Russia – Ukraine crisis: sanctions update

In our bulletin of 10 February 2022 we outlined the potential sanctions that may be deployed against Russia in the event of an invasion of Ukraine and the potential measures insurers might consider implementing by way of preparation. Now that Russian troops have crossed the border into Ukraine, the scope of the sanctions that have been enacted and may be enacted in the near future is becoming clearer.

Exclusion from SWIFT payment system

On 27 February 2022, the UK, the US and the EU all agreed to exclude a number of Russian banks from using the international payment system SWIFT, a secure messaging network that allows banks to make fast cross-borer payments. The potential disruption to Russia is likely to be substantial, as it is used by approximately 11,000 banking and financial institutions across more than 200 countries.

UK sanctions

On 24 February 2022, five Russian individuals and six entities were added to the UK Sanctions List, thereby making them subject to an asset freeze. These individuals are described as being members of Vladimir Putin’s ‘inner circle’ and include his ex son-in-law Kirill Shamalov. The entities added to the Sanctions List include VTB, Russia’s second-largest bank with assets totalling £154 billion and 95,000 employees, and Rostec, Russia’s biggest defence company which exports more than £10 billion of arms a year and employs two million people.

It is clear, however, that further sanctions are on the horizon, and the UK Government has set an outline what it describes as “punishing new sanctions that will devastate Russia’s economy and target Putin’s inner circle.”

These UK sanctions will include

  • Asset freezes against all Russian financial institutions.
  • Measures to prevent Russian companies from issuing transferable securities and money market instruments in the UK.
  • A prohibition on the Russian state raising sovereign debt in the UK.
  • A power to prevent designated banks from accessing Sterling and clearing payments through the UK. Banks subject to this measure will be unable to process any payments through the UK or have access to UK financial markets.
  • New restrictions to cut off wealthy Russians’ access to UK banks, including £50,000 limits on bank accounts.
  • Measures to strengthen trade restrictions against Russia, including a prohibition against the export of a range of high-end and critical technical equipment and components in sectors including electronics, telecommunications, and aerospace.
  • The extension of financial and trade measures applying to Crimea to the Donetsk and Luhansk regions of Ukraine.
  • Russia’s national airline Aeroflot will be prohibited from flying within UK airspace.

The UK Government has also announced that it will bring forward an Economic Crime (Enforcement and Transparency) Bill on 1 March 2022. The government said the measures are one part of its mission to “tackle the scourge of economic crime in the UK and will safeguard our reputation as a clean and safe place for legitimate investment.”

The US response

In response to Putin’s decision to recognise the so-called Donetsk and Luhansk People’s Republics as independent states, Washington had already imposed sanctions on two major Russian state-owned financial institutions (Vnesheconombank and Promsvyazbank) and five individuals with connection to the Kremlin.

In addition, the US listed as Specially Designated Nationals, the main company behind the Nord Stream 2 gas pipeline between Russia and Germany, Nord Stream 2 AG, and its CEO.  This action followed on from Germany’s decision to withdraw certification for the pipeline, without which it cannot go into operation.

In the immediate aftermath of Russia’s invasion, the US has announced

  • Enhanced measures against Russia’s two largest financial institutions, Sberbank and VTB Bank, which together make up more than half of the total banking system in Russia by asset value. In the case of Sberbank, all US financial institutions will be required to close any Sberbank correspondent or payable-through accounts and to reject any future transactions involving Sberbank or its subsidiaries.
  • Full blocking sanctions on VTB Bank as well as three additional major Russian financial institutions: Otkritie, Novikom, and Sovcom, meaning that assets held in US financial institutions will be instantly frozen.
  • The pre-existing restrictions on debt and equity dealings have been expanded so as to prohibit transactions and dealings in new debt of longer than 14 days maturity and new equity of Russian state-owned enterprises, entities that operate in the financial services sector of the Russian Federation economy, and other entities determined to be subject to the prohibitions in the newly issued ‘Russia-related Entities Directive’.
  • Trade restrictions with regard to military goods, as well as restrictions on the export of sensitive technology relating to the Russian defence, aviation, and maritime sectors.

The EU position

On 23 February 2022, again in response to Putin’s decision to recognise the so-called Donetsk and Luhansk People’s Republics as independent states, the EU imposed asset freezes and travel bans on all 351 members of the Russian State Duma, and on additional 27 individuals and entities said to have played a role in undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.

In addition, the EU introduced measures to restrict the ability of the Russian state and government to access the EU’s capital and financial markets and services, as well as an import ban from non-government controlled areas of the Donetsk and Luhansk, restrictions on trade and investments related to certain economic sectors, a prohibition on the supply of tourism services, and an export ban for certain goods and technologies related to the transport, telecommunications, energy and fossil fuel sectors.

On 24 February 2022, the European Council agreed on further restrictive measures to be adopted “without delay”.

European Council restrictive measures

  • The financial sector.
  • The energy and transport sectors.
  • Dual-use goods.
  • Export control and export financing.
  • Visa policy.
  • Additional listings of Russian individuals.

On 27 February 2022, the EU announced a blanket ban on any Russian flights, meaning they are unable to land in, take off from or fly over any EU nation.

Future outlook

We do not anticipate that the measures described above will be the last word when it comes to sanctions against Russia for its actions in Ukraine, and we fully expect the UK and its allies to seek to ratchet up the economic pressure further in the weeks, months and, potentially, years to come. As we noted in our previous bulletin, insurers may well consider it prudent to seek to mitigate their risk exposure now in order to get ahead of the curve.

Related item: Russia-Ukraine crisis: insurers should be prepared for enhanced sanctions