Following the economic restrictions imposed by the European Union and the US government on Russia, we talk to Sarosh Zaiwalla, the lawyer who got sanctions against Iran's Bank Mellat lifted last year.

Amid rising tensions between the West and Russia over the annexation of Crimea, the European Union and the US imposed sanctions last month on high-ranking individuals connected to President Vladimir Putin, with the possibility of further economic action on the horizon.

In response to the Crimean referendum on 16 March, the US and the EU both carried out their threat to impose sanctions on individual Russians and Ukrainians. The EU punished senior Russian government officials and other named individuals with asset freezes and travels bans, while the US also ordered similar sanctions against 11 individuals.

Later in the week, the US increased its number of sanctioned officials to 31, targetting a number of Putin's inner circle, and blacklisted a high-profile bank, while the EU also extended its sanctions to include another 12 individuals, bringing the total up to 33. The US and the EU also confirmed they would introduce further economic measures if the situation were to escalate.

Despite fresh sanctions from the West, Putin signed a treaty completing the procedure to absorb Crimea into the Russian Federation in a move that was quickly condemned by Western leaders, with US vice-president Joe Biden describing the annexation of the territory as "nothing more than a land grab" by Moscow.

The impact of sanctions was immediate. Shares plummeted in Moscow in response to the new measures and two credit-rating agencies downgraded Russia's outlook from stable to negative. Visa and MasterCard have also restricted access to Russian financial institutions in order to comply with US sanctions.

After sanctions were quashed last year against Bank Mellat, an Iranian bank that was banned from trading with the UK over alleged links with Iran’s nuclear programme, the EU is scared of imposing stricter financial restrictions on Russia, according to Sarosh Zaiwalla, the lawyer who won the case for the bank.

“I have been informed by a confidential source within the EU that it is facing a dilemma and is very reluctant to increase the effort of the sanctions because it is concerned about the effect the Bank Mellat judgment will have,” Zaiwalla told this publication in an interview.

“It is important to remember that the EU and all Western democracies have the basic principle of rule of law. You can’t just put a person under sanction for political reasons. If the state has any allegations against individuals or corporations for any wrongdoing, the state can only act providing it can justify its conduct before a court of law,” he said.

Zaiwalla is senior partner at Zaiwalla & Co Solicitors, and has represented some of the most powerful people in the world.

He was the first Asian to set up a law firm in the City of London 30 years ago and has represented a number of high profile clients, including the Dalai Lama, members of the Ghandi family, and millionaire tycoons Robert and Vincent Tchenguiz. He also famously hired and then fired a young Tony Blair when he was a barrister, before he began his political career. His firm now boasts a £3.5 million ($5.8 million) a year turnover and employs 18 lawyers.

Bank Mellat

Zaiwalla hit the headlines last year when he managed to get trading sanctions lifted by the UK government on Bank Mellat, Iran's largest private bank.

The UK Supreme Court overturned sanctions imposed in 2009 on Bank Mellat by the UK government over the bank's alleged involvement in Iran's nuclear energy programme. The bank is now suing the UK government for £2.4 billion and the case has paved the way for similar actions from scores of Iranian firms, including banks and oil companies.

Western countries have taken a number of steps in recent years against Iran over its nuclear activities with sanctions that have taken a huge toll on its economy and people. Measures imposed by the US government and the EU have targeted Iran's oil, banking and financial sectors, and sanctions have included the freezing of assets and the blocking of trade to prevent Iranian companies from doing business with Western banks.

Zaiwalla said that he saw many parallels between what is happening as a result of sanctions imposed by the US and the EU on Russia and the economic measures taken against Iran.

“The courts have made it very clear that unless [there is] evidence against an individual or a bank that they are involved with, you cannot sanction them based on suspicion. Those that have been named on the list will seek to do the same thing as Bank Mellat. We have already been contacted by two people on the list so far that want to talk to us about the implications of the sanctions," said Zaiwalla.

US will go it alone

The latest US list of sanctioned officials includes 20 names and targeted several influential businessmen with close ties to Putin. Sanctions were also imposed on Bank Rossiya, which the US claims is the personal bank for senior officials of the Russian Federation.

