RFS0031

Written evidence submitted by Mr Joe Horsfall – Investor in Evraz Plc

Treasury Committee inquiry: are the UK’s financial sanctions on Russia working?

7. The mitigation of any unintended consequences of financial sanctions

1. Introduction

1.1.  Evraz Plc (Evraz) is a UK incorporated multinational steel manufacturing and mining company that is part owned by minority shareholding “Russian Oligarchs” with substantial assets and operations in Russia, North America and Europe. It is a vertically integrated steel company and carries out the production of steel, coal and vanadium products. Its portfolio of products includes semi-finished steel products, pipes, raw materials, coking coal concentrate, raw coking coal, tubular products and vanadium.

1.2.  Evraz Plc is a UK incorporated Plc holding company that joined the London Stock Exchange in November 2011 where it has remained since, despite being unable to trade since suspension was enacted on announcement of the sanction of Roman Abramovich on 10th March 2022.

1.3.  Within the latest available financial results approx. 30% of Evraz’ outstanding shares are owned by institutions, of which;

1.3.1.      9.2% being UK institutions

1.3.2.      10.2% being US institutions

1.3.3.      the remaining institutions largely being outside of Russia (Europe exc. Russia and UK – 5.2%, Asia/Pacific – 1.5%, other 1.9%, with Russia accounting for only 0.2% of institutional ownership[1].

1.4.  The following aims to highlight the position of innocent investors now stuck without peaceful enjoyment of possessions for over 2yrs due to indirect expropriation of investment due to UK sanctions policy, with a view to using the reference as a way of mitigating unintended consequences.

2.0.            Context of Urgency in Respect of Sanctions leading to Unintended Consequences

2.1.                         On the Tuesday 22nd February 2022 the incumbent Prime Minister Boris Johnson in response to Dame Margaret Hodge detailed in the Ukraine debate within the house of commons, as extracted from Hansard:

2.2.                         “I understand the right hon. Lady’s concern but believe she is in error in what she says, because we can certainly target members of the Duma, Abramovich is already facing sanctions and in the announcements I have made today Gennady Timchenko, to whom she just referred, is specifically targeted; he is on the list, as are Boris Rotenberg and Igor Rotenberg. These are people who are very close to the Putin regime, but, as I said to the House, they are just part of the first barrage”[2].

2.3.                         Subsequently, the Prime Minister admitted he misspoke and would correct the record as Roman Abramovich was not sanctioned at this time[3]. Two days later on the 24th February 2022 Russia invaded Ukraine.

2.4.                         The Leader of The Opposition on Wednesday 2nd March 2022 in PMQ’s questions the Prime Minister as to why Mr Roman Abramovich has not been sanctioned. Evidence of sentiment available showing this was an embarrassing mistake by the Prime Minister[4].

2.5.                         In the FT next day 3rd March 2022 the Foreign Secretary is published as announcing plans to expedite legislation and reducing the threshold for evidence required in imposing sanctions[5]. Potential political duress in not having sanctioned the UK’s arguably most famous “Oligarch” (Mr Roman Abramovich) is noted:

2.5.1.      “UK foreign secretary Liz Truss is pushing for emergency legislation to speed up the process of imposing sanctions on Russian oligarchs with links to President Vladimir Putin following the invasion of Ukraine.

2.5.2.      Truss hopes to reduce the evidence threshold for proving an individual’s links to the Kremlin and introduce measures to make it easier to designate groups of individuals more quickly, according to government officials”.

2.6.                         On 9th March 2022 in the FT the foreign secretary admitted the UK had been slower in imposing sanctions on high-profile Russian oligarchs compared with the EU and US[6].

2.7.                         10th March 2022 Evraz Plc was suspended on the London Stock Exchange – and subsequently removed from the FTSE 100.

3.0.            Reasons for Unintended Consequences

3.1.                         Sanctions being imposed unilaterally before other blocs with stark differences in the veracity and content of designation detail.

3.1.1.      15th March 2022 EU sanction of Mr Roman Abramovich and detail in his sanction designation[7] only mention of Evraz Plc is due to being a large tax payer in Russia, “He is a major shareholder of the steel group Evraz, which is one of Russia’s largest taxpayers”.

