US, UK, and EU Announce Potential Sanctions Responses to a Ukraine Incursion

Sanctions measures have been proposed in several jurisdictions as a potential response to any prospective Russian military incursion into Ukraine. A sanctions response of the sort currently proposed would have significant implications for companies doing business in Russia or with Russian companies. This post discusses the current proposed Ukraine-related sanctions measures in the United States, the United Kingdom, and the European Union.

United States

On 12 January 2022, US Senator Bob Menendez (Chairman of the Senate Foreign Relations Committee) and other US Senators introduced the Defending Ukraine Sovereignty Act of 2022 (the “US Legislation”). The US Legislation authorizes (and in some cases requires) specified sanctions if the US President determines that the Russian government: (i) “is engaged in or knowingly supporting a significant escalation in hostilities or hostile action in or against Ukraine, compared to the level of hostilities or hostile action in or against Ukraine prior to 1 December 2021”; and (ii) “if so, whether such escalation has the aim or effect of undermining, overthrowing, or dismantling the Government of Ukraine, occupying the territory of Ukraine, or interfering with the sovereignty or territorial integrity of Ukraine.” The sanctions provisions of the US Legislation are outlined below.

• Mandatory sanctions on certain Russian officials. This provision includes proposed sanctions on Russian officials, including the President, Prime Minister, Foreign Minister, Minister of Defense, Chief of the General Staff of the Armed Forces, and commanders of various branches of the armed forces.
• Mandatory sanctions on certain Russian financial institutions. This provision includes proposed sanctions on certain Russian financial institutions, including Sberbank, VTB, Gazprombank, VEB.RF, the Russian Direct Investment Fund, Credit Bank of Moscow, Alfa Bank, Rosselkhozbank, FC Bank Otkritie, Promsvyazbank, Sovcombank, and Transkapitalbank.
• Potential sanctions related to SWIFT transfers to or from certain Russian financial institutions. This provision includes proposed sanctions on providers of specialized financial messaging services (including SWIFT), that continue to provide such services for any Russian financial institution sanctioned pursuant to the US Legislation.
• Mandatory sanctions on certain Russian sovereign debt. This provision includes proposed sanctions on non-US persons that engage in transactions involving certain debt “of not less than 10 entities owned or controlled by the Government of the Russian Federation.”
• Mandatory sanctions related to the Nord Stream 2 pipeline. This provision includes proposed sanctions on non-US entities that are involved with the Nord Stream 2 pipeline, and on non-US corporate officers of such entities.
• Mandatory sectoral sanctions related to certain Russian industries. This provision includes proposed sanctions on the following sectors of the Russian economy: (i) oil and gas extraction and production; (ii) coal extraction, mining, and production; (iii) minerals extraction and processing; and (iv) any other sector or industry of the Russian economy in which the President “determines the imposition of sanctions is in the United States national security interest.”

The potential sanctions include the blocking of the non-US person’s property and interests in property “if such property and interests in property are in the United States, come within the United States, or are or come within the possession or control of a United States person.” The potential sanctions also include certain US visa restrictions.

A senior administration official also suggested that the US government is considering implementing restrictions that could impact the ability to export US products, and certain foreign-made products subject to US jurisdiction, to Russia.

Notably, White House National Security Council officials Peter Harrell and Tarun Chhabra reportedly told executives from the Semiconductor Industry Association that an invasion of Ukraine by Russia would trigger “unprecedented actions,” including  potentially “broadening export restrictions to Russia to be like those for Iran and North Korea,” i.e., imposing an embargo, and using the so-called Foreign Direct Product Rule to target Russian persons or entities, among other measures.  Whereas US export controls are typically triggered by the presence of a de minimis physical quantity of US-origin content by value in a controlled item, the Foreign Direct Product Rule, 15 C.F.R. § 736.2(b)(3), extends to a far broader range of items based upon the US-origin of the technology used to produce the item.  Since items with no US-origin content may be caught by the Rule, a number of non-US manufacturers could face restrictions on exports to Russia.

In practice, applying the Foreign Direct Product Rule to target Russian persons and entities could significantly impede such persons’ ability to access a wide range of products ranging from consumer electronics to telecommunications equipment and computers, given the widespread use of US-origin technology in the manufacturing process. The Foreign Direct Product Rule brings any item that is the “direct product” of certain controlled technology or software, or is the “direct product” of a manufacturing plant that is itself the “direct product” of certain controlled technology, within the scope of US export restrictions, even if the item itself is manufactured outside of the United States and contains no US-origin content. The Rule is currently applied to a limited number of countries based upon national security concerns.

