The US, EU and UK implement the 'first phase' of New Sanctions in response to Russia’s recognition of the independence of the Donetsk and Luhansk regions

As the Russian military presence continues to build up along the Ukrainian border and against the backdrop of the Russian Parliament authorising the deployment of troops into the Donetsk and Luhansk regions following Russia’s recognition of the independence the two regions, the United States, the European Union and the United Kingdom have implemented carefully coordinated packages of sanctions and reiterated their commitment to imposing further phased sanctions against Russia.

The specific scope and focus of the initial phase of new sanctions measures, as expected, is focused on Russian state actors and entities of economic and strategic significance to the Russian state (including the chemical, defence, extractives, ICT and financial services sectors). This represents a significant escalation of existing Russian-related sanctions regimes implemented since 2014.

There is general consensus and a high degree of coordination between Western allies on the response to the recent escalation between Russia and Ukraine. Should the situation continue to escalate, sanctions measures are expected to become more significant and impactful on the Russian economy.

Current situation

• The US has announced an immediate and near complete economic embargo of the Donetsk and Luhansk regions, including a prohibition on trade, investment or financing with or in the Donetsk and Luhansk regions. Limited licenses have been issued that authorize a short period for the wind-down of operations and certain limited activities.
• The UK Government has stated that President Putin’s actions amount to a “renewed invasion” of East Ukraine, and “establishing the pretext for a full-scale offensive”. Measures imposed on 22 February 2022 are limited to asset-freezing measures targeting:

• Five Russian banks:

• Bank Rossiya
• IS Bank
• GenBank JSC
• Promsvyazbank PJSC (services 70% of state contracts signed by Russian MOD)
• Black Sea Bank for Development and Reconstruction

• Three high-net-worth Russian individuals (each of which were already SDNs)

• Gennadiy Timchenko
• Boris Rotenberg
• Igor Rotenberg

• Full list is here.
• Regulations implementing the additional UK measures will be released later today (23 February 2022), including confirmation of when these measures will be implemented/become live.
• The UK Prime Minister has indicated that this is the first tranche of sanctions, with more to follow as the situation escalates still further. In particular, (and in line with the EU’s response, see below) the UK is expected to finalise a further sanctions package to impose on Russia in the coming days. It is expected that this will include additional Russian individuals connected to President Putin being added to the existing list of asset freezing targets, together with members of the Russian Duma and Federation Council who voted to recognize the independence of Donetsk and Luhansk.
• In a coordinated approach with the US and EU, the next phase of UK sanctions will target Russian energy and defense companies, state owned enterprises and wider businesses linked to President Putin. In particular,

• The UK is expected to widen the scope of export controls on Russia with additional restrictions being imposed on trade in sensitive advanced technology such as semiconductors, aerospace, defense and cyber surveillance technologies, as well as quantum computing.
• In line with the EU response, the UK will restrict Russia’s ability to issue sovereign debt and raise funds on its capital markets.
• The UK will impose additional scrutiny on Russian investment in/ownership of UK property.

• Following the UK’s designations, the US took two additional steps to implement further sanctions:

• The US designated 50 persons, entities, and vessels to the SDN List, including critically Vnesheconombank (VEB), the State Corporation Bank for Development and Foreign Economic Affairs, and other financial institutions; and
• The US updated Directive 1a under Executive Order 14024 targeting Russia’s sovereign debt. Under the prior Directive 1, prohibitions existed as of 14 June 2021 on US financial institutions’ participation in the primary market for ruble and non-ruble denominated bonds and on lending 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. The updated Directive 1a now also prohibits participation by US financial institutions in the secondary market for ruble or non-ruble denominated bonds issued after 1 March 2022.
• The US Treasury Department also issued two related wind-down licenses.

• The full list of US designations is available here.
• More information on the US sanctions can be found in this article.
• EU foreign ministers unanimously agreed on Tuesday (22 February 2022) on an initial package of sanctions against Russia. The EU measures:

• Target those involved in the decision to recognise the Donetsk and Luhansk regions, including all 351 members of the lower house of the Russian parliament who voted in favour of the recognition.
• Place asset freezes and travel ban on 27 individuals and entities “who are playing a role in undermining or threatening Ukrainian territorial integrity, sovereignty and independence”, including military, economic operators, disinformation exponents.
• Impose restrictions on trading in Europe of Russian state bonds and more generally target the ability of the Russian state and government to access the EU’s capital and financial markets and services.

• The EU measures will be finalised and signed off by EU ambassadors in a written (fast-track) procedure today (23 February 2022) as the first phase of a package that could have up to four escalatory stages and may come into effect in the coming days.
• Taking steps to limit or ban Russia’s access to the Belgium-based SWIFT global interbank payments system used for Russian money flows is not part of this first package.