3.1.2.      UK designation detail made 10th March 2022, “Furthermore, ABRAMOVICH is or has been involved in destabilising Ukraine and undermining and threatening the territorial integrity, sovereignty and independence of Ukraine, via Evraz PLC, a steel manufacturing and mining company in which ABRAMOVICH has a significant shareholding and over which ABRAMOVICH exercises effective control. Evraz PLC is or has been involved in providing financial services, or making available funds, economic resources, goods or technology that could contribute to destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine – which includes potentially supplying steel to the Russian military which may have been used in the production of tanks. ABRAMOVICH exercises effective control of Evraz PLC given his significant shareholding and the shareholdings of his close associates who it is reasonable to expect ABRAMOVICH could direct through his close ties with Abramov and Shvidler, as well as his power to nominate directors of the board. ABRAMOVICH is or has been involved in obtaining a benefit from or supporting the Government of Russia, as ABRAMOVICH and Evraz PLC carry on business in sectors of strategic significance to the Government of Russia – namely the construction, defence and extractive sectors.

3.2.                         Sanctions were focussed on “celebrity” see Treasury Committee report, “Defeating Putin: the development, implementation and impact of economic sanctions on Russia”[8]. The section on p10 “Measures against Russian kleptocrats and oligarchs”:

3.3.                         Sanctions are formulated on the threshold of “reasonable suspicion”

3.3.1.      On the 1st March 2018 the Joint Committee on Human Rights’ Third Report of Session 2017-2019 Legislative Scrutiny: The Sanctions and Anti-Money Laundering Bill[9] gave robust foresight on the potential issues surrounding reduced threshold.

3.3.2.      Reasonable suspicion requires only sufficiently solid factual basis. Journalistic sources of such can be protected and there is no transparency of sources.

3.3.2.1.            Example, the FCDO were in contract with OCCRP under DFID Project Name” Supporting Investigative Journalism on Illicit Finance and Corruption, DFID Project Number: 300789-101[10]. Payments were forecast in an annual allocation of £191,196.50 to be made over 2yrs, total £382,393.

3.3.2.2.            You can view the actual payments in the dev tracker[11] amounting to:

3.3.2.2.1.      Feb 21 - £136,565

3.3.2.2.2.      Mar 21 - £77,529

3.3.2.2.3.      Aug 21 - £113,565

3.3.2.2.4.      Nov 21 - £183,662

3.3.2.2.5.      Apr 22 - £7,535

3.3.2.2.6.      TOTAL: £518,856

3.3.3.      The FCDO have a relationship with the OCCRP. Some extra £136,463 of taxpayer money claimed by the OCCRP right around the time evidence required for reasonable suspicion. The OCCRP published articles such as 20th July 2022 “Despite Denials, Abramovich Companies Have Supplied Materials for Russian Military”[12].

3.4.                         Poor impact assessment detail

3.4.1.      In 2018 the regulatory policy committee established a de minims threshold of £5mil for impacts from primary legislation[13]. This threshold is easily fulfilled by UK private investors in Evraz within our small group, without considering large UK institutional holders like ABDRN with significant sums invested including pensions.

3.4.2.      The current suite of impact assessments are very basic and rudimentary in so far as they provide options on a binary “do nothing” or “do something” basis.

3.4.3.      Unable to locate an impact assessment specifically relating to Evraz investors.

3.5.                         No cohesion between regulatory authorities; FCDO, OFSI and FCA.

3.6.                         Legislation enacted with Henry VIII powers and without parliamentary scrutiny.

4.0.            Unintended Consequences – Expropriation

4.1.                         Innocent UK investors have been without effective control due to interference with peaceful enjoyment and benefit of investments

4.2.                         Regulatory authorities have taken effective control of investments directly relating to the sanctions acts via creeping and/or indirect expropriation for bone fide public purpose in the absence of compensation

4.3.                         Value of shareholding has been diminished by accusations made under “reasonable suspicion” and the suspension

4.4.                         Expropriation - At the time of writing no mention has been made from any organisation with regards to compensation. By way of extension the lack of control of UK investors in their shareholding after a “reasonable time” is appears an indirect expropriation, The 1961 Harvard Draft on expropriation includes:

4.4.1.      “any such unreasonable interference with the use, enjoyment or disposal of property as to justify an interference that the owner thereof will not be able to use, enjoy or dispose of the property within a reasonable period of time after the inception of such interference”

4.5.                         The below sections used to qualify expropriation are taken from Volume 61 of the Halsbury’s Laws of England “International Law and Foreign Relation”.

