Further Developments in UK Sanctions: Does Putin Control Every Company in Russia?

At a Glance

• A decision in the UK’s High Court is the most recent to address the definition of ‘control’ in Regulation 7 of the Russia Regulations 2019. 
• The case, heard earlier in November, restricts the broad interpretation given by the Court of Appeal that every company in Russia was potentially controlled by Russian President Vladimir Putin.

A recent decision in the High Court illustrates a further development in the landscape of the UK sanctions regime that we explored in our article for the Global Legal Post. This decision is the first significant judicial consideration of Flaux C’s comments made in the Boris Mints case as to the definition of ‘control’ in Regulation 7 of the Russia (Sanctions) (EU Exit) Regulations 2019 (the Russia Regulations).

Definition of ‘control’

In the Boris Mints case it was found that Regulation 7 covers a designated person who exercises control over another company, irrespective of whether they have any form of ownership of the company. ‘Control’ was interpreted in terms of sufficient influence and power, rather than direct ownership, and there is no limit in the provision as to how this control is achieved. Flaux C noted that the implications of this interpretation were wide and far reaching and that the ‘consequence might well be that every company in Russia was “controlled” by Mr Putin and hence subject to sanctions’.

However, a further case that was heard in the High Court this month has somewhat restricted this interpretation. In an application for summary judgment in Litasco SA v Der Mond Oil and Gas Africa SA & Anor [2023] EWHC 2866 (Comm) the defendant, Der Mond Oil and Gas Africa SA (Der Mond) argued that it had a reasonable defence as the claimant, Listasco SA (Litasco) should be a designated as a sanctioned entity under the Russia Regulations. Litasco are wholly owned by Lukoil PJSC (Lukoil), a Russian oil company.

Mr Justice Foxton considered whether Litasco was controlled (within the meaning of Regulation 7) by Mr Alekperov. Mr Alekperov was the founder, president and chief executive of Litasco until April 2022 when he stood down, having been sanctioned by the Russia Regulations. Foxton J highlighted that Mr Alekperov only held 8.5% of the shares in Lukoil, and that this was not sufficient to demonstrate that he retained a controlling stake in Litasco. There was no other evidence of ‘control’ by Mr Alekperov advanced by Der Mond.

The court also considered whether, in the alternative, Litasco could be controlled by President Putin. In this defence, Der Mond relied on the discussion of control that had had occurred in the Boris Mints case. However, as Foxton J summarised, in that case, the claimant bank was 97.9% owned and controlled by the Central Bank of Russia (a Russian public body). There was no similarity in that respect with Litasco or Lukoil. The judgment did state that there is a strong likelihood that Putin could place Litasco under de facto control if he wished. However, Foxton J clarified that the interpretation of Regulation 7 is with a focus on ‘existing influence’ and not on potential control.

All of Der Mond’s defences were found to have no real prospect of success and summary judgment was granted in favour of Litasco.

Impact

When discussing the Flaux C’s comments in the Boris Mints case, Foxton J stated the need for caution in their interpretation. He argued that these comments were made tentatively and should be considered in the particular context in which they were made. Extrapolating their meaning to a case which is not similar on the facts would not be appropriate.

Der Mond went as far as to argue that the case should proceed to trial so that it could be used as a test case for the definition of control under the Russia Regulations. However, as Foxton J stated: ‘there is unlikely to be a shortage of disputes providing the courts with the opportunity to examine the 2019 Regulations over the coming months’. We will provide updates as and when the judgments in any such cases are published.

In the meantime the Foreign, Commonwealth & Development Office (FCDO) has reacted to the Boris Mints case by publishing guidance on its approach to ownership and control under the Russia Regulations. In relation to public bodies, a designated person holding a leadership position does not automatically make the body subject to sanctions, although if the FCDO considered that such a person was in fact exercising control it would designate the public body. In relation to private entities, they do not consider that they are subject to control by designated public officials just because an entity is based in the relevant jurisdiction. Specifically, the FCDO does not consider that Mr Putin exercises indirect or de facto control over all entities in the Russian economy merely by virtue of his occupation of the presidency.