The latest UK sanctions - and the wider impact of sanctions on Russia

On 16th December 2022, the UK government introduced a further amendment to the Russia Regulations – Amendment 17. The new legislation introduces and expands the existing trade and financial sanctions. It does not provide any ground-breaking amendments to the legislation but does, however, contain a few notable additions to the prohibition on professional and business services.

Professional and business services restrictions have been expanded to cover the provision of auditing, advertising, architectural, engineering and IT consultancy and design services to persons connected with Russia. A new Schedule 3J now defines all of the above services, which provides the clarity desired by practitioners. Some services were defined in previous amendments. However, the meaning of auditing services, for instance, has only been defined in the latest amendment.

The new regulations also provide several amendments and additions to the existing lists of goods, as well as a prohibition on providing trust services to or for the benefit of designated persons or persons connected with Russia.

These measures were expected following the UK government’s announcement on 30 September 2022, in response to the illegal annexation of Ukrainian regions. It is interesting to note, however, that the proposed ban on “transactional legal advisory services” has not been introduced at this stage.

On 7 February 2023, the Treasury further updated its guidance on supplying professional and business services to persons connected with Russia. It helpfully contains several practical examples on the application of the prohibitions, which is of assistance to both companies and law practitioners who are engaged in providing legal advice. For example, the guidance now contains a list of activities related to IT consultancy and design services, which do not fall under the prohibition.

Enforcement

Whilst legislators continue to look for ways to impose further restrictions on Russia, debates among lawmakers and sanctions experts seem increasingly focused on the need for the legislation and for regulators to actually deliver effective enforcement.

On 23 January 2023, the Grand Committee of the House of Lords debated the newly-introduced Amendment 17 and its potential impact on Russia and its economy. Notably, Lord Collins of Highbury said:

‘We repeatedly pass legislation on sanctions. We have good law, if you like. But, of course, none of these laws is necessarily effective unless we also focus on enforcement… Enforcement is really important.’

Indeed, a year has now passed since Russia’s military invasion of Ukraine that, inevitably, led to a tsunami of sanctions being imposed on Russia, its nationals and persons connected to it. However, enforcement cases of note have been rare. 2022 only saw two monetary penalties imposed by the Office of Financial Sanction Implementation (OFSI) as part of its enforcement of financial sanctions. As Lord Collins alluded to, the sanctions regime is of little use without the enforcement mechanism to support it. Perhaps the theme of 2023 is, therefore, to be a focus on enforcement actions in relation to current legislation rather than issuing volumes of new provisions.

Effectiveness

Another interesting point which arose in light of rapidly-expanding and developing sanctions legislation is whether the sanctions are as effective as they are intended to be on Russia. It seems to be the case that the public is potentially drawing more comfort from the volume of legislation that is constantly being imposed on Russia and persons connected with Russia, rather than on the actual effectiveness of the sanctions regime.

This is clearly not a straightforward issue. On the one hand, after nearly 40 states coordinated their efforts and responded with a high volume of sanctions, it is obvious that the restrictions and prohibitions are having some detrimental effect. But the real question is to what extent are they having an effect?

Russian GDP contracted just 3-3.5% in 2022. This is significantly less than the International Monetary Fund’s forecast of an 8.5% decline. The likely cause of this is the continued flow of money for oil and gas, which may have provided a ‘cushion’ for Russia.

Another reason may be the fact that Russia has been under sanctions since 2014 and has subsequently learned how to adapt to them. On 14 February 2023, Bloomberg published an article confirming that Russia has been doing its largest amount of oil drilling in a decade, despite being hit by sanctions. Other worldwide media outlets are not silent on this either: America’s New York Post, Italy’s Il Fatto Quotidiano and other publishers have already suggested that the sanctions packages introduced by many countries – that have come at great expense to their citizens - have not yet caused the desired effect on Russia as a whole.

Having said that, it is clear that the sanctions targeting individuals do work. According to an article published by The Guardian on 30 December 2022, Russian oligarchs lost $95 billion in 2022 as a result of sanctions.

Inquiry

The government is already taking steps to determine the actual effect of sanctions. In order to assess whether the current sanctions regime is achieving the desired outcome, the International Trade Committee is to launch a new inquiry into the UK's trade sanctions on Russia, focusing on the following points:

• The role of the Department for International Trade (DIT) in developing, implementing and enforcing trade-related sanctions on Russia.
• The interaction regarding enforcing sanctions on Russia between the DIT and other government departments, including the Foreign, Commonwealth and Development Office (FCDO), the Home Office, HM Revenue and Customs and the Treasury.
• The impact of trade-related sanctions on UK businesses, supply chains and consumers, and the effectiveness of the government’s support and guidance.
• Whether the UK’s trade policy and approach to international co-operation has mitigated the domestic impact of the sanctions.

Only time will tell whether the sanctions have the desired punitive effect. But it is clear that the narrative is shifting from developing sanctions legislation to assessing their actual impact.