U.S. sanctions
As of February 24, 2022, Russia became subject to far-reaching U.S. export controls and economic sanctions, including full blocking designations of a large number of Russian government officials, oligarchs, and companies/banks; correspondent and payable-through account sanctions (which effectively impact the financial sector’s ability to process U.S. dollar payments); and debt and equity restrictions, as well as restrictions on the provision of certain services to anyone in Russia and restrictions on engaging in (or facilitating) new investments in Russia. The new strict export control rules on Russia also impose a higher level of export control on Russia than on any country other than Cuba, Iran, North Korea or Syria, and an export license is now required to export, re-export or transfer to Russia a wide range of items including hardware, software and technology (including those with encryption functionality), as well as “luxury items” none of which required a license for export to Russia in the past. In particular, exports, re-exports and transfers to Russia of all items subject to U.S. law (including food and medicine) are now restricted for military end-uses and end-users in Russia.
Key developments for the insurance industry include:
- Specially Designated Nationals (SDN) designations: With multiple new sanctions designations of key Russian oligarchs, banks, and other organizations (including entities not on any U.S. list but that are owned, at 50% or greater level, directly or indirectly, by one or more SDNs), insurance companies must conduct thorough screening. Certain Russian insurers were also designated as SDNs or are subject to SDN restrictions due to their ownership.
- New, comprehensive territorial sanctions: Executive Order (EO) 14065 (Feb. 21, 2022) imposes territorial sanctions that are focused on the self-proclaimed Donetsk People’s Republic (DNR) and Luhansk People’s Republic (LNR) regions of Ukraine (Covered Regions), in addition to pre-existing broad sanctions on the Crimea region. The EO also provides authority to the U.S. Government to include in the future additional areas of Ukraine as Covered Regions subject to comprehensive sanctions. From a primary sanctions perspective, EO 14065 prohibits new investment, trade, and provision of goods or services (as well as procurement of goods or services) by U.S. persons to, from, or in the Covered Regions. EO 14065 also creates secondary sanctions exposure, providing the authority to designate as an SDN any person determined to “operate in” the Covered Regions, or who provide “material” assistance to an SDN. Insurance companies should include the DNR/LNR regions when screening for activities involving comprehensively sanctioned jurisdictions.
- Aviation: (Re)insurance companies could face exposure under the Export Administration Regulations (EAR) if they provide (re)insurance aviation cover involving aircraft subject to the EAR that were previously exported to Russia without a proper U.S. export license. As a result of changes to the EAR in late February 2022, civil aircraft do require a license for export to Russia, and License Exception AVS for temporary sojourn of aircraft is not available for flights to Russia if the aircraft is registered in, owned or controlled by, or under charter or lease by Russia (or Belarus) or a national of Russia (or Belarus). As a result, the U.S. Department of Commerce’s Bureau of Industry and Security issued orders temporarily denying all export privileges for over 150 Russian and Belarusian aircraft that have violated U.S. export controls, and released the tail numbers of the planes. Provision of aviation hull/liability cover for such designated aircraft could create General Prohibition 10 (GP10) exposure for reinsurers. GP 10 prohibits any person (including a non-US person) from knowingly “servicing” an item subject to the EAR that was exported in violation of the EAR or that is about to be exported without proper authorization.
- Oil and gas import bans: under EO 14066 (Mar. 8, 2022), the importation of Russian origin crude oil, liquefied natural gas and coal into the United States, as well as new investment in Russia’s energy sector are prohibited. EO 14066 also prohibits any approval, financing, facilitation, or guarantee by a U.S. person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited, if performed by a U.S. person or within the United States. This includes reinsurance, and would have implications for reinsurance companies, but does not restrict U.S. persons from facilitating imports of Russian origin oil/gas into third countries (when such products are not destined for the United States).
- “New investment” bans: EO 14066, EO 14068 (Mar. 15, 2022), and EO 14071 (Apr. 6, 2022) each contain bans on “new investment” in Russia, a term that OFAC has broadly defined under FAQ 1049 as “the commitment of capital or other assets for the purpose of generating returns or appreciation” made on or after the date of the respective EO. There are some exceptions for “maintenance” of an existing investment in Russia and for certain types of activities involving goods/services but those have to be analyzed closely. The “new investment” ban also restricts U.S. persons from purchasing securities (new or existing) issued by Russian companies. Insurance companies will need to review whether covered risks would involve such “new investment” activities.
