Russia (Sanctions) (EU Exit) (Amendment) Regulations 2024
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Lord Ahmad of Wimbledon
That the Grand Committee do consider the Russia (Sanctions) (EU Exit) (Amendment) Regulations 2024.
The Minister of State, Foreign, Commonwealth and Development Office (Lord Ahmad of Wimbledon) (Con)
My Lords, this instrument contains measures to deter Russia from continuing its illegal invasion of Ukraine. Specifically, it targets the key sources of revenue that Mr Putin uses to execute the invasion. It was laid on 28 February 2024 under powers provided by the Sanctions and Anti-Money Laundering Act 2018 and entered into force on 1 March 2024. The instrument has been considered and not reported by the Joint Committee on Statutory Instruments. The instrument contains trade measures developed in close co-ordination with our G7 allies. The regulations ratchet up the pressure on Russia’s war machine and economy as part of the most severe package of economic sanctions that country has ever faced.
In 2022, Russia earned an estimated $3.5 billion from the export of diamonds. The UK was among the first to address this income stream by sanctioning Alrosa, the largest state-owned Russian diamond producer—estimated to hold a 30% share in the global diamond market—and its then CEO, Sergey Ivanov. Following this, we placed an additional tariff of 35 percentage points on imports of Russian diamonds in April 2022. On 1 January this year, we acted to reduce this income stream to the Russian regime by completely banning the import of diamonds into the UK from Russia. On 24 February, among a package of 50 new sanctions to mark the second year of the invasion, we sanctioned two further Russian diamond companies and five individuals, including Pavel Alekseevich Marinychev, the new CEO of Alrosa.
Today, we go even further. As announced in December, the G7 is acting together to curtail the flow of Russian diamonds into the world’s largest consumer market of diamonds. This legislation, prepared in close co-ordination with our G7 partners, bans the import of Russian diamonds processed in third countries. Previously, a rough Russian stone could be processed elsewhere, in effect transforming the stone’s origin. It will now remain banned regardless of any intermediate destination.
This will first apply to stones equal to or larger than 1 carat or equivalent to 0.2 grams or larger from 1 March 2024. From 1 September this year, it will drop to stones equal to or larger than 0.5 carats or equivalent to 0.1 grams or larger. The legislation will also ban providing technical assistance, brokering and financial services in connection with the import of third-country processed Russian diamonds.
Lord Ahmad of Wimbledon (Con)
My Lords, I thank the noble Baroness and the noble Lord for their support of the sanctions we have announced. As I said in my opening remarks, the Government recognise the importance of consistency— notwithstanding the right to debate and challenge the Government—and, equally, the message about the importance of alignment on this is always going out.
These measures are the latest we have added to our package of sanctions. The noble Lord, Lord Collins, and the noble Baroness, Lady Smith, asked about effectiveness. In my opening remarks, I articulated what has happened with exports and imports overall for the UK. The noble Lord, Lord Collins, mentioned luxury cars; data indicates that we have seen some real impacts on the specific countries he mentioned. I will write to him in more specific terms.
The noble Baroness, Lady Smith, talked about acting in conjunction with G7 partners and asked whether that was inclusive of the EU. My answer is yes, we are working very closely with the EU, and of course the EU also attends the G7 meetings.
Overall, we are funding new activity across the Government to improve the enforcement of sanctions. The noble Lord, Lord Collins, rightly mentioned oil, which I will come on to later. First of all, though, we have the economic deterrence initiative, which is a cross-government drive to strengthen the UK’s existing sanction regime, making it more robust and reaffirming the UK’s status as a world leader.
The EDI is providing £50 million of additional funding to bolster the UK’s sanctions framework, ensuring that we can go further to tackle circumvention and non-compliance issues, as the noble Lord, Lord Collins, raised. The objective of the EDI is to improve implementation and enforcement, and prepare for future scenarios. The EDI will fund activity across government to identify, anticipate and prepare our response to future threats. As I have said before from the Dispatch Box, we recognise that as we impose sanctions, there will be attempts to further circumvent them.
However, as the noble Lord, Lord Collins, will be aware, we have the establishment of the new Office of Trade Sanctions Implementation and the reinforcement of the Office of Financial Sanctions Implementation, which is up and running. It has an enhanced capability to improve novel financial sanctions, including the oil price cap. We have also given additional support to HMRC to investigate and prosecute the most serious sanction breaches.
As the circumvention evolves, we have provided increased specialist capability within the Joint Maritime Security Centre and the National Crime Agency, increasing the UK’s ability to detect and respond to breaches of maritime and transport-related sanctions. Work is also under way to expand the range of penalties that can be imposed for breaches of sanctions measures, to give our sanctions additional teeth. We will discuss that in your Lordships’ House as they come on board.
Major investment is taking place in building lasting sanctions capability across government. There is also investment in our ability to manage sanctions litigation. We are expanding the network of sanctions specialists in UK diplomatic missions. There is a programme of targeted technical assistance for third countries; both the noble Lord and the noble Baroness mentioned how we work with other countries. That is also being co-ordinated with EU and US partners.
The noble Lord, Lord Collins, talked about effectiveness compared to other countries. In terms of the total number of sanctions across three key jurisdictions on Russia since 2022, the UK stands at 2,001, the EU at 2,144 and the US at 4,053. Over that period of time, that is the sum of individuals and entities sanctioned. Of course, we work in conjunction with them but there are processes that we go through that are different to those in the EU and the US. At the same time, in certain sectors we have taken the lead, whereas the EU may have led on others—certainly the US has done so. This has included, specifically, more than 130 oligarchs in the UK, with a net worth of £147 billion; 78 oligarchs in the EU; and 95 oligarchs in the US. That gives a flavour of how the sanctions are being worked through.
