On July 18, 2022, further amendments to the UK’s Russia sanctions regime came into force in response to Russia’s invasion of Ukraine.  The new measures introduced under the Russia (Sanctions) (EU Exit) (Amendment) (No. 13) Regulations 2022 (“Amendment 13”) include an expansion of the designation criteria pursuant to which individuals and entities can be made subject to UK asset freeze sanctions and the introduction of a new trade sanctions exception for humanitarian assistance activity in non-government controlled areas of the Donetsk and Luhansk oblasts.  Amendment 13 also expands certain definitions in relation to the interpretation of the concept of “ownership” of ships and aircraft subject to UK sanctions measures.

On July 19, 2022, new financial sanctions measures also came into force targeting certain new investment activities in relation to Russia.  The measures, made pursuant to the Russia (Sanctions) (EU Exit) (Amendment) (No. 12) Regulations 2022 (“Amendment 12”), include restrictions on the acquisition of any ownership interest in land in Russia and in entities connected with – or having a place of business in – Russia, as well as a prohibition on the establishment of commercial arrangements such as branches in Russia and joint ventures with persons connected with Russia.  Investment services directly related to those activities also are prohibited by Amendment 12.

For more information on how these developments could impact your organization, contact the author of this post, Alexandra Melia, in Steptoe’s Economic Sanctions team in London.

Additional resources can be found on Steptoe’s “Sanctions against Russia: Implications for Business and International Trade” page.

New Designation Powers

Amendment 13 expands the designation criteria pursuant to which individuals and entities can be made subject to UK asset freeze sanctions, which may give some indication as to the categories of person that the UK government intends to focus on in future rounds of designations.  In pertinent part, the newly extended criteria:

  • Broaden the group of persons that can be designated for involvement in obtaining a benefit from, or supporting, the Government of Russia to include –
    • managers other than executive and non-executive directors, trustees or the equivalent of a Government of Russia affiliated entity, or an entity carrying on business of either economic significance, or in a sector of strategic significance to, the Government of Russia; and
    • persons holding the right, directly or indirectly, to nominate at least one director (whether executive or non-executive), trustee or equivalent of a Government of Russia-affiliated entity, or an entity carrying on business of either economic significance, or in a sector of strategic significance to, the Government of Russia.
  • Widen the group of persons that can be designated for destabilising Ukraine, undermining or threatening the territorial integrity, sovereignty or independence of Ukraine, or obtaining a benefit from (or supporting) the Government of Russia to include persons that work for, or are affiliated to, the Government of Russia, as –
    • an aide or adviser to the President of the Russian Federation;
    • a head or deputy-head of any public body, federal agency or service subordinate to the President of the Russian Federation, including the Administration of the President of the Russian Federation;
    • a member of the Security Council of the Russian Federation, its Secretary or any of its Deputy Secretaries;
    • the Chairman of the Government of the Russian Federation or any deputy of the Chairman;
    • a Minister or Deputy Minister of any Ministry of the Russian Federation;
    • a Governor or member of the Board of Directors of the Central Bank of the Russian Federation;
    • a Presidential Plenipotentiary Envoy to a Federal District, or a regional Governor or Deputy Governor or equivalent;
    • a head or deputy head of any other public body or agency of the Government of the Russian Federation;
    • a member of the armed forces or law-enforcement organs of the Russian Federation of the rank of colonel (or equivalent) or higher;
    • a member of the Russian security and intelligence services of the rank of colonel (or equivalent) or higher;
    • a vice president (or equivalent position) or higher, of a Government of Russia-affiliated entity; or
    • a director or manager (or equivalent position) or higher, of a Government of Russia-affiliated entity.
  • Expand the circumstances in which a person can be designated for being “associated with” a designated person to include being an immediate family member of a designated person, which is defined as being a wife, husband, civil partner, parent or step-parent, child or step-child, sibling or step-sibling, niece, nephew, aunt, uncle, grandparent, or grandchild.

Restrictions on New Investment Activities in Relation to Russia

The New Prohibitions

Amendment 12 introduces a new prohibition on carrying out certain specified investment activities if the person engaged in the activity knows or has reasonable cause to suspect that they are carrying out such an activity.  The prohibitions significantly broaden the restrictions imposed by the United Kingdom on new investment in Russia and companies should take early action to assess the impact the new provision may have on their activities.

