Russia/Ukraine conflict: what might the UK’s “unprecedented package of sanctions” look like?
With approximately 120,000 Russian troops currently massing on the Ukrainian border, the UK Government has been preparing to respond to a Russian invasion of Ukraine. The thinking within the UK Government is that the threat of such measures may have a deterrent effect in respect of Russia’s approach to Ukraine and, failing that, any further action Russia might consider in respect of other countries formerly within its sphere of influence.
At the same time, however, there appears to be little appetite for direct military engagement. Military equipment, training and logistical support is being provided but the focus of any reaction from the US, EU and UK is likely to be on financial sanctions against Russia.
In recent days, there have been reports that the US and EU are converging on the details of what any sanctions regime may look like. Likely measures include targeted sanctions on financial institutions, exclusion from the SWIFT payments system for global transactions, curbs on the Russian energy sector and export controls in respect of sensitive technologies.
This note specifically sets out some of the potential options that the UK Government may seek to utilise in the coming days and weeks. This is not new territory; sanctions have been in place since 2014 when Russia previously invaded Ukraine and captured Crimea and have subsequently been strengthened following the Salisbury poisonings in 2018.
Since the UK left the EU, the UK has the ability to implement its own sanctions without agreement with EU member states. In practice, sanctions are most likely to be effective when co-ordinated with allies, but the UK Government will argue that it is able to “lead by example” and that EU nations more hesitant about firm action against Russia will, in due course, agree to EU sanctions along the lines of those implemented by the UK.
In contrast to the situation in 2018, there is likely to be good cross-party support in taking strong action against Russia. Primary legislation is unlikely to be necessary, but there is likely to be little parliamentary opposition to strong measures.
All of this suggests that the UK Government will take a maximalist approach to financial sanctions on Russian individuals, both in terms of the severity of sanctions and the number of individuals, companies and sectors which may be affected.
As this note sets out, the powers available to the UK Government are considerable. We also identify one potential constraint to an effective sanctions regime – namely enforcement.
At a time of great uncertainty, the purpose of this note is to provide some clarity as to the options available to Ministers in the event that present tensions are not successfully defused.
Author: Rt Hon David Gauke, Head of Public Policy
Existing state-focused sanctions
Any further measures would be the latest escalation in increasing waves of financial sanctions issued by the UK against Russia. Beginning in 2014, when the UK joined its EU allies in imposing sanctions following Russia’s annexation of Crimea, three phases of further sanctions followed which were then held in place to pressure the Russian Government into implementing the bilateral “Minsk protocol” regarding the conflict in the Donbas region of Ukraine. As the relationship between the UK and Russia further deteriorated following the poisoning of Sergei and Yulia Skripal in Salisbury, Russian persons and entities would be added to the UK’s consolidated list of financial sanctions targets in 2018, 2020 and 2021, supplemented by those imposed following the poisoning of Alexei Navalny in 2020 and 2021.
The UK consolidated sanctions against Russia following Brexit with the introduction of the “Russia (Sanctions) (EU Exit) Regulations 2019” (the Russia Regulations), which now encompass not just asset freezes targeting individuals and companies, but also broader “sectoral” sanctions encircling key areas of the Russian economy including capital markets, military technology and the supply of energy. The latest conflict with Ukraine, however, has the potential to mark an entirely new phase of geoeconomic antagonism between Westminster and Moscow. After a meeting with NATO allies on 25 January 2022, a Downing Street statement promised “swift retributive responses including an unprecedented package of sanctions.”
The conventional lever for this response would be to harden the existing sectoral sanctions, putting more pressure on Russian sovereign debt and transactions between Russian and UK financial institutions, in particular. The UK is also reportedly considering extending the restrictions currently contained in the Russia Regulations on the supply of energy, to explicitly curtail financing and technology transfer for natural gas projects, one of Russia’s largest exports. In a more extreme scenario, the UK might seek to extend some of the existing, extremely broad financial and export control restrictions in respect of Crimea to Russia as a whole, though this would prove extremely disruptive and highly challenging, and therefore remains unlikely.
The UK Government has further legislative flexibility regarding sanctions against Russia, derived from the various intersecting new regimes and initiatives introduced following Brexit. Equipped with a newly-autonomous freedom to impose restrictive measures, the UK has sought to go beyond traditional “state-focused” sanctions like the Russia Regulations, and introduce various “thematic” sanctions orientated around specific categories of behaviour. In a sign of how the UK intends to utilise its latitude from the EU27, Russian persons and entities have already been designated under all of the following categories, representing multiple potential strands under which to constitute any “unprecedented package” of forthcoming measures.
1. Global Human Rights Sanctions
The Global Human Rights Sanctions Regulations were introduced by the UK Government in July 2020, accompanied by the Foreign Secretary’s claim that they would be a “demonstration of Global Britain’s commitment to acting as a force for good in the world”. The regulations apply to those who “facilitate, incite, promote, or support” abuses, as well as those deemed to “financially profit” from human rights violations, a potentially significant additional category in widening the scope of those caught by the regulations.
Notably, Russia already has the largest share of designations of any country, a fact perhaps unsurprising given that the regulations have been commonly dubbed “Magnitsky” measures - in reference to the late Sergei Magnitsky who died whilst incarcerated in Moscow’s Butyrka prison in 2009 - and were successfully lobbied for by Bill Browder, a prominent critic of the Russian Government. The regulations allow vast scope to be applied in the event of acts by the Russian Government that are deemed to represent violations of human rights - including the right to life and the right not to be subject to torture, degrading treatment or punishment.
