Briefing note: Potential sanctions against Russia

• Russia
• United Kingdom
• Europe
• USA

• Financial services disputes and investigations
• Fraud and financial crime
• Sanctions

01-02-2022

Executive summary

• There is potential for Russia to take military action in Ukraine. The situation is escalating rapidly and there is co-ordination across the EU, the UK, Canada and the US regarding potential widespread financial sanctions being imposed on Russia if it invades Ukraine
• any new sanctions will need to go further than the limited sectoral sanctions which have been in place since 2014 in respect of Russia’s banking, energy and defence sectors
• governments have made it very clear that, in order to be effective, the sanctions will need to be co-ordinated. However, it is possible that some authorities (ie the US) may proceed with sanctions earlier than others. If military action is taken in Ukraine by Russia, we can expect sanctions to be imposed relatively quickly, and the recommendation is that financial institutions should start contingency planning
• if Russia does take action, institutions may need to act quickly. Contingency and business continuity planning should be taking place now.

Potential sanctions

Reading across the US, EU and UK, potential sanctions that could be introduced into legislation in respect of the various sanctions regimes include:

• designation of individuals: imposing asset freezes and travel bans on individuals, including high-ranking government and military officials, as well as Russian oligarchs
• designation of Russian financial institutions: targets are most likely to be Russian state-owned banks; however, reports suggest this could be extended to private banks
• barring Russia’s access to SWIFT: by prohibiting certain Russian banks access to the global messaging system
• prohibitions in respect of Sovereign Debt: this could impact both primary and secondary markets
• energy sector restrictions and Nord Stream 2: imposing measures to prevent the Nord Steam 2 pipeline from becoming operational and, from a US perspective, this could include a review of current waivers for the project
• additional sectoral sanctions: additional key Russian sectors and industries could be targeted
• designation of entities connected to the Russian state: the UK has announced plans to broaden the sanctions to include any company 1) linked to the Russian state, (2) that engages in business of economic significance to the Russian state, or (3) operates in an industry of strategic significance to the Russian state, as well as those who own or exercise control over such companies.

Impact for financial institutions

• Financial institutions in the US, UK and the EU are engaging with relevant authorities as to the potential impact on the sector if sanctions are imposed. Despite engagement at government level, it is impossible to ascertain the exact consequences for financial institutions
• a number of financial institutions may have significant direct and indirect exposure to Russia through correspondent relationships, branches or subsidiaries, customers and counterparties. The UK, in particular, has a significant degree of Russian investment and capital
• in contrast to corporates, financial institutions are in a stronger position, with more mature and robust sanctions compliance programmes already in place. We anticipate most will be equipped to deal with the types of sanctions to be imposed (for example, traditional asset freezes as well as sectoral sanctions). However, the scale and impact of these sanctions, given how deeply Russia is integrated into the global financial system, will pose its own challenges.

Key considerations

• If not already doing so, we would encourage financial institutions to engage with industry bodies in their jurisdiction to ensure a continuous feedback loop between government and the sector
• consider exposure or links to Russia in any existing contracts, noting that long standing agreements are unlikely to contain adequate sanctions clauses
• financial institutions may have exposure to Russian oligarchs within their customer base. General consideration should be given to how these individuals may be linked to the corporates through the general principles of ownership (US regime) and ownership and control (EU/UK regimes)
• new Sovereign Debt and equity measures are harder to navigate, and restrictions may be imposed on primary trading as well as in the secondary market. 
• with the pending imposition of sanctions across multiple sanctions regimes, financial institutions should be alive to the risk of removal of assets out of Russia by targeted persons and should have in place measures to understand the red flags specific to their customers, products and jurisdiction
• regulators will expect financial institutions to be adequately prepared to respond to any new financial sanctions imposed. One key area of risk is the ability to recognise where Russia-related exposure may lie. Consideration should be given to data sources, automated screening systems, due diligence processes required to understand ownership and control structures, and the ability to switch off payments or in-train transactions without delay

Russian retaliation

The State Duma in Russia has a law which makes compliance with Western sanctions in Russia a criminal offence. As we understand it, this law is not yet in effect. However, this law could be brought into effect in Russia in retaliation if sanctions are imposed. It could therefore become a criminal offence to comply with Western sanctions in Russia. This would put employees of foreign corporates or financial institutions in Russia at risk of criminal prosecution.  There is also the Lugovoy Law which allows for arbitration involving sanctioned parties in Russia regardless of what is stated in the contract.

Next steps

Contingency planning is key and this should start as soon as possible within financial institutions. Key actions include:

• early engagement with sanctions authorities to understand the potential impact of sanctions on the business (directly or via local finance bodies)
• examining any asset flight risk. Financial institutions should look at large transaction movement in certain jurisdictions
• issue guidance for US, UK and EU persons and their potential exposure, and give general consideration to the recusal policies
• reviewing and evaluating your own and supplier/customer relationships with Russian state-owned banks
• evaluating the scope of US, UK and EU sanctions jurisdiction as applied to in-country operations
• evaluating wind-down scenarios and timelines
• strategic reviewing of force majeure, governing law and other clauses in identified relationships
• assessing risks and developing risk mitigators related to near-term payments and commercial transactions
• follow macro-economic shifts in oil, gas, coal and other commodities markets
• considering Russian counter-sanctions risks and retaliation
• developing compliance policy updates and preparation to update compliance procedures.

We would be happy to provide necessary support and assist with any queries, advice or concerns you may have.