On 3 March 2022, K2 Integrity hosted a webinar on the developing sanctions against Russia and what it means for global markets and businesses. This article summarizes the key points and analysis from the event. If you would like to watch a recording of the webinar,
In less than a week since Russia began its invasion of Ukraine, the United States (U.S.), United Kingdom (UK), and the European Union (EU) have led a global coalition to impose a powerful range of sanctions against Russian entities in response to the country’s continued aggression.
Overview: A Highly Dynamic Environment
More sanctions and other economic measures have been levied against Russia in the past week than we have seen in years of action against other sanctioned countries or organizations. These measures have come not just from the U.S., UK, and EU but also from authorities all over the world, including Canada, Japan, Taiwan, Australia, and New Zealand, and they have taken a variety of forms.
U.S. Measures. In the United States, action began with the executive order of 21 February, prohibiting U.S. persons from engaging in new investment, trade, and financing with the Donetsk and Luhansk regions of Ukraine. Significant U.S. actions include:
- Severing connections to the U.S. financial system for Russia’s largest financial institution, Sberbank, plus 25 of its subsidiaries.
- Imposing full blocking or asset freezing measures on a growing list of Russian elites and family members.
- Establishing new debt and equity restrictions on 13 of the most critical Russian enterprises and entities.
- Imposing full blocking sanctions against VEB, Promsvyazbank, VTB Bank, Bank Otkritie, Sovcombank, and Novikombank, along with various subsidiaries.
- Adding the project company Nord Stream 2 AG to the Specially Designated Nationals (SDN) list, immediately following Germany’s decision to halt certification of the Russia-Germany pipeline.
- Adding Department of Commerce export controls for U.S. technologies such as semiconductors, computers, lasers, telecom equipment, and other dual-use products used to sustain military and business capabilities.
- Instituting full blocking sanctions and foreign asset freezes on Vladimir Putin and Foreign Minister Sergei Lavrov, an unprecedented designation of world leaders.
- Promulgating full blocking sanctions on the Russian Direct Investment Fund (RDIF), a key Russian sovereign wealth fund.
These and other actions were accompanied by authorizations from the Office of Foreign Assets Control (OFAC) to provide wind-down periods, divestment opportunities, and general licenses, and to minimize some of the other negative externalities that can occur when sanctions are imposed on a broad jurisdiction or entity.
Recent statements from the U.S. Department of the Treasury were unusually explicit in calling out Russia’s intentions to use exporters as agents to prop up their currency. At the same time, Treasury also explicitly excluded energy-related transactions.
UK and EU Measures. In the United Kingdom and European Union, most actions align with those enacted by the United States, though momentum on new restrictions has clearly shifted into the European theater as the situation has progressed.
In the United Kingdom, the prime minister and foreign secretary have announced new actions against Russia on seven of the last ten days. UK airspace is closed to all Russian aircraft, and Russian nationals now face deposit limits at UK banks. Measures have been announced to prevent Russian companies from issuing transferable securities and money market instruments in the United Kingdom, and to stop designated banks from accessing Sterling and clearing payments through the UK. Asset freezes and travel bans so far affect approximately nine Russian financial institutions and five Russian corporations; six Russian directors of financial institutions and aerospace and technology companies; three high-net-worth individuals; and all members of the Russian Duma who recognized the independence of Ukraine’s Donetsk and Luhansk regions. UK individuals and entities are banned from providing financial services to the Central Bank of Russia, the Ministry of Finance, and the RDIF. A new economic crime bill also was introduced with a clear aim at Russian oligarchs. The bill creates a new register for overseas ownership of UK land and property, strengthens the UK’s unexplained wealth order mechanism, and adds penalties for noncompliance and sanctions-busting.
Coordination and implementation of these new restrictions falls among the Treasury’s Foreign, Commonwealth, and Development Office; the Department of International Trade and its Export Control Joint Unit; the Home Office, for travel bans; and the Civil Aviation Authority, for restriction on Russian airlines.
Across the EU, we are seeing similar and growing restrictions, with member nations implementing sanctions on Russia’s financial, transport, and energy sectors; freezing assets and applying broad sanctions on Russian government individuals; closing its airspace to Russian aircraft; instituting increased export controls; banning certain Russian media outlets; committing to restrict Russian banks’ access to the SWIFT payments system; and placing limits on applications for so-called “golden passports” that let Russian elites invest in a country in exchange for citizenship.
Timing of the implementation of these measures varies.
Where Things Go from Here
Russia’s aggression against Ukraine and the sweeping global response represents a clearly historic moment, not just for Europe but also for the application of sanctions and financial pressure on rogue states. The rapid escalation of the response has been stunning, with countries disavowing potential actions on one day—such as removing Russian banks from SWIFT—and then reversing course on the next day. A level of debilitating sanctions that took five years to enact against Iran has been achieved in one week against Russia, a G20 country whose economy is substantially greater and more globally integrated than Iran’s.
Unlike most sanctions regimes, which are touted as a targeted response, this one has come with direct rhetoric about its intended effects: Prevent Russia’s Central Bank from propping up the ruble, disconnect the Russian economy and financial system from Western markets (other than energy), and put blame where it is due by naming the head of state in the first round of sanctions.