The specified activities are:

  • directly acquiring any ownership interest in land located in Russia;
  • indirectly acquiring any ownership interest in land located in Russia for the purpose of making funds (e.g., financial assets and benefits of every kind) or economic resources (i.e., assets of every kind that may be used to obtain funds, goods or services) available directly or indirectly to, or for the benefit of, a person connected with Russia;
  • directly acquiring any ownership interest in – or control over – a legal person connected with Russia;
  • indirectly acquiring any ownership interest in or control over a legal person connected with Russia for the purpose of making funds or economic resources available directly or indirectly to, or for the benefit of, a person connected with Russia;
  • directly or indirectly acquiring any ownership interest in, or control over, a relevant entity (i.e., a legal person that has a place of business located in Russia, but is not a person “connected with Russia”) for the purpose of making funds or economic resources available directly or indirectly to, or for the benefit of, a person connected with Russia;
  • directly or indirectly establishing any joint venture with a person connected with Russia;
  • opening a representative office or establishing a subsidiary or branch (e.g., a place of business forming a legally dependent part of a legal person and that carries out all or some of the transactions inherent in the business of that legal person) located in Russia; or
  • providing investment services directly related to any of the foregoing activities. For the purpose of this prohibition, “investment services” adopts the broad definition used in relation to the prohibition on dealing in transferable securities and money-market instruments (see Regulation 16(10) of the Russia (Sanctions) (EU Exit) Regulations 2019, as amended (“Russia Regulations”)).

A person is “connected with Russia” for the purpose of this prohibition if they are an individual (or an association or combination of individuals) who are ordinarily resident or located in Russia, or a legal person that is incorporated or constituted under the law of, or domiciled in, Russia.

For the purpose of the new investment restrictions, a person directly or indirectly acquires an ownership interest in, or control over, a person or entity if they directly or indirectly:

  • acquire any share in the person/entity;
  • acquire any voting rights in the person/entity;
  • acquire any right to appoint or remove a majority of the board of directors of the person/entity; or
  • acquire any means of ensuring that the affairs of the person/entity are conducted in accordance with the wishes of the person, where it is reasonable to expect (having regarding to all of the circumstances) that the person, if they chose to, in most cases or significant respects would be able to do so by whatever means.

Amendment 12 provides guidance as to when the new investment restrictions that bite only to the extent that they are undertaken for the purpose of making funds or economic resources available directly or indirectly to, or for the benefit of, a person connected with Russia will be triggered.  In pertinent part, Amendment 12 provides that:

  • economic resources are made available to a person connected with Russia only if that person would be likely to exchange the economic resources for, or use them in exchange for, funds, goods or services;
  • making funds or economic resources indirectly available to a person connected with Russia includes making them available to a legal person that is more than 50% owned or controlled directly or indirectly by a person connected with Russia; and
  • funds or economic resources are made available for the benefit of a person connected with Russia only if that person thereby obtains, or is able to obtain, a significant financial benefit, including but not limited to the discharge (or partial discharge) of a financial obligation for which the person connected with Russia is wholly or partly responsible.

Amendment 12 also prohibits intentional participation in activities knowing that their object or effect (whether direct or indirect) is to circumvent the new investment prohibitions or to enable or facilitate the contravention of such prohibitions.

Exceptions to the New Prohibitions

Amendment 12 creates a new exception to the prohibitions on investment activities in relation to Russia.  The exception permits a person to engage in activity that otherwise would be prohibited to the extent that it involves the satisfaction of an obligation of that person that arose under a contract concluded prior to July 19, 2022 – or an ancillary contract necessary for the satisfaction of such a contract – provided that the person notifies HM Treasury’s Office of Financial Sanctions Implementation no later than five working days before the day on which the act is carried out.

The exception for authorised conduct in a relevant country also has been expanded to apply to the prohibition on investment activities in relation to Russia.  This exception, which is set out in regulation 62A of the Russia Regulations, provides that when a person’s conduct in any of the Channel Islands, the Isle of Man or any British Overseas Territory (“Relevant Country”) would, in the absence of this exception, contravene the prohibition on new investments in relation to Russia, the prohibition is not contravened if the conduct is authorised by a licence or other authorisation that is issued under the law of the Relevant Country and for the purpose of disapplying a prohibition in that jurisdiction which corresponds to the prohibition on investment activities in relation to Russia.

