Foreign Trade Law
Foreign trade law update: EU and U.S. sanctions against Russia tightened further – Russia takes “countermeasures”
Due to Russia’s continuing attacks on Ukraine, the EU and U.S. (as well as numerous other countries) have once again adopted harsh sanctions against Russia. Following the entry into force of a first package of EU sanctions on 24 February 2022 and a second on 26 February 2022 (link to first article from 28 February 2022 here), the EU published a third sanctions package on 28 February 2022 further restricting foreign trade with Russia. On 2 March 2022, the EU also significantly tightened sanctions against Belarus due to the involvement of the Belarusian military in the attacks on Ukraine. The U.S. likewise tightened its sanctions against Russia and Belarus once again. The Russian government, in turn, adopted its first counter-sanctions on 28 February 2022.
Expansion of EU sanctions against Russia
On 28 February 2022, the EU again expanded and tightened Regulations (EU) No 269/2014 and No 833/2014, adding persons and entities to the sanctions lists, tightening financial sanctions against the Central Bank of the Russian Federation, banning the export of euro notes and imposing sanctions on the Russian aviation industry. In addition, the EU suspended the broadcasting licences of certain Russian media and banned the broadcasting and distribution of content produced by them. It is moreover now clear which Russian banks will be excluded from the SWIFT payment system.
- The EU first extended the scope of application of the personal sanctions on 28 February 2022 (see Regulation (EU) No 2022/336) and then again on 2 March 2022 (see Regulation (EU) No 2022/353): The list of persons affected by the measures now covers 718 individuals and 56 bodies:
- The listed persons are still banned from entering and transiting the territory of the European Union and all their funds and economic resources are being frozen.
- German and other European companies are moreover prohibited from directly or indirectly providing the listed persons with funds or economic resources. Indirect provision of funds or economic resources is generally assumed where these are made available to non-listed persons that are in turn owned (> 50%) or controlled by a listed person (see Council document 5664/18, para. 55b, for the relevant criteria). However, this does not apply if it can be determined on a case-by-case basis – taking into account the relevant circumstances (including the potential practical use of the resources by the listed person) – that the funds or economic resources in question are not in fact used by or for the benefit of the listed person/entity. In line with the EU Sanctions Guidelines (Council document 5664/18, para. 55d.), it can be assumed that the mere fact that a resource is used by a non-listed person/entity to generate profits which might be in part distributed to a listed shareholder (minority or majority shareholder), will not mean that the ban on indirect provision has been violated. This has been the approach followed by at least the German authorities to date. Further developments in this regard should however be carefully monitored.
- The scope of the financial sanctions has also been expanded once again:
- The trading ban already in place on securities and money market instruments issued by the Russian Central Bank now includes a prohibition on all transactions related to the management of reserves and assets of the Russian Central Bank. A special licence for such transactions may only be granted to safeguard the financial stability of the Union or a Member State.
- All investments in projects co-financed by the Russian sovereign wealth fund RDIF are now prohibited
- A broad ban has also been imposed on the sale, supply, transfer and export of euro-denominated banknotes to Russia or to natural or legal persons, entities or bodies in Russia. The only exceptions are for personal use and for the official purposes of diplomatic missions, consular posts or international organisations in Russia enjoying immunities in accordance with international law.
- On 1 March 2022, the EU published the previously decided and announced exclusion of some Russian banks from the SWIFT payment system (see new Article 5h Regulation No 833/2014, amended by Article 1(3) Regulation No 2022/345): As of 12 March 2022, this will apply to the banks listed in Annex XIV to Regulation No 833/2014 (currently: Bank Otkritie Novikombank, Promsvyazbank, Bank Rossiya Sovcombank, VNESHECONOMBANK (VEB), VTB BANK) as well as to legal persons established in Russia more than 50% of which is directly or indirectly owned by one of the financial institutions listed in Annex XIV.