I turn to the specific issue of diamonds. The noble Baroness, Lady Smith, said that she is not an expert on diamonds—neither am I. I have purchased diamonds on two occasions: once when I proposed and, the second time, on our 10th anniversary. For the sake of transparency, Lady Ahmad was the beneficiary of both; I am sure that she can comment on the quality of both the rings and the diamonds contained within.
The net impact that we estimate for the cost to business, which has been raised, is below £10 million per year. On the issue that the noble Lord, Lord Collins, raised, referring to the debate in the House of Lords, the revenue gained by Russia from diamonds smaller than 0.5 carats is much reduced compared with larger stones. Those diamond sizes are key for other non-Russian manufacturers in the supply chain. The value of smaller stones is added at the processing stage of the diamond’s life cycle. There is a market for diamonds smaller than 0.5 carats but the measures in this instrument need to balance the needs of non-Russian producer nations and the industry, which the noble Baroness flagged, with causing the maximum possible disruption to Russian revenue and with the capacity of the relevant traceability systems, which I shall come on to.
The staggered commencement dates will also allow the industry and producer and manufacturing nations to adapt. As I said in my opening remarks, diamond supply chains are complex and involve actors of many sizes, from miners and processors to global mining companies. The sunrise period will allow for adjustment to take place in this time so that there are no unintended consequences. The diamond industry itself is regulated, with various codes for sorted diamonds; they are categorised appropriately.
The G7 import restrictions extend to processed diamonds. There is also the existing Kimberley process, which applies only to rough diamonds. These two will run in a complementary fashion. We expect that the G7 implementation systems will complement the Kimberley process certification—the first line of clarification of the diamond country of origin—and be an additional layer that is placed over the Kimberley process for G7 markets specifically.
In terms of producing nations, which the noble Baroness mentioned, we are targeting only diamonds produced in Russia. In fact, our objective is to remove Russian diamonds from the world’s largest market for diamonds. Russia’s presence in the market is affecting the whole industry by eroding the reputation of diamonds. This initiative that we are undertaking with partners will help to mitigate this.
On the issue of enforcement on diamonds, we have released detailed guidance to help importers and traders demonstrate compliance with the sanctions. Traders should also be prepared to provide specific documentation to demonstrate evidence of a good supply chain, which must be consistent with the prohibitions under the regulations. Further detail has been made available to the sector, as I have said already, but it is also available on GOV.UK. Traders need to confirm that the diamond does not originate from Russia.
This is something that we are looking at with our G7 partners: there is a further strengthening of the implementation of the sanctions, in that we will look to improve the traceability of the supply chain. We are currently working with G7 partners on a mechanism that will ensure the integrity of the diamond supply chain. The G7 is developing what is termed a certification mechanism, which is being trialled from March and will work by using and expanding on the existing tracing technologies and controls.
On the question of oil, the noble Lord, Lord Collins, mentioned circumvention. The import ban on Russian oil and oil products in our markets has substantially reduced the size of the global market for Russian oil. The current oil price cap operates globally by prohibiting UK and coalition firms from providing services such as shipping, of which the UK is a major provider, insurance and finance to facilitate the maritime transport of Russian oil and oil products to countries worldwide, unless the oil was purchased from Russia at or below the price cap.
The noble Lord also referred to the impact. As he mentioned, oil remains Russia’s single largest revenue stream, accounting for roughly a quarter of the Russian budget in 2023. Taking measures to reduce this revenue stream is therefore critical to undermining Mr Putin’s ability to fund the illegal war. The OPC is designed to constrain Putin’s ability to fund this war by restricting the revenues flowing to the regime while, at the same time, ensuring as much market stability as possible, including that of third countries, so that there is affordable energy. In restricting Russian revenues in an OPC context we have effectively required Russia to either sell its oil at a discounted price through the OPC or spend time and money that would otherwise be spent on the battlefield.
The issue of circumvention is still very much a live subject. The coalition has recently acted jointly to tighten price cap compliance rules by placing more robust, regular and detailed requirements regarding the provision of price information on actors involved in facilitating the shipping of Russian oil. We of course reserve the right to take further action alongside our international partners to ensure its effectiveness, if needed. The Office of Financial Sanctions Implementation is also undertaking a number of investigations into suspected breaches of the OPC, using the powers under our SAMLA legislation.
I will end my comments there but will review the questions raised by both the noble Baroness and the noble Lord to ensure that we have answers to any questions that I have not answered. I assure noble Lords, as I have done repeatedly, that we will continue to work on a cross-party basis to ensure that there is full information. It is right that we debate these sanctions regimes. The questions raised by the noble Baroness and the noble Lord serve a key purpose in ensuring that we are robust in our actions and that we send a strong signal to Russia that, when the United Kingdom talks of sanctions, it is not just talk; there is real structure and focus behind it. I assure both the noble Lord and the noble Baroness that we will continue to work in concert with our EU, US and other allies to have a maximum impact on Russia’s strategic and economic interests, including on the issue of diamonds. As the traceability mechanism comes into being I will certainly share it with noble Lords at the appropriate time.
I am sure that I speak for all in this Committee and beyond when I say that we stand firmly and resolutely with the people of Ukraine. We will continue to support them until they prevail. With that, I commend these regulations to the Committee.