EU and UK Adopt Additional Sanctions Against Russia, with Further International Sanctions Measures Announced

EU and UK Adopt Additional Sanctions Against Russia, with Further International Sanctions Measures Announced

February 28, 2022, Covington Alert

This alert provides a further update on the rapidly evolving sanctions landscape with regard to the Ukraine crisis, further to our alerts on February 22 and February 25. On 25 February 2022, the European Union adopted an additional package of targeted and sectoral sanctions against Russia in response to its military actions in Ukraine. Those measures, which were announced earlier last week, include a range of new asset-freezing designations, financial sector restrictions, export controls, and other measures. The UK has also announced further economic sanctions against Russian individuals.

According to a joint statement issued by Canada, France, Germany, Italy, the UK, the U.S., and the European Commission on 26 February, further economic sanctions yet will be introduced in the coming days. Those measures will include the removal of selected Russian banks from the SWIFT messaging system using to facilitate global financial transactions.

Additional Asset-freezing Designations

Council Implementing Regulation (EU) 2022/332 adds 98 people to the EU asset-freezing list. The list notably includes the Russian President Vladimir Putin and the Minister of Foreign Affairs Sergey Lavrov, as well as other members of the Russian National Security Council. Sanctions will also be extended to the remaining members of the Russian State Duma, who ratified the government decision of the Treaty of Friendship, Cooperation and Mutual Assistance between the Russian Federation and the two Ukrainian non-government controlled regions of the Donetsk and Luhansk oblasts. The Regulation also targets individuals who facilitated the Russian military action from Belarus. 

New EU Sectoral Sanctions

The most far-reaching measures are introduced in Council Regulation (EU) 2022/328 (the “Regulation”). The Regulation amends Regulation (EU) 833/2014, first issued in August 2014, which set out the EU’s existing Russia sectoral sanctions regime, and introduces new measures targeting various sectors of the Russian economy.

As with regard to the original version of Regulation 833/2014, the restrictions summarized below extend to the worldwide conduct of EU persons and entities, conduct aboard EU-flagged vessels and aircraft, and to non-EU parties with regard to business occurring in whole or in part within the EU.

The Regulation introduces the following new export and related services restrictions:

• Restrictions on exports of dual-use goods and technology: The Regulation replaces the pre-existing prohibition on exports of dual-use goods and technology under Council Regulation 833/2014. The pre-existing prohibition was limited to the export of dual-use goods and technology that were intended for military use or for a military end-user; the amended Regulation expands that prohibition to restrict the export of dual-use goods and technology and the provision of related services to persons in Russia regardless of the intended end-use or end user.
  
  While exports of dual-use items always required licensing for Russia pursuant to the EU Dual Use Regulation, these new restrictions expand on those measures in important ways. In particular, as the jurisdictional scope of the Regulation extends to the conduct abroad of EU persons and entities, dual-use export controls on Russia are no longer limited to exports from the EU – the Regulation’s dual-use controls could apply with regard to actions by EU persons and entities in connection with the sale, supply, or transfer of dual-use items to Russia from anywhere in the world.
  
  The Regulation provides for various grounds upon which EU Member States may grant an export license for dual-use products or related services. Most significantly it introduces a grandparenting provision which allows Member States to authorize the transaction or activity in question with regard to contracts concluded before 26 February 2022, or ancillary contracts necessary for the execution of such a contract, provided that the license is requested before 1 May 2022.

• Further export controls on strategic goods: The Regulation also prohibits the export of goods and technology listed in Annex VII or the provision of related services. Annex VII provides a list of goods and technologies that the EU deems to contribute to Russia’s military and technological enhancement, or the development of its defense and security sector. This list includes a broad range of products such as certain:
  • semiconductors and other electronics
  • mass market encryption hardware and software
  • sensors and lasers
  • navigation and avionics equipment
  • various types of vessels and associated equipment
  • ground vehicle engines, and various other propulsion equipment
  • aerospace-related equipment

  The new Annex VI restrictions are subject to a grandparenting clause similar in scope as the dual-use grandparenting provision noted above (i.e., allowing for licensing for activities pursuant to pre-existing contractual obligations).

