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UK likely to seek tighter EU curbs on Russia banks after spy poisoning: lawyers

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UK likely to seek tighter EU curbs on Russia banks after spy poisoning: lawyers

The U.K. will likely lobby the EU to toughen its sanctions against Russian state-controlled banks following the poisoning of a former Russian spy in the English town of Salisbury on March 4, according to lawyers specializing in sanctions-related advice.

Britain will also seek to pass more aggressive laws allowing it to seize Russian-owned assets, but the chances of unilateral curbs on the operations of Russian banks appear slim, the lawyers said.

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British Prime Minister Theresa May surveys the area where former Russian spy Sergei Skripal was found critically ill in Salisbury, U.K., on March 15.
Source: The Associated Press

Prime Minister Theresa May told Parliament that Britain would freeze Russian state assets wherever it found evidence that they "threaten U.K. life and property," after determining that the Russian government was culpable for the poisoning of Sergei Skripal, a former spy working for U.K. security agencies; his daughter; and 18 other people including a police officer, with a banned military-grade chemical weapon.

Skripal and his daughter remain in critical condition; the policeman, Nick Bailey, remains in serious condition. Russia has denied involvement in the attack.

International consensus

The U.K. has few legal options for unilaterally targeting Russian state banks, said Maya Lester, a London-based lawyer who specializes in international economic sanctions, in an interview.

Instead, it is likely to seek an international consensus to crack down on Russian banks through EU mechanisms, in a way similar to previous rounds of sanctions that followed Russia's involvement in Ukraine's civil war and its annexation of Crimea in early 2014, according to Lester, a lawyer at Brick Court barristers' chambers, who has advised sanctioned governments and companies including PAO Sberbank of Russia.

The U.K. expelled 23 Russian diplomats following the Skripal incident and said March 20 that it would not impose further sanctions for now. But Foreign Secretary Boris Johnson has suggested EU sanctions could be sought if Russia does not cooperate with an inquiry into the poisoning. The leaders of Germany, France, Italy and other countries have endorsed the U.K.'s initiative to take action against Russia following the incident. Russia expelled 23 British diplomats in a tit-for-tat move.

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EU and U.S. sanctions against Russia related to Ukraine were first enacted in July 2014. The EU's existing sanctions package prohibits Russia's state-owned banks from raising debt in the EU capital markets with a maturity of more than 30 days, causing funding problems.

The overall effect of EU and U.S. sanctions on the likes of state-controlled JSC VTB Bank and Sberbank is difficult to discern given that their introduction coincided with a steep drop in the price of oil, an important element in Russia's economy.

But as the economy suffered, so did the banking sector, with bad loans spiking and income declining; the government was forced to intervene numerous times to recapitalize struggling banks. Russian banks posted an aggregate net profit of 762.02 billion Russian rubles in 2013, which tumbled to 247.67 billion rubles in 2014 and 81.40 billion rubles in 2015, according to S&P Global Market Intelligence data. This has since recovered to 969.26 billion rubles in 2017.

Strengthened EU sanctions on Russia "would obviously be very effective because they [would] be EU-wide," Lester said.

VTB did not respond to requests for comment. Sberbank said it had no comment on the matter.

Lester added that without "concerted action" by the UN or the EU, the U.K.'s options are limited. It is not used to acting alone in imposing sanctions, she said. Meanwhile Russia is a vetoing member of the UN security council, making it improbable that it would permit the adoption of any measures against itself in that venue.

Gavin Irwin, another London-based lawyer, agreed that the U.K.'s most viable and likely course of action is to persuade the EU to bolster existing Russia sanctions.

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A police tent covers the area where Skripal and his daughter were found critically ill in Salisbury, U.K.
Source: The Associated Press

"Rather than taking unilateral actions, the U.K. would likely encourage the EU to [adopt] targeted freezes against Putin apparatchiks and then [move] that further into sectoral interventions which we saw in the aftermath of the Crimea invasion," he told S&P Global Market Intelligence in an interview.

Irwin has advised companies on doing business in sanctioned jurisdictions, including Russia.

"The U.K. is still trying to achieve an international consensus around new sanctions, and that is particularly important because the vast majority of international sanctions are generated by the EU, and the U.K. takes them on board wholesale, having had an input in their creation," he said.

Large EU subsidiaries

VTB's continental European operations, which have been consolidated into the VTB Bank (Europe) SE entity, had €12.69 billion in assets at the end of 2016, according to S&P Global Market Intelligence data. Sberbank Europe AG had €12.71 billion in assets at the same point. Both banks also have investment bank operations in London — VTB Capital PLC had $6.88 billion in assets at end-2016, while Sberbank CIB (UK) Ltd. had about £50 million. The former reports in dollars and the latter in pounds.

Russian and other banks may also be indirectly hurt by the U.K.'s more forceful use of so-called unexplained wealth orders, a new power for authorities to freeze assets with a value above £50,000 of owners who cannot account for their provenance, said Lester.

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Meanwhile, the U.K. is set to adopt the provisions of the Global Magnitsky Act, Theresa May said, targeting Russian companies and individuals that the government believes have been involved in gross human rights abuses. Irwin said that these measures are likely to come in the form of "targeted" travel bans and property seizures against high-ranking Russian state security officers and Kremlin-linked businessmen.

"The government will table an amendment to the Sanctions and Anti-Money Laundering Bill to strengthen our powers to impose sanctions in response to the violation of human rights," a spokeswoman for the British Foreign Office said in an interview. "If we have evidence that Russian state assets may be used to threaten the life or property of U.K. nationals and residents, we will freeze those assets."

Such an amendment may affect the U.K. businesses of Russian banks inasmuch as those banks are related to the Russian state's hostile activities, she said.

When asked whether the U.K. would push for tighter EU sanctions, the Foreign Office said it would not comment on its next steps.

As of March 20, US$1 was equivalent to 57.53 Russian rubles.

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