Failure of Shvidler and Naumenko appeals strengthens the UK government’s hand on sanctions

1 March, 2024 | 5 minute read

The UK government has prevailed in two high-profile challenges related to Russian sanctions measures, including the detention of a superyacht and a UK citizen’s sanctions designation. 

On Tuesday, the appeals in Dalston Projects Limited and others v The Secretary of State for Transport and Shvidler v Secretary of State for Foreign, Commonwealth and Development Affairs were unanimously dismissed, with the combined Court of Appeal judgment setting out how courts should scrutinise sanctions measures and assess their contributions to the government’s ultimate aim of encouraging Russia to cease aggression against Ukraine. 

The ruling was the latest in an unbroken series of sanctions wins for the government. With the courts confirming the government’s wide remit to impose sanctions, it’s now time for more ambition to ensure kleptocratic networks are effectively addressed, safeguards such as licences are working appropriately, and all sanctions tools are used when there is sufficient evidence at play.

Shvidler and Naumenko bring the first Court of Appeal sanctions challenges

As the first Court of Appeal ruling on sanctions measures imposed following Russia’s full-scale invasion of Ukraine, proceedings were linked for the cases of Sergei Georgievich Naumenko, a Russian property developer who was not even on the sanctions list, and Eugene Markovich Shvidler, a dual British-American citizen and former non-executive director of the steel giant Evraz, who was. 

Naumenko appealed a High Court decision upholding the Secretary of State for Transport’s detention of his superyacht, the Phi, while docked in Canary Wharf in March 2022, under Russian sanctions regulations. Naumenko is the ultimate beneficial owner of the Phi, while the case gets its name from the yacht’s legal owner, a special purpose vehicle called Dalston Projects. 

Shvidler appealed a High Court decision upholding his March 2022 sanctions designation based on his “close business links” to Roman Abramovich and his previous role at Evraz, which operates in the extractives sector that is of strategic significance to the Russian government. 

Proportionate sanctions – a “serious price” to pay  

Both Shvidler and Naumenko challenged whether sanctions measures used against them were rationally connected to the objective of encouraging Russia to cease its aggression against Ukraine – and whether there was a fair balance struck between the infringement of their rights with this objective. 

The court made clear that it will make its own assessment of proportionality and not simply rubber stamp the Secretary of State’s analysis. However, the infringements of Shvidler and Naumenko’s property rights and Shvidler’s rights to private and family life were considered by the court to be proportionate given Putin’s “very serious violation of international law and the need to bring the invasion of Ukraine to an end”. 

In discussing Shvidler, the court found that “each individual designation does make a contribution to the overall impact of all the measures imposed under the sanctions regime,” and that sanctions often “have to be severe and open-ended if they are to be effective.” A “serious price” must be paid by those who are designated.

Naumenko additionally questioned whether his yacht’s detention was lawful since he is a non-designated person, with detention reasons being that he is “a wealthy Russian resident.” The court reiterated that the low threshold set in the Russia sanctions regulations only requires the person to be “connected with Russia,” not designated. 

The court also went much further, recognising that the Russian patronage system and need for loyalty to Putin from wealthy Russians, like Naumenko, provided reason for concluding that he was likely to have received benefits from the Russian regime. Sanctioning wealthy Russians could realise Parliament’s intention by weakening “tacit support” for Putin’s regime. 

This was also the first appeal regarding sanctions for a UK citizen. Shvidler argued that the more extensive effects of his sanctions as a UK citizen (the measures effectively freeze his assets worldwide) should be considered in the court’s analysis. The court highlighted that Shvidler and his family can obtain permission to pay for their basic needs through the Treasury’s Office for Financial Sanctions Implementation (OFSI) licensing system, referencing a remedy against the Treasury for licensing complaints but that such complaints are not a reason to “question the lawfulness of the designation.”

Where does this leave us?

This judgment overall leaves the Government with a wide remit for designations and other sanctions measures against UK citizens and non-citizens, alike. Further challenges to sanctions measures will now face very high legal hurdles to succeed. However, legal challenges are just one factor in the complexities of ensuring the overall sanctions regime’s effectiveness. 

While the government has won every sanctions challenge, there is a noticeable lack of follow through in enforcement of sanctions breaches. The first criminal charges related to Russian sanctions evasion were only brought this year against Dimitrii Ovsiannikov, a former governor of Russian-occupied Sevastopol, whose trial is planned for March 2025. OFSI has so far issued one reprimand for Russia sanctions breaches and imposed fines in less than 1% of breach reports across all sanctions regimes. More enforcement is needed to ensure sanctions will be effective in deterring Putin and the kleptocratic networks that sustain his power.  

Within the government’s broad sanctions powers, key safeguards and best practices need improvement. Licensing issues were highlighted in cases such as the designation challenge from Anzhelika Khan, wife of Putin-ally German Khan, where basic needs licences faced significant delays, while OFSI then granted luxury expenses such as private schooling. Licensing for luxury expenses has persisted since the Aven case in 2022, with the Khan case demonstrating that more work needs to be done on striking a balance between providing critical needs licences swiftly and resisting luxury licensing permissions.

The court also reprimanded Grant Shapps, the then Secretary of State for Transport, for inaccuracies in his public statements about Naumenko. The minister made false comments about Naumenko’s connection to Putin, which “ought not to have been said” and should not be taken into account when making sanctions decisions, though the court found that the comments ultimately did not make a difference in the outcome of the yacht’s detention. To ensure its sanctions measures are credible, the government must use accurate information and intelligence to inform its decisions and messaging on sanctions. 

With the government being given a green light for bold use of sanctions powers, it should also pursue consistency in its approach across all sanctions regimes, particularly the underutilised global anti-corruption framework. 

With courts limited to scrutinising sanctions on a case-by-case basis, it’s critical that there is proper scrutiny and oversight of the sanctions regime. The newly announced Treasury Select Committee’s parliamentary inquiry on the effectiveness of Russian sanctions is a welcome step in this direction, and we hope it will provide some welcome scrutiny of how current sanctions measures are working and what are the critical factors hampering their success. But ultimately, Parliamentary scrutiny may need to be complemented by a rigorous independent review of how the sanctions regime as a whole is operating, from designation strategy and licensing to enforcement and oversight, to ensure its use of these powerful tools are credible and effective.

The Shvidler and Naumenko appeals were heard at the Royal Courts of Justice

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