EU and UK Sanctions against Russia: a focus on the Financial Sector

In recent days the EU and the UK have adopted and expanded a number of sanctions measures against Russian and Belarusian individuals and companies. This article focuses on restrictive measures directed against Russia’s financial sector from an EU (I.) and a UK (II.) perspective.

I. EU Measures

1. Comprehensive Sanctions (Asset Freezes)

While called “financial sanctions”, the comprehensive sanctions imposed by the EU on certain natural and legal persons, entities or bodies and which include (i) a freeze of all EU assets, (ii) a prohibition to make funds or economic resources available to them and (iii) – in case of natural persons – travel bans, which prevent them from entering or transiting through EU member state territories, are not sanctions against the financial sector as such.

However, the EU has also designated four credit institutions, which are subject to these comprehensive sanctions including: Russian National Commercial Bank, Bank Rossiya, Promsvyazbank, and Vnesheconombank (VEB.RF).

2. Sectoral Sanctions against Credit Institutions

The EU restricts the access to the EU’s primary and secondary capital markets for certain credit institutions.

More specifically, it is prohibited to directly or indirectly purchase, sell, provide brokering or assistance in the issuance of, or otherwise deal with transferable securities and money-market instruments with a maturity exceeding 90 days issued after 1 August 2014 or 30 days issued after 12 September 2014 by

• Sberbank
• VTB Bank
• Gazprombank
• Vnesheconombank (VEB)
• Rosselkhozbank
• or their majority held (> 50 %) subsidiaries outside the EU.

For Vnesheconombank, which is subject to comprehensive sanctions since 23 February 2022, this is now of secondary relevance.

3. Sectoral Sanctions against Russia and State Institutions

Council Regulation (EU) 2022/262 of 23 February 2022 added a new Article 5a into Regulation (EU) No 833/2014, which imposes capital market related sanctions on the following parties:

• Russia and its Government
• the Central Bank of Russia
• a legal person, entity or body acting on behalf or at the direction of the Central Bank of Russia

It is now prohibited to directly or indirectly purchase, sell, provide investment services for or assistance, in the issuance of, or otherwise deal with these parties in transferable securities and money-market instruments issued after 9 March 2022.

Moreover, after 23 February 2022, it shall be prohibited to directly or indirectly make or be part of any arrangement to make any new loans or credit to Russia and its Government, the Central Bank of Russia or a legal person, entity or body acting on behalf or at the direction of the Central Bank of Russia.

Exceptions for the financing of non-sanctioned goods and services in foreign trade, however, remain permissible.

4. Ban on Transactions related to the Management of Reserves of the Central Bank of Russia

Council Regulation (EU) 2022/334 of 28 February 2022 amended Article 5a of Council Regulation (EU) No 833/2014 which states that transactions related to the management of reserves as well as of assets of the Central Bank of Russia, including transactions with any legal person, entity or body acting on behalf of, or at the direction of, the Central Bank of Russia, are prohibited. Authorized exceptions remain permissible for transactions that are “strictly necessary” to ensure the EU’s or a Member State’s financial stability.

5. Transaction Ban on Euro Denominated Banknotes

Council Regulation (EU) 2022/345 of 1 March 2022 introduced a new Article 5i into Regulation (EU) No 833/2014 according to which it is prohibited to sell, supply, transfer or export Euro denominated banknotes to Russia or to any natural or legal person, entity or body in Russia, including the Government and the Central Bank of Russia, or for use in Russia.

Exceptions, e.g. for personal use of natural persons travelling to Russia or official purposes of diplomatic missions in Russia, remain permissible.

6. Ban on Investment Participations with Russian Direct Investment Fund

Council Regulation (EU) 2022/345 of 1 March 2022 amended Article 3e of Regulation (EU) No 833/2014 according to which it shall be prohibited to invest, participate or otherwise contribute to projects co-financed by the Russian Direct Investment Fund. Competent authorities may, however, authorize an investment participation under certain conditions provided they are due under (ancillary) contracts concluded before 2 March 2022.

