged to be involved in the decision to recognise and send Russian troops Donetsk and Luhansk, which is alleged to be in violation of international law;
- Banks that are financing Russian military and other operations in Donetsk and Luhansk;
- The ability of the Russian state and government to access the EU's capital and financial markets and services; and
- Trade from Donetsk and Luhansk to and from the EU.
These measures are expected to be considered, and potentially enacted at a European level over the coming weeks.
Steps have also been taken by EU Member States at a national level. Notably, Germany’s Chancellor, Olaf Scholz, announced earlier today that the German government would not provide the requisite regulatory approvals for the Nord Stream 2 pipeline.
1. Appetite for Further Potentially Stricter Measures
This first package of sanctions implements some of the measures contained in the menu of sanctions that have been previously mooted in response to Russia’s actions in or in relation to Ukraine. Additional measures on this menu may subsequently be imposed as the current situation persists or escalates.
Statements made by US and UK legislative representatives in response to the first package indicates that there is broad support for the imposition of further, and potentially stricter, measures in order to encourage a withdrawal from regions of Ukraine occupied by Russia and/or seek to halt further escalation of the situation.
Such measures include:
- Designation of a broader range of prominent Russian individuals and companies.
- Extensions of US exportation/re-exportation controls and the ‘Foreign Direct Product Rule’ to major sectors of the Russian economy; and
- Banning Russian trade carried out in US dollars and sterling.
In a previous post, we outline what companies can do to prepare for the impact of additional US, UK, and EU sanctions on Russia.
2. Compliance Challenges Resulting from Implementation
Whilst the US, UK and EU seem to be aligned at a policy level, the manner in which this first package of sanctions has been implemented could give rise to compliance challenges and pitfalls.
In particular, differences in timings for when new sanctions measures come into force is likely to result in compliance challenges for multi-national organisations operating across these jurisdictions.
These new sanctions measures have also been enacted pursuant to powers which differ in scope. Though state actors and international organisations may seek to act in coordination, they may ultimately enact and implement sanctions frameworks with subtle differences.
We continue to monitor the situation in Ukraine closely and will continue to update you as there are further developments.