Amendment 12 also creates a carve out from the prohibition on investment activities to prevent an overlap with the existing prohibitions in Regulation 16 of the Russia Regulations on dealing with transferable securities or money market instruments.

Licensing Grounds

Amendment 12 creates a new Part 3, Schedule 5 of the Russia Regulations, which sets out the licensing grounds applicable to the prohibition on investment activities in relation to Russia.  The available licensing grounds are limited in scope and comprise:

  • Extraordinary situation – To enable anything to be done to deal with an extraordinary situation;
  • Humanitarian assistance activity – To enable anything to be done in connection with the performance of any humanitarian assistance activity;
  • Medical goods or services – To enable anything to be done in connection with the provision of medical goods or services for the benefit of the civilian population of a country or to enable the import, export or use of medical goods;
  • Food – To enable anything to be done in connection with the production or distribution of food for the benefit of the civilian population of a country;
  • Diplomatic missions – To enable anything to be done in order that the functions of a diplomatic mission or consular post in Russia, or of an international organisation enjoying immunities in accordance with international law, may be carried out, or to enable anything to be done in order that the functions of a diplomatic mission or consular post of Russia in the United Kingdom may be carried out;
  • Safety and soundness of a firm – To enable anything to be done by a person, following consultation by that person (or a person acting on their behalf) with the relevant supervising authority or authorities, that is necessary or expedient in order to promote the safety and soundness of a firm which is supervised by the Bank of England, the Prudential Regulation Authority or the Financial Conduct Authority; and
  • Space – To enable anything to be done for a United Kingdom person to undertake spaceflight activity.

Wind Down General Licence

On July 19, 2022, OFSI published General Licence INT/2022/2002560, which allows for a seven day wind down period in respect of the ban on new investment in relation to Russia outlined in Amendment 12.  The General Licence currently is in effect and will expire on July 26, 2022.  A Person seeking to rely on the General Licence must keep accurate, complete and readable records, on paper or electronically, of any activity purporting to have been permitted under the licence for a minimum of six years.

New Trade Sanctions Exception

Amendment 13 also creates a new exception from certain trade sanctions measures for activities necessary to ensure the timely delivery of humanitarian assistance activity in non-government controlled areas of the Donetsk and Luhansk oblasts, provided that the person undertaking the activities believes that carrying out the particular activity is so necessary and there is no reasonable cause to suspect otherwise.  The exception applies to the:

  • Export, supply, delivery and making available of infrastructure-related goods prohibitions set out in Regulations 48 to 51 of the Russia Regulations;
  • Provision of financial services and funds prohibitions relating to infrastructure-related goods set out in Regulations 52(1) to (3) of the Russia Regulations, excluding the prohibitions on providing such services in relation to the import to the UK of goods originating in non-government controlled Ukrainian territory;
  • Provision of services in relation to a relevant infrastructure sector in non-government controlled Ukrainian territory (e.g., transport, telecommunications, energy, or the prospection, exploration and production of oil, gas and mineral resources) as set out in Regulation 54(1)(a) of the Russia Regulations; or
  • Provision of brokering services concerning non-UK activity relating to infrastructure-related goods as set out in Regulation 53(1)(b) to (g) of the Russia Regulations, except for any such prohibition that relates to an arrangement whose object or effect is the import of goods that originate in non-government controlled Ukrainian territory.

Humanitarian assistance activity is defined in Amendment 13 as including the work of international and non-governmental organisations carrying out relief activities for the benefit of the civilian population of the non-government controlled areas of the Donetsk and Luhansk oblasts.

Expansion of Definition of Ownership of Ships and Aircraft

Amendment 13 extends the definition of ownership of ships and aircraft to include situations where:

  • The legal title, or any share in, the ship or aircraft is vested in a person that is more than 50% owned or controlled by that person; or
  • The person, or any person that is more than 50% owned or controlled by that person has a beneficial interest, or any share, in the ship or aircraft.