United Kingdom

The UK has made various statements indicating that a package of new sanctions could be imposed on Russia in relation to the current situation in Ukraine. It appears clear that the intention is for coordinated action between the UK, US and EU (among others). The UK Foreign Secretary, Liz Truss, stated in the House of Commons on 6 January 2022 that “Russian military aggression will be met with strength including massive economic consequences through coordinated economic sanctions by allies and partners targeting Russian financial transactions and individuals but I can’t speculate on future sanctions.” Similarly, the UK Defence Secretary, Ben Wallace, made a statement to the House of Commons on 17 January in which he stated that “there is a package of international sanctions ready to go.”

It is not clear precisely what measures will form part of this “package” (although one specific element is referred to below). Given the various references to alignment with other jurisdictions, it is reasonable to assume that any new sanctions imposed may include some or all of the following categories of measures (which are reportedly under consideration from a US and/or EU perspective):

• an extension of the existing asset freeze measures to new targets, potentially including certain Russian banks and/or companies in targeted sectors of the Russian economy;
• restrictions on dealing in Russian sovereign debt;
• an extension of the existing sectoral (capital markets) sanctions on more Russian state-owned or state-controlled entities; and/or
• potentially restricting the provision of specified goods and services to targeted sectors of the Russian economy (building on existing restrictions which relate to the provision of specified goods and services to certain oil projects).

On 31 January, Ms. Truss announced an expansion of its existing sanctions legislation (the Russia (Sanctions) (EU Exit) Regulations 2019 (the “UK Regulations”)). The draft legislation has yet to be published but it appears that amendments proposed to the UK Regulations would expand the criteria under which individuals and entities may be designated as subject to the UK’s existing asset freeze. On the same day, Ms. Truss made a statement to the House of Commons in which she stated that the UK was “preparing an unprecedented package of co-ordinated sanctions with our partners, which would impose severe cost,” suggesting that, as mentioned above, the UK’s response to developments in the geopolitical situation would likely involve the imposition of a range of measures (not just these particular amendments to the UK Regulations). Ms Truss's original statement noted that the new measures were intended to come into force by 10 February. However, this appears to have been delayed. James Cleverly (Minister for Europe) noted in Parliament on 10 February that he had signed the relevant legislation but this had not been published at the time of writing, with press reports noting that the new measures may not come into force while Parliament is in recess.

The specific amendments referred to on 31 January would allow asset freezing restrictions to be applied to “any company that is linked to the Russian state, engages in business of economic significant to the Russian state, or operates in a sector of strategic significance to the Russian state,” together with individuals who own or control such companies. Those listed individuals and entities (known as “designated persons”) would therefore be subject to the existing asset freeze contained in the UK Regulations. This prohibits (i) dealing with assets owned or controlled (directly or indirectly) by the designated person; and (ii) making funds or other assets available to or for the benefit of the designated person, essentially prohibiting all dealings with those individuals or entities (unless licensed under what are currently relatively limited grounds). Individuals who are designated persons are also subject to a UK visa ban.

These changes only relate to an expansion of the available designation grounds – i.e. no additional Russian individuals or entities have been added to the UK’s current list of designated persons at this stage. However, the expanded grounds would give the UK the ability to impose asset freezing sanctions on new targets at short notice, should this be deemed necessary in light of the situation in Ukraine. The impact of those additional designations would, of course, depend on precisely which individuals and entities were listed – something which is not apparent from the currently available information.

UK companies with a connection to Russia will therefore, no doubt, be watching any further developments closely, both in order to understand the scope of the new designations and, more generally, whether any broader sanctions are to be imposed. Key considerations in relation to new measures such as additional sectoral sanctions will include the extent to which they contain provisions exempting, or allowing for the wind-down of, existing contracts, and whether they may contain any exemptions for UK subsidiaries of sanctioned Russian entities (as is currently the case in the existing Russia capital markets restrictions).

European Union

The EU has made various statements indicating its willingness to impose additional sanctions on Russia although, as is the case with the UK, it has not yet announced what form those sanctions may take. In the conclusions of the December 16 European Council meeting, the Council stated that “any further military aggression against Ukraine will have massive consequences and severe cost in response, including restrictive measures coordinated with partners.” Josep Borrell (High Representative of the EU for Foreign Affairs and Security Policy) has made various statements indicating the UK’s willingness to impose sanctions, reiterating the above comment on 14 January and stating on 24 January that “we continue building up a strong package of sanctions . . . the process is underway.”

Given that the EU has also strongly emphasised its desire for a coordinated approach, we anticipate that any additional EU sanctions would be likely to include measures similar to those outlined in the UK section of this briefing above. A number of press reports have focused on the possibility that EU sanctions will include an exclusion of Russian banks from the SWIFT network (an approach that has been used in the EU’s Iran and North Korea sanctions regimes in the past). However, Mr. Borrell did not respond directly to a question on whether these measures were still under consideration on 24 January, noting that the EU was not going to announce any “concrete measures.” Given the significant impact of such a step, it may be that this would only be used as a measure of last resort by the EU.

We will continue to monitor developments in this area, and encourage you to subscribe to be kept informed of latest developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.