Anticipated ratcheting-up of Sanctions

The immediate US, UK and EU response is likely to be ratcheted-up with further sanctions expected to include the following measures:

• Blocking sanctions (i.e. asset-freezing measures) against wider Russian entities and individuals operating in strategic sectors of the Russian economy, including the extractive and financial services sectors.
• Wider targeting of those alleged by the US, EU and UK of being involved in actions perceived to undermine the territorial integrity of Ukraine.
• Further prohibitions on Russian access to the US, EU and UK financial markets;
• New and more robust sanctions targeting the Nord Stream 2 pipeline (Germany has announced that it is withholding certification of the pipeline which is necessary for the pipeline to become operational); and
• Additional restrictions on the import or export of certain technology and goods to or from Russia.

Blocking Sanctions against Major Russian Banks, Individuals and Other Entities

If the current situation continues to escalate, the expectation is that – at minimum – the list of Russian asset-freezing targets will be expanded, in particular to include wider Russian state and state-owned entities. Effectively, this means placing further entities or individuals on the OFAC Specially Designated Nationals List and Blocked Persons (SDN List), the EU Consolidated Financial Sanctions List and/or HM Treasury’s Consolidated List of Financial Sanctions Targets.

Likely targets are understood to include banks and financial institutions. In effect, this would:

• Bar US, EU or UK companies and individuals from engaging in any transaction or dealing (i.e., transferring, paying, exporting, withdrawing, or otherwise dealing, etc.) with designated (i.e. sanctioned) Russian banks;
• Prohibit the designated banks from accessing the US, EU or UK financial systems.
• Require blocking (freezing) of any assets/funds/accounts, etc. of the designated banks that are held by US, EU or UK persons (including financial institutions).
• Restrictions on refinancing of Russian Government debt.

If imposed, blocking sanctions would be expected to target large Russian banks with majority government ownership, including Sberbank of Russia, VTB Bank PJSC, Gazprombank, and potentially others. While these banks are already subject to sectoral sanctions (more targeted in nature than blocking sanctions) that prohibit them from raising long-term debt or equity, adding these banks to asset-freezing lists would be designed with the intention of inflicting significantly more financial harm to the Russian economy as it would impose a complete ban on US, EU or UK transactions directly or indirectly involving those banks – including transactions denominated in US dollars, Euros or Sterling.

Other targets are likely to be Russian state-owned enterprises, senior Russian government and military officials, Russian oligarchs and possibly entities involved in the oil and gas or other extractive industries (US officials though indicated that sanctions imposed on Russia should not disrupt global oil and natural gas flows). As a result, US, EU and UK persons would be similarly barred from any transactions or dealings with those individuals or entities, and required to freeze any of their assets, funds, or accounts held by US, EU or UK financial institutions.

Given the economic disruption of such asset freezes, we may see any of the following mitigation efforts:

• Wind-down licenses;
• Potential “carve-outs” to the sanctions, such as carve-outs for pre-existing contracts, projects, or entities/operations outside of Russia; and/or
• Humanitarian-related licenses (potentially related to food, medicine, telecommunications, and internet services).

Financial Sanctions on the Russian Economy

The US, the EU and the UK may prohibit (or at least restrict) Russia and Russian entities from transactions denominated in US dollars (USD), Euros (EUR) or the British pound (GBP). This option would be the most severe in terms of impact because it would potentially prohibit all Russian entities from accessing the US, EU and UK banking systems; not just those subject to asset-freezing measures (as described above).

Blocking Russian companies from access to international financial markets would cause significant disruption to the Russian economy, which is one of the world's top exporters of oil, gas and metals – sectors that largely trade in US dollars.

Prior discussion of cutting off Russian access to the global financial payment system SWIFT has largely been sidelined.

Sanctions against the Nord Stream 2 pipeline

While US sanctions have targeted the construction of Nord Stream 2 pipeline, now that the pipeline has been completed President Biden has vowed to stop the pipeline from becoming operational. The 1,225-km (760-mile) pipeline connecting Russia to Germany took five years to build and cost USD 11 billion. German Chancellor Olaf Scholz announced on Tuesday (22 February 2022) that his Government would not certify its operations, effectively preventing the pipeline from becoming operational. Additional sanctions targeting the pipeline’s ability to take up operations again in the future are being considered including the designation of all entities involved in the pipeline’s construction and operation.

New Export Control Measures

Export controls on commodities, software and technology to Russia may also be imposed on US-origin items and others subject to the Export Administration Regulations (EAR). The UK and EU are also likely to consider imposing:

• export controls covering key goods and technologies in the aerospace, defense, cyber, technology and luxury goods sector;
• Additional export controls (i.e. prohibitions or licensing requirements) on trade in sensitive advanced technology such as semiconductors, aerospace, defense and cyber surveillance technologies, as well as quantum computing; and
• A prohibition on the export of EU-origin goods to Russia, similar to those imposed on Crimea.

We continue to monitor these developments and will update this alert as changes take place. If you have any questions regarding these potential new requirements and their implications, please contact any of the authors or your DLA Piper relationship attorney.