7. SWIFT Exclusion: EU Measure with Global Impact

Council Regulation (EU) 2022/345 of 1 March 2022 further introduced a new Art 5h into Regulation (EU) No 833/2014 that implements the exclusion of certain Russian banks from the SWIFT system, the global payments system used by over 11,600 credit and financial institutions worldwide, sending an average of over 46 million messages per day. The following listed Russian banks and their direct or indirect (> 50 %) subsidiaries established in Russia are currently cut off of SWIFT:

• Bank Otkritie
• Novikombank
• Promsvyazbank
• Bank Rossiya
• Sovcombank
• Vnesheconombank (VEB)
• VTB BANK

For the time being, GAZPROMBANK, SBERBANK and the otherwise comprehensively sanctioned Bank Rossiya are not affected.

II. UK Measures

The UK Government has made commitments to restrict access to Russian banks and entities from the UK capital and financial markets, payment clearing systems, the SWIFT payment messaging systems, as well as commitments to take measures to restrict access to high-end and critical technical equipment and components in sectors including electronics, telecommunications, and aerospace and other strategic sectors, as well as extensions of financial and trade measures applying to the Donetsk and Luhansk regions. At the time of writing, the UK Government has designated a total of 195 individuals and 65 entities subject to total asset freezes. We set out below a summary of the key sanctions packages (enacted to date) relating to the financial sector.

To date, the UK has designated ten banks subject to total asset freezes, in addition to the four designated by the EU, this includes: IS Bank, JSC Genbank, Black Sea Bank Development and Reconstruction, VTB Bank, Bank Otkritie Financial Corporation PJSC, and SovComBank. As is the case in the EU, in some instances the majority shareholder of a bank may be listed as a designated person subject to a total asset freeze but the bank itself may not. This includes for example: Georgieva Elena Alexandrovna, Chairwoman of the Novikombank Board who was listed on 24 February 2022, and Rotenberg Boris Romanovich a major shareholder of SMP Bank and sits on its Board of Directors. Businesses should be particularly cautious in such circumstances where transacting with the bank could benefit a designated shareholder under UK rules.

Since 1 March 2022 the UK has expanded on the 2014 capital market restrictions (these are the same as the EU and were taken into national law following Brexit – see details in paragraph 2.a above) with several additional measures including:

• Expanding the prohibition on dealing in transferable securities and money market instruments issued on or after 1 March 2022 to include dealing with:
  • an entity incorporated or constituted under UK law and owned by an entity listed under Schedule 2 of the Russia Regulations as persons named in relation to financial restrictions, most recently including Sberbank (see the current full list here) (the “Schedule 2 Entities”), or an entity acting on behalf of or at the direction of such an entity, where the security/instrument has a maturity exceeding 30 days. Previously the UK subsidiaries of Schedule 2 Entities were exempt from the restriction;
  • a “person connected with Russia” or an entity owned by or acting on behalf/at the direction of such a person. “Person connected with Russia”, meaning companies incorporated or constituted under the law of Russia but excludes companies domiciled outside Russia and their branches/subsidiaries.
  • the Government of Russia (i.e. Russian sovereign debt).
• An expansion of the scope of the prohibition on issuing loans or credit to include:
  • Category 1 – 30-day maturity loan or credit, made or granted to a Schedule 2 Entity or their non-UK subsidiaries and made or granted any time post-Brexit. This would also include loans and credit made or granted to any entities acting on behalf of or at the direction of a Schedule 2 Entity or their non-UK subsidiary.
  • Category 2 - 30-day maturity loan or credit, made or granted to a UK subsidiary of a Schedule 2 Entity made or granted any time after 1 March 2022.
  • Category 3 - 30-day maturity loan or credit, made or granted to an entity connected with Russia or an entity owned by them or acting on their behalf or direction at any time after 1 March 2022 and does not fall within categories 1,2 or 4 and is not made to an entity domiciled in another country than Russia.
  • Category 4 – loans or credit of any maturity made or granted to the Government of Russia at any time on or after 1 March 2022.
• A prohibition on UK credit or financial institutions establishing or continuing a correspondent banking relationship (subject to certain exemptions and licences) with: (i) a designated person, in this case including a Schedule 2 Entity; (ii) a UK credit or financial institution owned by a designated person; or (iii) a non-UK credit or financial institution owned by a designated person. UK credit or financial institutions are also prohibited from processing sterling payments to, from or via a designated person or a credit or financial institution owned or controlled by them.
• A prohibition on any UK individual or entity from providing financial services for the purpose of foreign exchange reserve and asset management to:
  • the Central Bank of the Russian Federation
  • the National Wealth Fund of the Russian Federation
  • the Ministry of Finance of the Russian Federation
  • a person owned or controlled directly or indirectly by any of the persons above; or
  • a person acting on behalf of or at the direction of any of the persons above.

