Sanctions Update: UK, US and EU set to impose first round of new sanctions on Russia in response to escalation of Ukrainian crisis, while Germany blocks Nord Stream 2 certification

Since March 2014, the UK, US and EU has progressively imposed restrictive measures against Russia in response to the illegal annexation of Crimea and its actions in destabilising the Luhansk and Donetsk regions of Ukraine.

Although it is widely known that Russian-backed rebels have been present in these regions since 2014, the scale of forces now present on the borders of Ukraine, in addition to the Russian President Vladimir Putin's declaration on Monday, 21 February 2022 recognising the two breakaway regions of Ukraine as independent and ordering the Russian military to deploy troops in the two regions to "keep the peace", have led to international condemnation and the first salvo of wider economic sanctions being imposed on Russian entities and individuals.

On 10 February 2022, the UK published additional legislation enabling the expansion of economic sanctions to cover a wider set of activities in connection with the UK's existing sanctions framework related to Russia; the Russia (Sanctions) (EU Exit) (Amendment) Regulations 2022. These regulations widen the ability of the UK to impose sanctions on individuals and entities to those "obtaining a benefit from or supporting the Government of Russia" and list a number of sectors considered to be of significance which might be the focus of new sanctions, such as financial services, transport, energy, chemicals and construction. This was followed by comments from the UK's foreign secretary, Liz Truss, who warned of “the toughest sanctions regime against Russia we have ever had”.

On 21 February 2022, the US announced the prohibition of US investment or trade in Luhansk and Donetsk and the potential for sanctions against individuals and entities operating within these territories. On the same day, the EU imposed restrictive measures on an additional 5 individuals for actively supporting actions and implementing policies that undermine or threaten the territorial integrity, sovereignty and independence of Ukraine.

The UK, US and EU have strongly indicated that these measures will likely be expanded should further territorial incursions take place. There is a significant amount of uncertainty and debate currently on how far measures should go at this stage, but here are some steps taken on Tuesday 22 February:

• The German Chancellor, Olaf Scholz, stated that the Nord Stream 2 cannot go ahead given Russia's latest actions.
  
  The 750-mile pipeline connecting Russia and Germany has already been completed but has not yet been certified by Germany's energy regulator and the Chancellor indicated that it would not be certified given that the situation has "fundamentally changed". Although this is likely to have an impact on energy prices and supplies across Europe, it will also have a material financial impact on Russian energy producers. This is one of the most significant international actions taken to date and potentially goes further than what Russia would have anticipated from a first round of additional restrictions. It remains to be seen, however, whether the project could be certified at a later stage.
  
  
• The UK's Prime Minister, Boris Johnson, announced before Parliament that the UK and its allies will begin to impose sanctions on Russia. The UK announced a limited set of specific sanctions on five Russian banks – (i) Rossiya, (ii) IS Bank, (iii) General Bank, (iv) Promsvyazbank and the (v) Black Sea Bank, and three high net-worth individuals – (i) Gennady Timchenko, (ii) Boris Rotenberg and (iii) Igor Rotenberg, freezing any UK assets and restricting UK individuals and entities from dealing with the funds or assets or making them available (directly or indirectly) to such persons unless licensed.
  
  London is a particular focus given its long-standing network of Russian companies, investments and property portfolios. Transparency International estimates that there is roughly £1.5bn of Russian money invested in London property alone, with much of it coming from investment funds held in offshore tax havens.
  
  In comparison to Germany's announcement banning the certification of Nord Stream 2, the level of sanctions imposed by the UK are considered to be relatively restrained at this stage. The strong implication from this is that diplomatic channels remain open, and this potentially leaves scope for Russia to back-down without further measures being taken, while also signalling that the UK has not yet played its full hand in terms of restrictions it might impose.
  
  
• The President of the European Commission, Ursula von der Leyen, stated that Russia's aggression against Ukraine is illegal and unacceptable and that a first package of sanctions was being tabled. In a published statement, it was suggested that the EU may be prepared to go further than expected and that its package of sanctions is likely to target (i) those who were involved in the illegal decision to enter the Luhansk and Donetsk regions of Ukraine, (ii) banks that are financing Russian military and other operations in those territories, (iii) the ability of the Russian state and government to access the EU’s capital and financial markets and services, to limit the financing of escalatory and aggressive policies and (iv) trade from the two breakaway regions to and from the EU, to ensure that those responsible clearly feel the economic consequences of their illegal and aggressive actions.
  
  EU foreign ministers subsequently agreed to sanction 27 Russian individuals and entities (although the full list has not yet been published, it is expected to be available here later on 23 February). In addition, the majority of members of the Russia's Duma, parliament's lower house, are set to be targeted by EU sanctions, which typically involve travel bans and asset freezes. The package of sanctions is likely to be finalised and signed off by EU ambassadors on 23 February.
  
  
• In a televised announcement on the evening of the 22 February, the President of the United States, Joe Biden, announced that restrictions would go beyond those implemented by the UK, EU and US in 2014.
  
  New US sanctions are being applied to VEB bank and Russia's military bank, Promsvyazbank (and 42 of their respective subsidiaries). All assets under US jurisdiction will be immediately frozen and US individuals and entities are prohibited from doing business with these institutions unless authorised. Five individuals were also targeted: Denis Bortnikov, Aleksandr Bortnikov, Petr Fradkov, Vladimir Kiriyenko and Sergei Kiriyenko and five vessels.
  
  Dealings in the secondary market with Russia's sovereign debt for bonds issued after March 1 are also set to be restricted (with the President adding that Russian government debt will not be tradeable on the markets of Europe and other key financial centres too, including London – which was confirmed by the UK's foreign secretary on 23 February).
  
  
• Australia is also set to impose sanctions and travel bans on eight members of Russia's security council, while existing sanctions are expected to be expanded.

It is important to emphasise that these are likely to be only the first steps and that other international bodies will also likely respond to Russia's actions.

• Currently, Russian backed rebel forces in Ukraine are estimated to control around a third of the Donetsk and Luhansk regions. At the time of original publication on 22 February 2022, Russia's foreign ministry had stated that Russia only recognised the breakaway regions within borders that they "currently control." However, later that day, the Russian President, Vladimir Putin, stated that Russia had recognised the expanded borders of the two Russian-controlled territories in east Ukraine, which increases the likelihood of a larger conflict in the near future.
  
  This is in addition to the Russian President asking for, and being granted, permission from Russia's Parliament to use force outside Russia, which could more easily pave the way for a broader attack on Ukraine. Such an escalation is likely to trigger further sanctions and trade restrictions on Russia.

Businesses, projects and transactions that are connected with either Russia and/or the Donetsk and Luhansk regions of Ukraine should carefully monitor these developments as they unfold.