UK sanctions: is every company in Russia controlled by Putin?
Published on 11th Oct 2023
Surprise Court of Appeal opinion has potentially wide-ranging impact on UK businesses dealing with Russian companies
Following the increase in Russia-related sanctions since the onset of the Ukraine conflict, a problem that many businesses have been grappling with has been to ensure that they are not inadvertently dealing with a sanctioned entity. Under many sanctions regimes worldwide, "control" by a sanctioned entity can convert a seemingly unsanctioned entity into a sanctioned one.
Under the UK's sanctions regulations against Russia (the Russia (Sanctions) (EU Exit) Regulations 2019), a UK person (including a UK entity) is prohibited from (i) dealing with the funds or economic resources owned, held or controlled by a designated person or (ii) making funds available directly or indirectly to a designated person.
These prohibitions (known as an "asset freeze") also apply in respect of entities "owned or controlled" by a designated person. "Owned or controlled" is defined as including where:
"it is reasonable, having regard to all the circumstances, to expect that P would (if P chose to) be able, in most cases or in significant respects, by whatever means and whether directly or indirectly, to achieve the result that affairs of C are conducted in accordance with P’s wishes".
On Friday 6 October 2023, the Court of Appeal expressed the view that not only was the Central Bank of Russia (which is not itself a designated person) "controlled" by President Putin and/or Ms Elena Nabiullina (the governor of the Central Bank of Russia), both of whom are designated persons, but that "in a very real sense (and certainly in the sense of Regulation 7(4)), Mr Putin could be deemed to control everything in Russia". The logical endpoint of this would be that no trade whatsoever would be permitted with Russian entities. What ramifications might this case have in practice?
The decision was handed down in the long running case of Boris Mints v PJSC National Banke and PJSC Bank Otrkitie Financial Corporation.
One of several issues to be determined by the court was whether a party (which was not itself designated, but was a subsidiary of the state-owned Central Bank of Russia) was subject to sanctions as a being an entity which was "controlled" by President Putin and/or Ms Elena Nabiullina.
First instance finding
The judge held that the meaning of "control" under the sanctions regime should be interpreted as excluding control which arose by reason of office or employment (as opposed to control arising where there was a personal economic interest).
Accordingly the judge held that the Central Bank of Russia (and its subsidiaries) were not controlled by a sanctioned person (President Putin/Ms Nabiullina).
Court of Appeal opinion
Overturning the judgment of the High Court, the Court of Appeal unanimously expressed the view that the meaning of "control" was not limited in the manner suggested by the judge in the High Court.
Instead, the Court of Appeal found that "control" where a designated person is, for whatever reason, able to exercise control over another company (irrespective of whether the designated person has an ownership/economic interest).
Applying this to the case, the court found that the Central Bank of Russia (and therefore also its subsidiary) was controlled by President Putin and/or Ms Nabiullina and was therefore subject to UK sanctions.
Impact of the decision
This surprising decision has potentially far-reaching consequences, with a much larger number of entities than previously thought now likely to be deemed controlled by President Putin (and other designated persons) and therefore subject to UK sanctions.
As the Court of Appeal put it:
"the absurd consequences arise not from giving the Regulation its clear and wide meaning but from the subsequent designation by the Government of Mr Putin, without having thought through the consequences that, as he put it, Mr Putin is at the apex of a command economy…In those circumstances, consistently with the concession I mentioned in , in a very real sense (and certainly in the sense of Regulation 7(4)), Mr Putin could be deemed to control everything in Russia".
Osborne Clarke comment
The Court of Appeal decision on "control" was not strictly necessary to determine the appeal (since it failed on its primary ground).
Nevertheless, the Court of Appeal decided to express its opinion having had the benefit of significant reasoned argument from the parties on the point, and considering it to be a matter of wider importance. While this opinion is not, strictly speaking, binding on lower courts, it will, of course, have considerable persuasive impact.
The judgment has potentially wide-reaching ramifications: as the court indicated "Mr Putin could be deemed to control everything in Russia", with any entity controlled by President Putin therefore subject to sanctions.
As all of the UK regulations implementing sanctions adopt similar wording it raises the question of whether, in other autocratic or totalitarian regimes the designation of other heads of state and/or individuals in senior government positions could lead to similar outcomes. Trade with whole swathes of organisations could be restricted.
It may be a stretch to say that every company in Russia is now subject to sanctions. However, the risks of dealing with Russian businesses have increased considerably (particularly those with close state links) following this judgment.
Whether an entity is to be considered as being controlled by President Putin (or another designated person) involves a factual enquiry involving "all the circumstances" and the Court of Appeal has made clear that any such enquiry would be broad in scope.
It is plain that the outcome of the judgment was not expected or intended by the UK government or the OFSI (the financial sanctions enforcement body) and there is a signpost in the judgment that it is for "the executive and Parliament to amend the wording of the Regulations" so as to avoid the consequences which have materialised.
The UK government may well need to act quickly following this judgment to resolve the uncertainty that this decision will doubtless generate. In the meantime, all firms dealing with Russian entities should take care.
If you are affected by any of the issues raised in this Insight please contact our experts