General Licences

The Office of Financial Sanctions Implementation in the UK (“OFSI”) the UK regulator in charge of implementing and enforcing sanctions rules is currently publishing general licences to allow for certain wind-down and certain other limited activities for a short period of time despite the designated status of various banks and credit institutions. So far seven have been issued:

• VTB wind-down. Allows the wind-down of transactions involving VTB Bank (including its UK subsidiary VTB Capital plc, and VTB Capital plc’s UK subsidiaries). Under the licence, it is permissible to close out any position and for UK financial institutions and VTB to carry out any activity reasonably necessary to effect such wind-down activities. However, the licence does not permit funds or economic resources to be provided to a designated person in breach sanctions. Expires on 27 March 2022 (INT/2022/1272278).
• VTB - Basic needs. Allows VTB Capital and its UK subsidiaries to make payments, including for its basic needs, reasonable fees or service charges arising from routine holding and maintenance of its frozen funds and economic resources, and reasonable professional fees for the provision of legal services (INT/2022/1280876).
• VTB - UK financial stability. Allows relevant financial authorities to do anything with regard to VTB Capital and its UK subsidiaries related to prudential supervision, or protecting, maintaining, or enhancing the financial stability of the UK (INT/2022/1280976).
• Sberbank wind-down. Allows the wind-down of transactions involving Sberbank (including its subsidiaries) for the purpose of winding down that activity. Under the licence it is permissible to carry out any activity reasonably necessary to effect this. However, the licence does not permit funds or economic resources to be provided to a designated person in breach sanctions. Expires on 3 April 2022 (INT/2022/ 1298776).
• Sberbank - Correspondent Banking Relationships & Processing Sterling Payments. Allows UK credit/financial institutions to have correspondent banking relationships and the process of sterling payments with Sberbank (and connected entities) (INT/2022/1277778).
• A 7-day wind down period in respect of sovereign debt, loans and money market instruments measures expiring on 8 March 2022 (INT/2022/1277777).
• A 30-day wind down period in respect of the clearing and correspondent banking prohibitions (INT/2022/1277778).
• A wind down period until 24 June in respect of the clearing and correspondent banking prohibition where the payments relate to Relevant Energy Products (INT/2022/1277877).

OFSI has the ability to grant individual licenses permitting otherwise prohibited activity where certain conditions are met. Licensing grounds for these purposes include: basic needs, fees for legal services, routine maintenance of frozen funds and economic resources, extraordinary expenses, compliance with ore-existing judicial decisions, humanitarian assistance, diplomatic missions, extraordinary situations, and prior obligations.

Further developments

Over the coming days and weeks, it is likely that further measures will be taken by both the EU and UK with further credit institutions and associated natural persons becoming subject to comprehensive sanctions and further institutions being excluded from SWIFT.