- Bans on providing accounting, trust and corporate formation, and management consulting services: on 8 May 2022 OFAC issued determinations under EO 14071 (prohibiting US persons from providing (or facilitating), directly or indirectly, accounting, trust and corporate formation, and management consulting services to any person in the Russian Federation, subject to certain exceptions) and EO 14024 (authorizing the imposition of economic sanctions against any persons (including non-US persons) that are found to operate, or have operated, in the accounting, trust and corporate formation services, and management consulting sectors of the Russian economy, as they are now among the sectors targeted under EO 14024). The former is effectively primary sanctions measures while the latter is secondary sanctions measures. These restrictions will affect the ability of insurance companies to provide such services to Russia (and may affect the ability of their Russian subsidiaries to receive such services, with some notable exceptions such as for entities in Russia that are ultimately U.S. owned or controlled which can still continue to receive such services).
EU sanctions
From additional asset freezes, to the expansion of sectoral debt/equity restrictions, to the imposition of broad new trade based measures, the EU has used a variety of means through which to increase pressure on Russia.
Of particular note are the restrictions implemented during June 2022 on the import of crude oil and petroleum products. In broad terms, these prohibit: (i) the purchase, import or transfer, directly or indirectly, of crude oil (CN 2709 00) or petroleum products (CN 2710) if they originate in Russia or are exported from Russia (and the provision of related technical assistance, brokering services, financing or financial assistance (which includes (re)insurance) or other services); and (ii) the provision, directly or indirectly, of technical assistance, brokering services or financing or financial assistance (again, which includes (re)insurance), related to the transport to third countries of crude oil or petroleum products which originate in Russia or which have been exported from Russia.
There are certain exemption to these restrictions, in particular, for the execution of certain contracts concluded before 4 June 2022 and, in some cases, for certain one-off transactions for near-term delivery, if specified conditions are met.
Given the broad nature of these restrictions and the limited nature of the exemptions, these are likely to have a significant effect on covers written in the (re)insurance market, particularly when the applicable wind-down periods come to an end.
UK sanctions
Following the end of the Brexit transition period, the UK has implemented sanctions against Russia under the Russia (Sanctions) (EU Exit) Regulations 2019 (as amended) (the UK Russia Regulations).
Whilst there are a lot of similarities between the measures that have been implemented by the UK and the EU in respect of Russia, there are also important differences which make the compliance response all the more challenging.
Two of the areas in respect of which we have seen key restrictions imposed in the past year are marine and aviation risks:
- On the marine side, the restrictions under the UK Russia Regulations prohibit directly or indirectly providing, to a person connected with Russia, financial services in pursuance of or in connection with an arrangement whose object or effect is: (a) the export of [vessels]; (b) the direct or indirect supply or delivery of [vessels]; (c) directly or indirectly making [vessels] available to a person; or (d) the direct or indirect provision of technical assistance relating to [vessels].
The key question for the purposes of this restriction is therefore to whom is the (re)insurance being provided (i.e. who is the insured and beneficiaries of cover)? This differs from the position under EU law which does not have the same concept of a person "connected with" Russia.
- It is also prohibited to provide, directly or indirectly, financial services or funds in pursuance of, or in connection with, an arrangement whose object or effect is: (a) the export of [vessels] to, or for use in, Russia; (b) the direct or indirect supply or delivery of [vessels] to a place in Russia; (c) directly or indirectly making [vessels] available to a person connected with Russia or for use in Russia; or (e) the direct or indirect provision of technical assistance relating to [vessels] to a person connected with Russia or for use in Russia.
For the purposes of this restriction, the key initial questions are whether the underlying activity which the (re)insurance covers involves: (i) vessels for use in Russia; (ii) vessels moving to Russia or through Russian territorial waters (in any way), or (iii) a person “connected with” Russia. This restriction is more aligned with the equivalent restrictions on the EU side under EU Council Regulation 833/2014 (as amended) save again for the use of the concept "connected with" Russia.
- There are also similar restrictions in respect of aircraft. However, there is an additional, broader restriction under Regulation 29A of the UK Russia Regulations on directly or indirectly providing insurance or reinsurance services relating to aviation and space goods/technology: (i) to a person connected with Russia; or (ii) for use in Russia.
- It should also be noted that the Export Control Joint Unit (which is the authority with responsibility for administering trade sanctions and export controls in the UK) has issued a general license for (amongst other things) the provision of financial services or funds with respect to vessels and aircraft where they are, in broad terms, moving from or to Russia or through Russian territorial waters or airspace and the movement is not for the purpose of a transfer of ownership of the vessel or aircraft or a change of the operator of the vessel or aircraft. With respect to aircraft, the aircraft must also be carrying goods or passengers when removed or must be removed in order to undertake a journey carrying goods or passengers.
Next steps
It is likely that additional sanctions will be introduced in future. In particular, on 27 June 2022, the leaders of the G7 announced their commitment to imposing further measures in respect of Russia.
If you have any queries regarding the measures imposed or the impact that these may have on business, please do feel free to reach out to Hogan Lovells.
Authored by Aleksander Dukic, Jamie Rogers and Julia Diaz.
