Sergei Naumenko: UK minister flexes sanctions muscles with seizure of Russian superyacht

Summary

The headline-grabbing seizure of a superyacht docked near Canary Wharf in March 2022 became the subject of the first court case about the UK’s sweeping powers under the Russia sanctions regime.

The Dutch-built superyacht was brand-new at the time and made London its first port of call to participate in the World Superyacht Awards before sailing on to the Mediterranean. But hours before the ‘MY Phi’ was due to depart London, the then Transport Secretary Grant Shapps ordered the detention of the superyacht. Capturing the moment on social media, Shapps’ intervention attracted considerable media attention as officers from the National Crime Agency boarded the bright blue yacht, which boasts what its builders describe as an “infinite wine cellar” and a freshwater swimming pool.

Sergei Naumenko, the wealthy Russian businessman who beneficially owns the Phi, went to court to challenge the government’s detention of his superyacht. Naumenko claimed the Transport Secretary had unlawfully exercised his sanctions powers as part of a publicity stunt to look “tough”, and argued that the Phi’s detention was a disproportionate interference with his property rights.

Naumenko’s challenge was unsuccessful both at the High Court and on appeal, when the case was heard together with Eugene Shvidler’s challenge to his sanctions designation. Handing down its decision in February 2024, the Court of Appeal confirmed that the Phi’s detention was lawful, as the government could exercise these powers simply on the basis that Naumenko is “connected with Russia”.

The appeal judges also found that the yacht’s detention was not a disproportionate interference with Naumenko’s property rights – as only one of his superyachts, it could hardly be said to have caused daily hardship to Naumenko. In reaching its decision, the Court of Appeal emphasised the government’s broad discretion when using its sanctions powers to achieve the important foreign policy aim of deterring Russian aggression.

Who is Sergei Naumenko and why was his yacht detained?

Sergei Naumenko is a wealthy Russian businessman who lives in Russia and has various business ventures in Russia. He controls and benefits from the ‘MY Phi’ superyacht detained by the UK’s transport secretary on 29 March 2022 while docked in London. Although Naumenko himself is not on any sanctions lists, the government has broad powers to detain ships that are “owned, controlled or operated by a person connected with Russia.”

Worth a whopping £38 million, the Phi was targeted by the UK government on the thinking that its seizure would demonstrate “strong action in the present crisis” in the early days after Russia’s full-scale invasion of Ukraine. The transport secretary at the time, Grant Shapps, said that impounding the superyacht had “turned an icon of Russia’s power and wealth into a clear and stark warning to Putin and his cronies”.

Naumenko told the court that he had never met President Putin nor participated in any political activity.

Why does this case matter?

This case was the first Russia-related sanctions challenge to reach the courts, testing the purpose and proportionality of sanctions measures against Russia. The legality of the Phi’s detention underscores the breadth of the government’s sanctions powers and the wide berth the courts are likely to give to ministerial decisions about how those tools are put to use. This decision should strengthen the government’s hand in making ambitious use of the full range of measures at its disposal across all sanction regimes.

The government successfully established that targeting a symbol of mobile Russian wealth docked in London can legitimately be done as a way of pressuring Putin to change course in Ukraine, even though it stopped short of designating Naumenko. The government also achieved court recognition of its rationale for targeting the systems of patronage that sustain the Russian political economy and those who benefit from them, providing further justification for bolder usage of sanctions against kleptocratic networks.

The case highlights the importance of ensuring sanctions decisions are informed by solid evidence and communicated accurately to the public. The courts were critical of false public statements that Grant Shapps made at the time of the Phi’s detention, including that Naumenko was an oligarch with close connections to Putin. While the statements ultimately had no bearing on the lawfulness of the yacht’s detention in this case, this judicial criticism serves as a warning against sanctions being used for political point-scoring. Misleading or ill-considered statements can hurt the legitimacy of sanctions as a key tool for communicating the UK’s defence of international norms.

Global context

The UK has long been a well-known hub and safe haven for oligarch wealth, from luxury London properties to private art collections. Superyachts like the Phi meanwhile are symbols of the opulent lifestyle and mobile wealth of the ultra-rich, and of Russian oligarchs in particular.