Expansion of EU sanctions against Belarus
On 2 March 2022, the EU also amended and expanded Regulation (EC) 765/2006 (see Regulation (EU) 2022/355), significantly tightening existing sanctions against Belarus in response to the involvement of Belarus’ military in the attacks on Ukraine.
- The personal sanctions against the currently 183 persons and 26 bodies listed in Annex I to Regulation (EC) 765/2006 generally continue to apply unchanged, as do the existing financial sanctions. However, regarding the ban on granting specific credit and loans and providing certain types of insurance and reinsurance to certain persons/entities, the privilege for existing contracts concluded before 25 June 2021 has been lifted.
- The EU has also decided to impose further restrictions on Belarus in the trade of certain goods. These goods-related sanctions concern the following areas in particular:
- The export ban on dual-use goods listed in Annex I of the Dual Use Regulation was tightened to prohibit the direct or indirect sale, export, transfer and supply of all such goods. This means that, unlike in the past, the specific (military or civilian) use of the goods in Belarus is no longer decisive. Exceptions apply only to certain humanitarian uses. In addition, companies can – until 30 April 2022 – apply to the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, “BAFA”) for a special licence to export dual-use goods if the goods ,existing contracts that were concluded before 3 March 2022.
- The EU has introduced a new export ban on goods and technology (whether or not originating in the Union) which might contribute to Belarus’s military and technological enhancement or to the development of its defence and security sector. The affected goods are listed in the new Annex Va to Regulation (EC) 765/2006. The list covers the following categories: electronics; computers; telecommunications; sensors and lasers; navigation and avionics; marine; aerospace and propulsion. Exceptions for certain humanitarian purposes apply in this case as well. As with the dual-use goods, companies can – under the aforementioned conditions – also apply for special licences in order to fulfil existing contracts.
- Moreover, an export ban is now also planned for a large number of machines across a wide range of economic sectors (such as the packaging and textile industries), which are listed in the new Annex XIV to Regulation (EC) 765/2006. Again, exceptions for certain humanitarian purposes also apply in this case. Furthermore, the ban on the execution of existing contracts concluded before 2 March 2022 does not apply until 4 June 2022 (“wind down period”).
- The export bans on equipment, technology and software for monitoring telecommunications are to remain in place.
- With regard to the already existing export ban on goods used for the production or manufacturing of tobacco products, the privilege for existing contracts has been lifted for contracts concluded before 25 June 2021.
- And finally, the EU has also widened existing bans on the import of certain goods originating in or exported from Belarus. The import bans now also prohibit the provision of financing and financial assistance as well as insurance and reinsurance in connection with the import of the products concerned. The restrictions now apply to
- mineral products (petroleum products and gaseous hydrocarbons),
- potassium chloride products,
- wood products,
- cement products,
- iron and steel products and
- rubber products.
Exceptions apply – until 4 June 2022 – to the import of wood, cement, iron and steel and rubber products, in each case for the execution of existing contracts concluded before 2 March 2022 (“wind down period”).
In a remarkable development, Switzerland also implemented the EU’s first and second sanctions packages on 3 March 2022 (see link to first article from 28 February 2022 here).
It has now adopted the third package of extended personal and financial sanctions against Russia – but not the measures imposed against Belarus.
Expansion of US sanctions
The U.S. has further tightened its economic sanctions against Russia and – in response to the Belarusian military’s involvement in the attacks – has also expanded its sanctions against Belarus:
- On 3 March 2022, the U.S. imposed personal sanctions on a number of additional individuals by expanding the SDN list. This concerns Russian oligarchs and their family members in particular.
- The listed persons’ U.S. accounts are being blocked and their assets frozen. U.S. persons are subject to a complete ban on transactions (transfer of goods and money) with SDN-listed persons; the term “U.S. person” refers to, among others, U.S. citizens and U.S. companies, green card holders as well any person during his or her stay in the U.S.