4.5.1.       Expropriation of the property of aliens.

4.5.2.      It is now generally accepted that, subject to any international engagements to the contrary, expropriation of the property of aliens is not in itself contrary to international law, provided that certain conditions are met. The debate has focused on the nature of these conditions. It is now generally considered that expropriation will not be contrary to international law, provided:

4.5.2.1.            (1)     it is for some bona fide public purpose;

4.5.2.2.            (2)     it is not discriminatory; and

4.5.2.3.            (3)     it is accompanied by compensation

4.6.                         Whilst the nature of the “bone fide public purpose” and the “discriminatory” aspects are open to discussion it is the absence of “compensation” that makes this expropriation concerning.

4.7.                         Expropriation: the nature of expropriatory conduct.

4.7.1.      At its most straightforward expropriation consists of an outright deprivation of the owner's title to property, but expropriation may take many forms and action that falls short of a direct taking of the assets in question by the state may still constitute expropriation. For example expropriation may be constituted by depriving the owner of the use of property, or excessive use of national legislation to deprive the owner of the fruits of the property (as in the use of tax or exchange laws), or by a government taking successive measures which result in a foreign company being rendered incapable of managing it’s property. One relevant factor will be whether the acts of the given state are in conflict with undertakings and investments affected by the action. While there has been limited analysis as to the types of property that may be subject to expropriation as a matter of customary international law, it is now well established that property is not confined to immoveable or tangible assets or assets such as shares, but also extends to rights under a contract

4.7.2.      See shares qualified as property.

4.8.                         Expropriation: public purpose.

4.8.1.      To be lawful under international law, an expropriation must be motivated in good faith by some social or economic public purpose involving the use of the property which is expropriated. Taking property for the purpose of exerting pressure in a political dispute, or in order to hand it over to another individual or company would therefore be unlawful.

4.9.                         Expropriation: discrimination.

4.9.1.      The expropriation of alien property must not be such as to discriminate against the property or its owners.

4.10.                    Expropriation: compensation.

4.10.1.  Even if an expropriation fulfils the conditions of public purpose and non-discrimination, it is still unlawful if there is a failure to provide for compensation. One formula commonly used is that the compensation must be prompt, adequate and effective, although according to a different school of thought the applicable standard is one of 'appropriate compensation'. A claimant may, in any event, agree to accept less than full compensation7.

4.10.2.  Compensation is absent

5.0.            Ways to Mitigate Unintended Consequences

5.1.                         In assessing the impact of “surgically targeted sanctions” and avoiding unintended consequences on individuals associated with trade and business it’s recognised that impact assessments are fundamentally crucial in conjunction with the periodic review of sanctions. For Evraz investors we notice an impact assessment is absent for our category, and the requirement for periodic review has been extended from 1yr to 3yrs. It would be beneficial to the assessment of sanctions if impact assessments are as surgically targeted as the sanctions themselves and conducted more regularly.

5.2.                         It would be beneficial to review the content of impact assessments and the existing rather rudimentary design of the recommendations in respect of binary conclusions within. The current suite of impact assessments are very basic and rudimentary in so far as they provide options on a binary “do nothing” or “do something” basis. The impact of sanctions are multivariate and the current format of impact assessments does not acknowledge the spectrum of mitigating circumstances that can be found between “do nothing” or “do something”, especially where “do something” is generally an extreme.

5.3.                         Evraz investors have witnessed clear discrepancies in the imposition of UK sanctions compared to other blocs, against government strategy[14]. It is currently fact that Evraz Plc is only sanctioned as a company specifically in the UK. The sanctions on the company specifically, in the absence of sanctions on other similar organisations, makes the sanctions appear arbitrary and disproportionate. It could improve sanctions strategy by working with other sanctions bodies to implement trade sanctions that envelop multiple organisations and avoid individual arbitrary sanctions that are open to future legal challenges. This seems to be a pragmatic approach to avert potential for challenge.

5.4.                         Sanctions as a policy are useful in regard to the cost efficiency of the reliance on the private sector to enact them. Wider trade sanctions as opposed to arbitrary targeting would arguably increase cost efficiency by reducing the administration of individual designations and replacing with sensible umbrella sanctions.

6.0.            Conclusion

6.1.                         By way of having comprehensive impact assessments conducted and utilising the potential for wider trade sanctions the UK can avoid “unintended consequences of sanctions” by predicting and mitigating unnecessary hardships imposed.

6.2.                         The umbrella of trade sanctions as opposed to individual sanctions on companies mitigates the potential for costly legal consequences. Importantly the construct of sanctions legislation and its expedition in early 2022 led to an admissionof errors as early as April 2022[15].

6.3.                         The detail offered by surgically targeted impact assesments could have an important role in bringing pragmatism back to the UK sanctions regime and reversing some of the errors made, aligning UK sanctions policy to the strategy that has been set out.

March 2024