As the first detention of a Russian-owned ship under the UK’s post-Brexit sanctions regime, the seizure of the Phi sent a strong message in the early days after the full-scale invasion of Ukraine that the UK will no longer provide a safe haven for Russian wealth. The US, EU and others have also taken strong actions against superyachts linked to sanctioned Russian oligarchs. This has included the $90 million Tango, located in Spain and owned by Viktor Vekselberg, and the $300 million Amadea, allegedly owned by Suleiman Kerimov and seized in Fiji.

But while the seizure of superyachts has been a powerful symbol of western resolve, the practical reality is that taxpayers may end up footing the bill for millions in maintenance each month while law enforcement agencies undertake the difficult and costly process of determining who is the real owner under layers of shell corporations. While the symbolism of capturing moving targets of wealth captured the public’s imagination, bold plans to return proceeds of seized vessels or sanctioned assets to Ukraine have not yet become a reality.

Details of the UK case

The High Court

After his lawyers unsuccessfully petitioned the Transport Secretary to release the Phi, Naumenko took his complaint to the courts. He brought his claim together with two companies used to hold his ownership of the yacht – Dalston Projects Ltd, a special purpose vehicle incorporated in St Kitts and Nevis that was the legal owner at the time of the detention, and Prism Maritime Ltd, the Maltese company to which Naumenko planned to transfer ownership of the Phi so it would become a EU-domiciled vessel.

On 21 July 2023, the High Court dismissed the challenge, finding that the government’s decision to detain the Phi was lawful despite Naumenko not being on the UK’s sanctions list. The court clarified that the sanctions regulations provide “distinct regimes” not limited to designated individuals, and that there were “likely direct and indirect links” between Naumenko’s wealth and the Russian state.

The court also accepted the government’s explanation that the detention of the superyacht in this context could “weaken tacit support for the regime”. It also made generous allowance for the government’s “broad margin of discretion” when exercising such powers to achieve its foreign policy objectives.

The Court of Appeal

Naumenko took his case on appeal, challenging whether the Phi’s detention was rationally connected to the government’s objective of deterring Russian aggression against Ukraine, and whether there was a fair balance struck between the infringement of his rights with this objective.

Handing down judgment on 27 February 2024, the appellate judges made clear that the court will form its own assessment of whether sanctions measures are proportionate and will not simply rubber stamp the government’s analysis. But considering the circumstances of this case, the judges unanimously concluded that the interference with his property rights was not disproportionate given Putin’s “very serious violation of international law and the need to bring the invasion of Ukraine to an end”. Echoing the High Court judge, the Court of Appeal emphasised that the detention of a luxury superyacht does not cause Naumenko daily hardship.

In rejecting Naumenko’s challenge, the Court of Appeal reiterated that the low, but clear, threshold set in the Russia sanctions regulations only requires the person to be “connected with Russia” not designated. The court also went further, recognising that the Russian patronage system and the need for wealthy Russians like Naumenko to show loyalty to Putin, provided reason for concluding that he was likely to have received benefits from the Russian regime. Sanctioning wealthy Russians could in this way realise Parliament’s intention by weakening “tacit support” for Putin’s regime.

A legal victory but a judicial rebuke

Although securing a clear legal victory, the government did not come away unscathed. The Court of Appeal criticised Grant Shapps, the then transport secretary, for his public statements about Naumenko when giving media interviews and filming himself on TikTok. While the High Court downplayed the comments about Naumenko’s connections to Putin as “political hyperbole”, the Court of Appeal was far more scathing about the minister’s “false” comments which “ought not to have been said”. Yet while the Court of Appeal was clear that false statements should not be taken into account when making sanctions decisions, the judges were in agreement that the minister’s statements did not make any difference in this case.

Notwithstanding the judicial criticism of the minister’s loose rhetoric in this case, this appellate level stamp of approval for targeting the assets of even non-designated individuals gives the government the green light for the bold use of its sanctions powers in future.