- Non-U.S. persons (European companies), for their part, risk having sanctions imposed on them by the U.S. authorities if they “knowingly facilitate a significant transaction” with SDN-listed persons. “Insignificant” transactions therefore remain unaffected. However, it is still unclear when a transaction is deemed “significant”. Unlike in the case of the U.S. embargo on Iran, serious consequences are unlikely to arise for EU companies based on the current assessment, since corresponding restrictions also exist in accordance with the directly applicable sanctions law. Nor is there any risk of the boycott prohibition being violated (section 7 Foreign Trade and Payments Ordinance) in this respect.
- The aforementioned consequences under sanctions law not only apply directly to the SDN-listed natural and legal persons, but also generally indirectly to all those companies where 50% or more is owned by SDN-listed persons, even if these companies have not been explicitly named (in the case of several listed owners, the shares are added together; control without ownership is not relevant – unlike under EU sanctions law).
- On 2 March 2022, the U.S. government had already added restrictions on oil and gas refining technology to the goods-related restrictions applicable to business dealings with Russia.
- The scope of application of the goods-related restrictions was also extended to business dealings with Belarus.
Adoption of “countermeasures” by Russia
The Russian government, in turn, adopted its first counter-sanctions on 28 February 2022.
- The measures require Russian exporters to sell 80% of foreign currency receipts from 28 February 2022 onwards. The obligation applies to proceeds credited on or after 1 January 2022 to accounts of residents participating in foreign economic activity. The provisions affect, above all, exporters of goods, services and IP.
- Since 1 March 2022, Russian residents have also been prohibited from granting foreign loans in foreign currency and from crediting foreign currency to bank accounts outside Russia as well as from making transfers, without opening a bank account, by electronic means of payment operated by foreign payment services providers.
- Capital controls are also in place to prevent foreign currency outflows: exports from Russia of cash and financial instruments in foreign currency with a value in excess of USD 10,000 have been prohibited since 1 March 2022.
- Since 2 March 2022, Russian residents have also been prohibited from, among other things, granting loans or credit (in roubles) and selling securities or real estate to foreign persons with ties to “unfriendly states” (including EU Member States). The prohibitions cover both nationals of “unfriendly states” as well as companies that have their “place of primary business or place of primary profit extraction from activity in unfriendly states”.
The Russian government has announced further measures to prevent foreign investors from withdrawing from Russia.
Conclusion and recommended action
The further tightening of the EU sanctions will once again significantly complicate the business done by German and other European companies with Russia. In addition to the combined financial sanctions imposed by the West, individual decisions by companies are bringing an additional - and, in this form, unparalleled - dynamic to the market: Many Russian plants of foreign companies, e.g. of Mercedes and VW in the automotive industry, are now facing closure. Shareholdings and subsidiaries in Russia are being sold off, for example by British-Dutch oil company BP or by Exxon from the U.S. Western companies ranging from Apple to SAP and Volvo are joining the mass exodus. This withdrawal from the Russian market undoubtedly also has its origins in the suspension of SWIFT for some Russian commercial banks as well as in the aforementioned foreign exchange restrictions imposed by the Russian government.
Companies remain advised to review their internal compliance structures and to subject any business with Russia to strict scrutiny. This also applies in particular to checking whether any persons involved in the transaction are on the EU or U.S. sanctions lists. At present, companies often face the challenge of obtaining reliable information on the current ownership and shareholdings of their business partners since in particular Russian sources are often not available or unreliable. In this case, we recommend documenting at least the efforts made to scrutinise the relevant business partner and the fact that it was not possible to investigate further. A risk assessment should be carried out on a case-by-case basis (taking into account the available information and the nature of the transaction) to determine whether the transaction should nevertheless be pursued.
Companies should also carefully monitor and review the goods-related restrictions. The restrictions on the export of certain machinery to Belarus, in particular, generally apply to all sectors and are therefore likely to affect numerous German or other European companies.