Taken together, the message seems clear: This situation will not resolve quickly. Even if the fighting in Ukraine stops mercifully soon, the question is not when these sanctions will be lifted but how much they are going to be enforced and increased. Given the scope of sanctions already enacted, actions going forward are likely to focus more on putting teeth behind enforcement than on mining further escalation points—though opportunities for these certainly exist, especially around energy.
One compelling trend in this regard is that European nations have begun acknowledging the need to begin weaning themselves off Russian energy and natural gas. Germany’s willingness to suspend the Nord Stream 2 deal was a start, and Russia’s reliance on the energy sector for hard currency offers potential opportunities for Europe to crack down harder, especially once spring arrives and brings lower demand for heating energy.
How Institutions Can Prepare
Barring unforeseen developments, we have likely entered a new normal. Given the speed at which the sanctions against Russia have been imposed, their global scope, the different types and levels of restrictions and controls, and the number of permissions and exceptions to work through, we anticipate institutions will face unprecedentedly complex implementation challenges.
We have identified four areas in which financial institutions (FIs) and other businesses and corporates should focus:
- Mapping risk exposures
- Monitoring for evasion
- Collaborating for compliance
- Understanding the enforcement environment
Mapping Risk Exposures. In order to protect their operations, relationships, and reputations, financial institutions and other businesses and corporates need to conduct a robust assessment of the risks to their organizations. For FIs, the saving grace is that while today’s situation escalated with frightening speed, the risks regarding Russia have been apparent for many years—meaning that most financial institutions are already meeting the moment from a position of strength in their regimes and controls around sanctions, anti-money laundering, financial crime, and broader risks.
But those regulations really stop at the borders of the financial system. Since large corporates, manufacturers, and other non-financial businesses face fewer formal compliance mandates, their controls, processes, governance structures, risk assessments, and other core tenets that have proven effective in protecting FIs are less robust.
While corporates—especially those that are engaged in dual-use or controlled technologies—have a familiarity with export control regimes, the relationship between the new Russia-related entity restrictions and global supply chains, customer bases, and intermediation makes it more important than ever for corporates to understand who they are doing business with, elevating the need for customer due diligence, monitoring, and investigations.
Monitoring for Evasion. For the foreseeable future, Russia is going to be more disconnected, but in order to maintain their economy Russian entities will need regular access to the major capital and financial markets, as well as avenues of trade. In order to circumvent Western sanctions, they will be seeking jurisdictions and institutions with geopolitical motives or higher risk appetites that are willing to take their business.
While we do not believe China will be entirely interested in or fully capable of acting as a conduit between Russia and the global financial system, Russia will likely look to China for increased trade. Businesses and financial institutions doing business in China should therefore be particularly diligent to avoid indirectly facilitating sanctioned Russian trade.
Former Soviet territories, including those that lie between Russia and NATO countries, could also present heightened risk given Mr. Putin’s evident wishes to reconnect those territories. Even in the absence of overt Russian aggression, potential economic lifelines between Russia and its former satellite states, as well as breakaway states such as Transnistria, will need to be heavily scrutinized for changes in typologies and transactions patterns and volumes.
Collaborating for Compliance. Facing the incredible complexities of the new normal, how will financial institutions—particularly smaller ones—and corporates with Russian exposure stay on top of their compliance obligations? We believe the unprecedented complexity and importance of the current crisis will lead them to greater collaboration, working within industry sectors and value chain relationships in order to gain a collective understanding of these risks, share the burden of monitoring, and work together toward efficient risk management solutions.
Understanding the Enforcement Environment. With so many different targets, so many different authorities, and so much complexity, effectively managing compliance with the evolving Russia sanctions will require a lot of bodies, a lot of resources, and a lot of technical skills. This could cause companies to adopt a zero-tolerance approach, which we are seeing right now with the week’s stream of corporate divestitures and dissolving of joint ventures with Russian entities. Those actions certainly align the companies with the historical moment and help them avoid both short- and long-term risk. Smaller companies need to strategically evaluate the impact the sanctions against Russia will have on their compliance programs, operations, and bottom line.
We advise compliance and sanctions officers to continue to take the following actions:
- Review and assess evolving sanctions developments in order to advise senior leadership/first line.
- Review all customer relationships or touchpoints to Russia, including beneficial ownership.
- Ensure sanctions screening lists are updated in a timely manner and all relevant sanctions lists are included in your screening platform.
- Collaborate with other compliance elements in your organization—including transaction monitoring, anti-money laundering, and anti-bribery and corruption functions—to ensure coordination regarding risk identification and mitigation.
- Update procedures as needed and train staff accordingly to understand the new regulations and their impact on processes.
As the Russia-Ukraine situation evolves, K2 Integrity will continue providing our clients with up-to-date information in the form of policy alerts, additional webinars, and other means, including through our website and our DOLFIN platform. You can learn more about this webinar’s expert presenters and get in touch by clicking on the links below.
Chip Poncy, Global Co-Head Financial Crimes Risk Management – Washington, DC
Daniel L. Glaser, Global Head Jurisdictional Services and Head of Washington, DC Office – Washington, DC
Please note that the information summarized in this note reflects K2 Integrity’s understanding and analysis of sanctions against Russia as of the 3 March date of the webinar. K2 Integrity expects the multilateral sanctions regime against Russia to continue to evolve rapidly in response to the highly fluid nature of the war precipitated by Russia’s invasion of Ukraine.