• Restrictions on exports of goods for use in oil refining: The Regulation expands pre-existing restrictions targeting Russia’s energy sector. The Regulation prohibits the sale, supply, transfer or export to Russia of specific goods and technologies suited for use in oil refining, and introduces restrictions on the provision of related services. Contracts concluded before 26 February 2022 can be executed until 27 May 2022.

• Export restrictions targeting the aviation and aerospace industry: The Regulation introduces an export ban covering aircraft, spacecraft, and parts thereof, as well as a prohibition on the provision of insurance and reinsurance and maintenance services related to those goods and technology. The Regulation also prohibits the provision of related technical and financial assistance. EU Persons may continue to execute contracts concluded before 26 February 2022 until 28 March 2022.

Some of the foregoing restrictions are subject to tailored exemptions and provisions allowing EU parties to seek case-by-case licensing in specific circumstances (in addition to the grandparenting provisions noted above).

The Regulation also includes a number of important new financial sector sanctions, including the following:

• Restriction on providing public financing: The Regulation prohibits EU Member States from providing public financing or financial assistance above EUR 10 million for trade with, or investment in, Russia, unless the financing commitment was established prior to 26 February 2022 (subject to certain limited exemptions).
• Debt and equity related sanctions: The Regulation replaces pre-existing debt/equity sanctions provision in Council Regulation 833/2014, which imposed restrictions on dealings in transferable securities or money market instruments, or the issuance of loans and credits, to certain Russian banks and energy sector companies. The Regulation has expanded these restrictions to target 70 percent of the Russian banking market as well as key state-owned companies. The Regulation prohibits EU persons from dealing in the following financial products:
  • Transferable securities or money-market instruments with a maturity exceeding 90 days, issued between 1 August 2014 and 12 September 2014, or with a maturity exceeding 30 days, issued between 12 September 2014 to 12 April 2022, or any transferable securities and money market instruments issued after 12 April 2022 by Russian credit institution listed in Annex III of the Regulation. The Regulation does not, however, add any new names to Annex III (the version of Annex III from 2014 included a number of prominent Russian banks, who continue to be subject to the foregoing sanctions measures).
  • Transferable securities and money-market instruments issued after 12 April 2022 by Russian banks listed in Annex XII: that list currently includes newly-designated Alfa Bank; Bank Otkritie; Bank Rossiya; and Promsvyazbank. (The latter two banks are also now subject to EU asset-freezing sanctions, pursuant to separate measures implemented last week.)
  • Transferable securities and money-market instruments with a maturity exceeding 30 days, issued between 12 September 2014 and 12 April 2022 or any transferable securities and money market instruments issued after 12 April 2022 by Russian companies from the defence and energy sector listed in Annex V and Annex VI. A number of major Russian defense and energy sector companies were included in Annexes V and VI in 2014 – those entities remain designated, and the Regulation did not add any new names to Annexes V or VI.
  • Transferable securities and money market instruments issued after 12 April 2022 by Russian companies, designated in Annex XIII, that are publicly-owned by the Russian state. The Annex XIII list notably includes major technology and transportation companies such as the Russian Technology State Corporation (Rostec) and Russian Railways, as well as United Shipbuilding Corporation.

  EU persons are also prohibited from directly or indirectly making or being part of any arrangement to make new loans or credit available to any of the parties listed from 25 February 2022 onwards (subject to certain limited exemptions). Notably, in contrast to earlier loan/credit restrictions in the EU sanctions, the Regulation removes the carve-out for loans and credits with a maturity of 30 days or less, with regard to loans or credits made available after 26 February 2022.
  
  As with regard to pre-existing EU debt and equity sanctions, these restrictions extend not only to the listed entities but also their majority-owned subsidiaries (excluding EU subsidiaries) and anyone otherwise acting on behalf or at the direction of listed parties.  These restrictions are also subject to limited carve-outs set forth in the Regulation (again, consistent with the 2014 version of these measures).

• Public listing restrictions: As of 12 April 2022 it will also be prohibited to list and provide services in relation to shares of Russian state-owned entities on EU trading venues.
• Measures to limit financial inflow into the EU: In addition, the Regulation introduces new measures which significantly limit the financial inflows from Russia to the EU, by prohibiting (subject to limited exemptions) the acceptance of deposits exceeding EUR 100,000 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 (or collective investment undertakings providing exposure to such securities). Further, the Regulation requires European credit institutions to supply to the national competent Member State authority or to the EU Commission by no later than 27 May 2022, a list of deposits exceeding 100,000 EUR held by Russian nationals or natural persons residing in Russia, or by legal persons established in Russia.

