Ukraine crisis: what will UK, EU and US sanctions mean for businesses?

The UK, EU and US have moved quickly to impose a first wave of financial and trade sanctions following Russia's recognition of the Luhansk and Donetsk breakaway regions and the deployment of Russian forces into Ukrainian territory. With a full-scale invasion now underway, this is a fast-moving situation and further sanctions will likely be imposed shortly.

These measures will have far-reaching consequences for those who do business with the newly sanctioned persons (and the businesses they own or control). UK sanctions to date have been targeted at Russian banks and oligarchs with extensive business interests – and the energy, transport and finance sectors are likely to be most affected. 

What new sanctions have been imposed?

• UK Sanctions. On 22 February 2022, the UK designated five Russian banks and three oligarchs as sanctions targets. The designated banks are IS Bank, Rossiya Bank, PJSC Promsvyazbank, JSC Genbank, and JSC Black Sea Bank Development and Reconstruction. The designated people are Gennadiy Timchenko, who is one of Russia's wealthiest billionaires who owns the Luxembourg-headquartered Volga Group, and Boris and Igor Rotenberg, who are uncle and nephew and have significant interests in infrastructure and construction. The UK foreign secretary has also announced that further sanctions will be imposed on the members of the Russia State Duma, which voted to recognise the independence of Donetsk and Luhansk. As the situation escalates, in addition to the designation of further individuals and companies, the UK is likely to seek to curtail the ability of the Russian state and companies to raise funds in UK markets, prohibit a range of high-tech exports, target its financial sector and prevent it from issuing sovereign debt on UK markets.
• EU Sanctions. On 23 February, the EU agreed its further sanctions, including: designating 351 members of the Russia State Duma who supported President Putin's actions and a further 27 individuals deemed to be playing a role in "undermining or threatening Ukrainian territorial integrity, sovereignty and independence". Trade between the Luhansk and Donetsk breakaway regions and the EU is also to be banned and the Russian government's access to EU capital and financial markets restricted.  
• US Sanctions. The US has designated  two of Russia’s largest financial institutions, VEB and Promsvyazbank (together with 42 of their subsidiaries), and five oligarchs and their relatives as sanctions targets:  Aleksandr Bortnikov and his son Denis, Sergei Kiriyenko and his son Vladimir, and Petr Fradkov, the CEO of Promsvyazbank. President Biden has also issued an executive order prohibiting US persons from doing business with the Luhansk and Donetsk breakaway regions. He has also expanded sovereign debt prohibitions restricting US individuals and firms from participation in secondary markets for new debt issued by the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation. Sanctions have also been imposed on Nord Stream 2 AG, the company in charge of building the Russian gas pipeline projects, and its CEO Matthias Warnig.

How might this affect my business? 

When we hear of sanctions, trade embargos or countrywide sanctions often come to mind, such as those that the US has in place relating to Cuba or Iran. In the modern world of sanctions, however, such "blanket" provisions are the exception rather the norm. 

While the EU and US sanctions have some "territorial" trade restrictions (in Luhansk and Donetsk), it is the targeted financial sanctions on "listed" or "designated" individuals and companies that will likely cause most headaches and concerns for most businesses. 

The reason for this is the broad effect that such sanctions have. Financial sanctions prohibit business with persons and entities that are sanctioned. Broadly, companies and individuals within the jurisdiction of a particular sanctions regime must not deal with the funds (for example, cash, cheques, credit, dividends etc.) or economic resources (assets of any kind) of a designated person, or make any funds or economic resources available to a designated person (whether directly or indirectly). Where you hold funds and economic resources of a designated person/entity, you must freeze these immediately and follow-up with the regulator or enforcement body in question (the Office of Financial Sanctions Implementation, or OFSI, in the UK). 

What is the risk of non-compliance with sanctions?

As a general rule, a breach of sanctions legislation (for example, providing funds to a designated person) or a deliberate circumvention are a criminal offence. Penalties vary but can include both fines and custodial sentences. There is also the reputational damage that follows and, amongst other matters, the risk of being in breach of sanctions warranties and obligations in other contracts.

Which sanctions will apply to my business?

UK companies and individuals must comply with UK sanctions legislation (wherever they carry out their activities) and non-UK companies that undertake activities within the UK must also comply. EU sanctions apply to all companies incorporated in a Member State (or EU nationals), including branches of EU companies in third countries and to non-EU companies doing business in the EU. US sanctions can be of very broad effect and specialist advice on the "long arm" jurisdiction of the US sanctions programme is advisable where there is any US nexus  in a transaction. It will follow from this that a business with a mix of employee nationalities and subsidiaries in different jurisdictions could find itself "caught" by a mix of sanctions regimes. "Overlapping" sanctions regimes need to be worked through carefully to manage sanctions risk.

What can I do to protect my business?

The key to sanctions compliance is a recognition that the risk exists (much as companies generally recognise "bribery and corruption" risks) and having a policy to deal with it. You must "know your client" or counterparty very well. Additionally, you should remember that financial sanctions do not stop with the "listed" or "designated" individual or entity: they will extend to entities that are owned or controlled by any designated person and entity. The implementation of an appropriate due diligence process for accepting new business and managing existing relationships, particularly when it comes to establishing the ownership and control structures of counterparties to check for sanctioned entities, is an important step. Typically this involves the use of compliance software that incorporates automated searches. Each business and sector has a different risk profile and the approach to sanctions compliance will vary accordingly. 

Osborne Clarke comment

With the situation in Ukraine unfolding rapidly and further sanctions threatened, we will update on further developments.