With the crisis showing no sign of abating, the possibility of more intrusive sanctions remains. President Barack Obama has said that the US was also considering penalties against Russia's economy, including its energy sector, while European Council President Herman Van Rompuy warned that failure to settle the crisis peacefully, and any steps by Russia to destabilise Ukraine, would have “far-reaching consequences”.

While Zaiwalla believes the Bank Mellat ruling has made the EU reluctant to impose further sanctions against Russia, he feels there is a strong possibility that the US will up the ante and impose stronger financial restrictions similar to those used against Iran.

"The sanctions as they stand will not have an effective bite against a country the size of Russia and are largely cosmetic as Western powers have to show they are doing something. The US could go off in a different direction as the EU will want to protect itself from a possible backlash of claims for damages. In the EU you can’t list an individual or company without evidence and you need to be able to justify it in an independent court of law," said Zaiwalla.

Zaiwalla said that the US could increase sanctions without threat of being sued as it has a different threshold in enforcing the rule of law principle.  

"The US and EU are completely different as the rule of law principle is in place which makes it possible to challenge in an independent court. The rule of law is applied in the US, but when it comes to political expediency it can be thrown overboard," said Zaiwalla.

"There are major differences between US and EU sanctions because the US ones are an executive order of the president. So it is very difficult to challenge. The only real remedy is for widening the executive order is to make an application for relief from sanction to OFAC," he added.

What will the banks do?

In 2012, Standard Chartered was fined $415 million after breaking US sanctions with Iran and New York banking regulators also threatened to strip  it of its state banking license. Royal Bank of Scotland also became embroiled in fresh controversy last December after being fined $100 million for breaching sanctions with countries including Iran, Cuba and Burma, while earlier this year, BNP Paribas set aside set aside $1.1 billion to cover the cost of likely breaches of US economic sanctions, including Iran.

Zaiwalla believes that because of the power the US government wields over Wall Street, as seen with fines imposed on financial institutions for violating sanctions, the big banks are likely to kowtow to its wishes if further financial restrictions are imposed.

"The US has strong muscle. The Iran situation has shown the US can arm-twist banks because most dollar transactions go through New York. Through New York banks they can make life difficult for anyone that deals with Russia. Big banks are scared as they don’t want complications, as has happened with Iran," said Zaiwalla.

Implications

Analysts have warned that increased sanctions would hit both sides hard. The EU is Russia's largest trading partner and accounts for over 50 per cent of all exports, while the hit to the EU would also be serious, mainly due to its dependence on Russian energy reserves.

Wider sanctions have huge implications for the finance industry as a whole considering the links wealthy Russians now have with the EU and US. Many Russian high net worth individuals bank in Europe and have invested heavily in real estate markets in Western capitals as well as businesses of all kinds and further financial sanctions against Moscow could potentially lead to an exodus of capital from the West.

With Russia's oligarchs becoming increasingly worried about the prospects of further economic sanctions, last month, Putin told company bosses to bring their assets home to help the nation survive the measures and economic downturn.

Fear of sanctions and assets being frozen overseas could see Russian high net worth individuals pulling their money from Western banks. Analysts have said that the threat of sanctions may already have resulted in a flow of Russian funds out of the West, with Russian oligarchs pulling billions out of banks in anticipation of stricter controls, echoing the situation in Cyprus last year when wealthy Russians withdrew their assets from the offshore centre before the bail-in.

“I don’t see money going back to Russia. If you look at the justice system in Russia, they would also be unsure of what happens when it goes there, as if you fall out with Putin you have problems. Most Russian money is in tax havens overseas such as Cyprus. What the governments could do is put pressure on offshore centres and tax havens to freeze assets on the basis that it is not clean. Whether it would be lawful or not is another matter,” said Zaiwalla.

BRICS

Many commentators have suggested that Western sanctions could in fact push Russia to deepen economic cooperation with BRICS states.

Despite being suspended from the G8 and facing the weight of Western sanctions, Zaiwalla believes Russia may not end up feeling so lonely on the world stage. He cited the support of the BRICS countries which recently rejected the use of sanctions and hostile language being directed at Russia over the crisis in Ukraine.

“The difficulty of sanctions against Russia is how they are going to be policed. The West has no authority without a UN resolution. The EU is also acting on its own. So many countries are going to question the sanctions. This is seen with the rejection of Western sanctions by BRICS countries which have refused to abandon Russia,” he said.