Visa Restrictions

Council Decision (EU) 2022/333 introduces a partial suspension of the application of the agreement between the EU and Russia on the facilitation of the issuance of visas to Russian and EU Member State citizens. From 28 February 2022, Russian diplomats, officials and business people will no longer benefit from visa facilitation provisions under the agreement.

Proposed Further EU Measures

On Sunday 27 February 2022, the European Commission President announced in a statement that the EU will introduce further economic sanctions and other measures in the coming days.  These measures will include:

• Banning all Russian owned, registered or controlled aircraft, including commercial planes and private jets, from EU airspace;
• Banning Russian state controlled media organisations and “developing tools” to prevent such organisations disseminating “misinformation” within the EU; and
• Introducing further economic sanctions on Belarus, including sectoral sanctions targeting the export of products from mineral fuels to tobacco, wood and timber, cement, iron and steel; extending to Belarus the export restrictions introduced on dual-use goods to Russia; and, targeting individual Belarusians “helping the Russian war effort”.

The governments of Canada, France, Germany, Italy, the UK, the U.S. and the European Commission released a joint statement on Saturday 26 February 2022 announcing their intention to introduce a number of further economic sanctions against Russia (the “Joint Statement”).

The main elements of the Joint Statement are set out below:

1. Selected Russian banks will be “removed from the SWIFT messaging system”;
2. The Russian Central Bank will be prevented from “deploying its international reserves in ways that undermine the impact” of economic sanctions introduced by these parties;
3. Measures will be taken to “limit the sale of citizenship” to “wealthy Russians connected to the Russian government” in order to prevent such individuals accessing the financial systems of the parties to the joint statement; and
4. A “transatlantic task force” will be launched to “ensure the effective implementation” of financial sanctions by identifying and freezing assets of sanctioned individuals and companies within the jurisdictions of those that have agreed the Joint Statement.

The Joint Statement also included a commitment by the parties to “step up coordination against disinformation and other forms of hybrid warfare”.

It is unclear, as of this writing, which Russian banks will be removed from the SWIFT system—in her official statement the European Commission President, said only that “a certain number” of Russian banks would be removed from SWIFT to prevent them conducting international financial transactions worldwide and “block Russian exports and imports”. The Commission President also said that the measures that will be taken against Russia’s Central Bank will prevent it from conducting transactions and liquidating assets. More details are expected in the coming days.

The Commission President also said that the measures that will be taken against Russia’s Central Bank will prevent it from using its foreign currency reserves to prop up the rouble or counter the impact of sanctions by conducting transactions or liquidating assets. 

On 25 January, the UK Government added Russia’s President Vladimir Putin and Foreign Minister Sergey Lavrov to the UK’s consolidated list of designated sanctioned individuals and entities under the UK’s Russia sanctions regime, meaning that they are now subject to an asset freeze in the UK.

On Sunday 27 February 2022, UK Foreign Secretary Liz Truss confirmed that the UK intends to add a number of “Russian oligarchs” to the UK’s list of sanctioned individuals in the coming weeks. The Foreign Secretary also indicated that the UK’s proposed Economic Crime Bill will be brought before the UK Parliament this week. Although precise details are unknown, the Bill is expected to include provisions providing for greater transparency regarding the beneficial ownership of UK companies and assets. 

It is unclear when the UK Government will pass secondary legislation to bring into effect the economic sanctions announced last week, which we described in our February 25 client alert.

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We are closely monitoring developments concerning the U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have.

Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, Brussels, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with the emerging Russia sanctions.

Our trade controls lawyers also work closely with Covington's Global Public Policy team which consists of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia. Many of the members of the Public Policy team have had substantial government experience in sanctions and export controls matters, and regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders. 

Covington is therefore exceptionally well-positioned to assist clients in navigating their most complex challenges, drawing on our trade and public policy teams as well as our additional multidisciplinary teams in areas including international arbitration and disputes, cybersecurity, anti-money laundering, corporate restructuring, finance, and insurance.

As the Ukraine crisis evolves, we will continue to monitor developments including regarding U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments.

Our teams would be happy to address any questions you may have.