Financial sanctions and Russia

Answer

What are financial sanctions?

Sanctions are restrictive measures imposed by one country (or a group of countries) on another. The intention is to achieve specific aims set by the government, for example, to discourage and prohibit a country from contravening international law or acting in a hostile way. Sanctions can be categorised into different groups such as financial, trade and immigration, all of which are conducted by different governmental bodies.

Financial sanctions are implemented by the Office of Financial Sanctions Implementation which forms part of Her Majesty’s Treasury and was established in 2016. Financial sanctions can include a freeze on assets belonging to certain individuals or organisations, restrictions on the use or access of financial services and payment systems and limits on dealing with specific individuals or organisations.

Legislation

Following the UK’s exit from the European Union, the UK implemented the Russia (Sanctions) (EU Exit) Regulations 2019 which came into force on 31 December 2020. The intention was to ensure the sanctions in place against Russia before the current crisis continued to operate post Brexit. Since then, the regulations have been amended multiple times to broaden the scope of the sanctions on certain individuals and organisations to show solidarity against the war crimes occurring in Ukraine carried out by Russia.

One amendment made to the Regulations on 10 February 2022 was the extension of the designation criteria. Previously, only those who were “involved in destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine” could be designated or specified under the regulations as ‘involved persons’ to whom the sanctions apply to. Now, the UK government can also designate those who are “obtaining a benefit from or supporting the Government of Russia“ which includes:

• Russian government-affiliated entities;
• businesses of economic significance to the Russian government;
• businesses in a sector of strategic significance to the Russian government; and
• businesses or other persons that own or control or act as a director, trustee or anything similar to any of the aforementioned.

Consequently, the UK government has captured hundreds of Russian individuals and entities under the amended legislation since the invasion of Ukraine, including many businesses, subsidiaries and oligarchs.

What financial sanctions have been imposed on Russia?

Following Russia’s ongoing and unprovoked invasion on Ukraine, the UK (along with other western countries) has imposed various sanctions on Russia with the intention of damaging the Russian economy and punishing President Putin and others who have benefited from his position of power.

One financial sanction implemented by several countries is the freeze on assets belonging to the Russian banks, including the Russian central bank, which means they are unable to use $630 billion (£470 billion) of foreign currency reserves. As a result, the value of Russian currency (the rouble) has fallen by 22% since the start of 2022, amplifying the price of imported goods and the rate of inflation in Russia by 14%. A dramatic increase in the rate of inflation is harmful because it will increase the cost of living for the Russian people faster than the wages people are receiving, devaluing the Russian people’s ‘real income’. It will also result in less spending and high costs of borrowing. Similarly, the volatility will also hit businesses which will damage the country’s long-term growth. The asset freeze sanction also applies to designated individuals. This included former Chelsea FC owner Roman Abramovich who had his assets frozen due to his connections with Putin’s regime. In addition, any businesses beneficially owned (by 50% or more) by a designated individual or entity is also subject to the same asset freeze sanction. This had a detrimental effect on Chelsea FC because it meant the club was unable to buy or sell football players, offer new contracts, sell merchandise, or sell tickets to games, reducing its income and ability to function as a business. Moreover, Abramovich was unable to sell the club without permission from the UK government.

Another financial sanction implemented by the UK is the extension of the prohibition on directly or indirectly granting or entering any loan and credit arrangements with designated individuals or organisations. Regulation 17A prohibits UK credit and financial institutions from creating or continuing a banking relationship with a designated entity, which applies to all bank accounts held in any currency. It also prohibits UK credit and financial institutions from processing sterling payments. Sberbank, a majority state-owned banking and financial service company in Russia, is one of the entities designated under this measure.

Alongside financial sanctions, the UK has implemented additional sanctions such as a ban on all Russian flights within UK airspace and a ban on all Russian chartered private jets. Furthermore, the UK will ban the export of luxury goods to Russia and intends to put a 35% tax on some imports from Russia, including vodka, to deter British citizens from buying it to further damage the Russian economy. Several global companies including Starbucks and McDonalds have ceased trading in Russia, while others have received criticism for not following suit. For example, Marks and Spencer have said it cannot remove its businesses from Russia because its businesses “operate complex franchise deals” which make it difficult to stop business there.

What is the impact?

As a result of the hard-hitting sanctions, the damage to the Russian economy has begun to show with the Russian people having been “substantially hit”, worsened by a rise in inflation. To cushion the blow, the central bank in Russia has cut interest rates to counteract the impact of the sanctions. In retaliation, President Putin announced he will make “unfriendly” nations pay for their imports of Russian gas in Russian currency to surge the value of the rouble, on top of implementing an export ban on over 200 products until the end of the year.

However, the aftermath of the sanctions imposed are not only affecting Russia. UK MPs have cautioned that these sanctions may have a “catastrophic and long-lasting” effect on the UK. For example, sanctions on Russian oil and gas are, in part, the reason for the rise in energy bills for households and businesses in the UK. In a report by the Treasury Select Committee, they state: “There will be a cost to the UK economy of the economic sanctions imposed on Russia. It is not possible yet to quantify that cost. But we believe that, on the information currently available, it is most definitely a cost worth bearing in order to aid Ukraine in opposing Russian aggression. However, that cost, combined with the already present pressures in the UK on the cost of living, will impact the whole country, and will be felt particularly by low-income households.”

The committee continue that more must be done to support UK households with the rising energy costs, as well as to boost confidence for businesses to encourage investment and growth to support the UK economy.

Clearly sanctions are an effective method of ‘punishing’ countries such as Russia for their wrongdoing and they demonstrate the UK’s condemnation against Russia’s actions. However, the repercussions of such sanctions are not a one-way street. The total extent of the damage to the Russian economy is not yet entirely clear, while the consequences closer to home of soaring energy prices are becoming apparent. While energy prices rise, the war is not yet over, and the extent to which economic backlash will continue is not yet known. 

Saffron Stay is a trainee solicitor at Shoosmiths.