2. Global Anti-Corruption Sanctions
The Global Anti-Corruption Sanctions Regulations 2021 authorise asset freezes, restrictions and travel bans for individuals and companies implicated in “serious corruption”. The definition of “serious corruption” is extremely broad, defined primarily as: (a) bribery; or (b) the misappropriation of property, but extending to cover any person or entity which “facilitates”, “profits”, “conceals” or “profits financially or obtains any other benefit” from such corruption.
The first designations under the regulations set the geopolitical tone, encompassing numerous Russian persons believed to have misappropriated state assets. Further to the public allegations contained in the UK House of Commons Foreign Affairs Committee’s 2018 report entitled “Moscow’s Gold: Russian Corruption in the UK” (the Russia Report), the regulations allow the UK Government capacious potential capacity to designate key figures within the Russian economy and Russian politics. In the week beginning 24 January 2022, the UK Foreign Secretary was questioned about the possibility of designating President Putin directly, which she did not rule out. While some heads of state (such as Robert Mugabe and Bashar Al-Assad) have been subject to sanctions previously, such moves remain extremely rare for reasons of diplomacy. The personal designation of the current president of Russia, one of the five permanent members of the United Nations Security Council, would represent unchartered territory.
3. Cyber-security sanctions
In 2020, the UK also transposed the EU’s existing thematic sanctions regarding cyber-security into national legislation, through the “Cyber (Sanctions) (EU Exit) Regulations 2020”. The regulations allow the UK Government to designate those “who are, or are considering, conducting or directing relevant cyber activity from a UK or international perspective”. This incorporates any persons who: (i) undermine the integrity, prosperity or security of the UK or a country other than the UK; (ii) directly or indirectly cause loss or prejudice commercial interests through cyber criminality; (iii) undermine the integrity, prosperity or security of the UK or a country other than the UK; (iv) undermine the independence or effective functioning of an international or non-governmental organisation; or (v) otherwise affect a significant number of persons in an indiscriminate manner.
The majority of the persons currently designated under the regulations are Russian, and the list includes multiple groupings within the “GRU” – Russia’s foreign military intelligence agency, which the UK Government blames for a spate of cyber-attacks since 2015. On 14 January 2022, the Ukrainian Government formally blamed Russia for being behind a cyber-attack on 70 of its government websites, giving an insight into the potential scope of any forthcoming conflict, encompassing cyberspace alongside more traditional forms of warfare.
On the 31 January 2022, the UK Foreign Secretary announced to parliament that a new sanctions framework concerning Russia would be brought forward, to be implemented in the event of an invasion in Ukraine. The new initiative will take the form of secondary legislation issued under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA), the umbrella legislation which underpins the UK’s financial sanctions programme. The secondary legislation will broaden the scope of the Russia Regulations, bypassing the need for any direct link between sanctions designations and Russian policy in Ukraine. According to the Foreign Office, the regulations will be drafted extremely broadly, capturing any individual or entity which “is linked to the Russian state, engages in business of economic significance to the Russian state, or operates in a sector of strategic significance to the Russian state”. It will also apply to those who own or control such entities.
The Government’s stated desire to bypass the link with actions in Ukraine has potential significance for the length of time that the sanctions may continue in the event they are implemented. In the contemporary era, states are generally slow to unwind sanctions unless the legislation in question is linked to specific behaviour that has since been reversed. By tying the newly-announced framework not to a specific category of behaviour, or a policy action of the Russian Government, but instead to the strategic interests of the Russian state as a whole, the UK is leaving open the possibility that the threat of further sanctions against Russian individuals and companies could continue indefinitely with no obvious route of resolution.
The likely weak point for the UK Government lies not in legislation but in the enforcement of sanctions. The UK’s Office of Financial Sanctions Implementation (OFSI) was created in 2016 as part of HM Treasury, intended to replicate its renowned equivalent in the US, the OFAC. Although it can impose civil penalties, OFSI lacks powers of criminal prosecution, and to date has concluded just five settlements - four of which totalled £500,000 or less, with by far the highest being the £20.47m fine issued to a UK financial institution for violating sanctions on Russia. If the UK Government really seeks an unprecedented expansion of its sanctions framework, then it may find it currently lacks the tools to enforce it. The much touted “Economic Crime Bill”, which is yet to be introduced to parliament, may provide an opportunity for a ramping up of enforcement tools and funding.
Finally, in the present “multipolar” landscape of competing financial sanctions regimes, every action tends to have an opposite reaction. The Russian Government has continually promised that any further UK Government restrictions will be met with an “asymmetric” and “tough” response. In June 2020, for instance, Russia passed amendments to its own Federal Law No. 171-FZ, known as the "Lugovoy Law", which provide Russian persons and entities subject to UK sanctions with the right to have their disputes determined in Russia.
In a response to the UK sanctions sparked by the poisoning of Alexei Navalny, the Russian Government also issued a series of travel bans against British representatives. Whilst the Russian Government has been less willing to impose sanctions than the UK thus far, any escalation over Ukraine would likely signal a significant increase of Russia’s legislative capacity to introduce countermeasures against UK persons, companies and financial flows. The greatest disruption would be caused by the introduction of a comprehensive “blocking statute”, making compliance with UK sanctions by multinational companies operating in Russia illegal. This would effectively force companies to choose between complying with the law of either jurisdiction. The impact would depend on the scale the Russian Government is prepared to countenance, both the UK and the EU have fairly narrow blocking statutes pertaining to US sanctions, whereas China has introduced a series of much wider “anti-foreign sanctions laws” in the past two years.
Authors: Neill Blundell and Francis Bond
We've also produced a podcast where we discuss the potential financial sanctions options available to the UK Government. Listen below: