Foreign Trade Law
Foreign trade law update: Tenth package of EU sanctions against Russia enters into force
A year into Russia’s war of aggression against Ukraine, the EU has introduced further economic sanctions against Russia. What is now the tenth sanctions package took effect on 25 February 2023, and toughens the sanctions adopted on 16 December 2022 (newsletter of 22 December 2022), 6 October 2022 (newsletter of 10 October 2022), 21 July 2022 (newsletter of 28 July 2022), 3 and 4 June 2022 (newsletter of 9 June 2022), 9 April 2022 (newsletter of 12 April 2022), 16 March 2022 (newsletter of 18 March 2022), 28 February / 2 March 2022 (newsletter of 7 March 2022) and 24 and 26 February 2022 (newsletter of 28 February 2022).
The aim of the European Union’s tenth sanctions package is to further increase the economic and financial pressure on Russia while further restricting its military and technological warfare capabilities. To this end, it has imposed more import and export bans and again expanded the list of personal sanctions. It is worth noting that restrictive measures have also been imposed on Iranian manufacturers who have been supplying Russia with unmanned aerial vehicles (drones). At the same time the European Union is continuing its policy of making it easier for European companies to wind down their business activities in Russia and withdraw completely from the Russian market.
In its tenth sanctions package (Regulations (EU) 2023/426 and 2023/427, Implementing Regulations (EU) 2023/428, 2023/429, 2023/430) the EU continues to tighten and modify the existing sanctions against Russia. The measures affect in particular the personal sanctions in Regulation (EU) 269/2014 and the trade sanctions in Regulation (EU) 833/2014.
I. Personal sanctions
The EU has added 87 individuals and 34 entities to the list of personal sanctions since its last package, and the list now has more than 1,600 entries. Regulation (EU) 269/2014 freezes funds and economic resources belonging to, owned or held by the persons listed in Annex I to the Regulation. No funds or economic resources may be made available, directly or indirectly, to or for the benefit of these persons. The natural persons listed are also banned from entering or transiting through EU territory (see our newsletters of 7 March 2022, 12 April 2022 and 9 June 2022).
The tenth sanctions package mainly adds persons and entities working in the Russian military and defence sector, in particular members of the Federation Council, members of the Duma, officials in executive positions as well as representatives of the Russian defence sector to the list in Annex I of Regulation (EU) 269/2014.For the very first time, some of the additions are Iranian individuals and entities involved in developing and supplying drones and components to support the Russian military. Sanctions have also been imposed on members of Russian mercenary group Wagner.
The European Union is also taking action against activities of the Wagner mercenary group in other countries such as Mali and the Central African Republic. Implementing Regulations (EU) 2023/7428 and 2023/430 impose personal sanctions on an additional 16 (Russian but also non-Russian) individuals and organisations linked to the activities of the group in Africa.
Since the package of measures introduced on 21 July 2022 (newsletter of 28 July 2022), third parties, i.e. non-listed individuals, entities and bodies, have been obliged to report information concerning assets located in the European Union that belong to individuals subject to personal sanctions (Article 8 Regulation (EU) 269/2014). Legal entities and natural persons whose registered office or place of residence is in Germany must submit this report to the Federal Office for Economic Affairs and Export Control. Implementing Regulation (EU) 2023/426 further clarifies this reporting obligation.
In addition, increased obligations apply to central securities depositories within the meaning of (EU) Regulation No 909/2014 that operate a securities settlement system. To allow for necessary adjustments to implement these changes, the new requirements will not apply until 26 April 2023. Specifically:
The reporting obligation now also retroactively applies to certain past events. Those impacted by the obligation must report, in particular, any asset movements, transfers, alterations or uses that have taken place in the two weeks preceding the inclusion of the respective individual, entity or body in Annex I to Regulation (EU) 269/2014.
The deadline for reporting assets located in the European Union is two weeks from receipt of the relevant information.
A new Article 8(1a) Regulation (EU) 269/2014 regulates the minimum information that a report must contain (including name, address and VAT or tax identification number, amount or market value and type of relevant assets).
Stricter requirements apply to central securities depositories. In addition to information relating to assets located in the European Union, these entities must also provide information on extraordinary and unforeseen losses and damage in connection with the assets in question. In addition to the ad-hoc reporting obligation within the specified two weeks (see above), they must also report to the competent authority every three months and immediately to the Commission.
II. Trade sanctions
The EU also adopted extensive further measures expanding and tightening trade sanctions:
Extended export restrictions primarily apply to goods that can aid the Russian Federation’s military and technological capabilities or its defence and security sectors. To this end, export restrictions have been imposed or tightened, particularly with regard to rare earths and their compounds, electronic integrated circuits and thermal imagers. In order to create legal certainty in the treatment of exports, the extended export restrictions on the vast majority of newly listed items will not apply to contracts concluded before 26 February 2023 until 27 March 2023.
To minimise the risk of the restrictive measures being circumvented, the transit of dual-use goods and technology and of arms exported from the Union via the territory of Russia has been prohibited. The European Union does allow exceptions (subject to authorisation) to this ban on transit, but only within narrow limits, such as for humanitarian purposes, health emergencies or in connection with intergovernmental cooperation on space programmes.
Import restrictions (Article 3i Regulation (EU) 833/2014) have again been comprehensively extended to include a wide variety of goods which, in the view of the European Union, contribute to substantial revenues for the Russian Federation, thereby continuing its war of aggression against Ukraine. In order to create legal certainty in dealing with imports, the extended import restrictions will not apply to contracts concluded before 26 February 2023 until 27 May 2023. Import quotas will also be created for certain products, and will apply until 30 June 2024.
III. Reporting obligations in relation to assets and reserves of the Central Bank of Russia
Regulation (EU) 2023/427 introduces a new reporting obligation in relation to assets and reserves of the Central Bank of Russia:
Natural and legal persons, entities and bodies with registered office in European Union, explicitly including the European Central Bank, national central banks and financial sector entities will be required to report certain assets and reserves of the Central Bank of Russia that they hold or control, or to which they are counterparty (Article 5a(4a) Regulation (EU) 833/2014).
Reports must be sent to the national authorities and the Commission.
A deadline of two weeks as from 26 February 2023 applies for reports to be submitted.
The report must include certain information at minimum (name, address and VAT or tax identification number, amount or market value and type of relevant assets). The information provided is to be updated every three months.
IV. Sanctions in the energy sector and in the area of critical infrastructures
Entirely new restrictions are contained in Article 5o Regulation (EU) 833/2014, introduced with the tenth sanctions package to protect critical infrastructures, and Article 5p Regulation (EU) 833/2014, introduced to safeguard the security of gas supply:
Pursuant to Article 5o(1) Regulation (EU) 833/2014, it will be prohibited from 27 March 2023 to allow Russian nationals and residents to hold positions on the governing bodies of the owners or operators of critical facilities and/or infrastructures under the CER Directive (Directive (EU) 2022/2557) or the EPCIP Directive (Directive 2008/114/EC). Only those nationals or residents of Russia who are (at the same time) nationals of an EU Member State, a country belonging to the EEA or Switzerland are exempt from the prohibition in Article 5o(1) Regulation (EU) 833/2014. According to the wording of the Regulation (“enable ... to hold ”), it is not entirely clear whether this is merely a ban on new appointments or whether positions in governing bodies already held by Russian nationals or persons resident in Russia before 27 March 2023 must also be terminated by 27 March 2023.
To safeguard the security of gas supply in the European Union, the new Article 5p Regulation (EU) 833/2014 now bans the provision of gas storage capacity (excluding storage capacities of liquefied natural gas facilities) to Russian nationals; natural persons residing in Russia; legal persons, organisations or bodies residing in Russia; or legal persons, organisations or bodies in which one of the aforementioned persons directly or indirectly holds more than 50% of the shares or that act at the direction of one of the aforementioned persons. In this respect, too, a transitional period until 27 March 2023 will apply, within which contracts for the provision of gas storage capacities covered by the ban must be terminated.
V. Further sanctions
Now that the existing air embargo has been expanded, aircraft operators are obliged to report non-scheduled flights between Russia and the EU 48 hours before departure (Article 3d(5) Regulation (EU) 833/2014). The purpose of this expansion is to ensure compliance with the prohibition under Article 3d(1) Regulation (EU) 833/2014 on any non-Russian-registered aircraft owned, chartered or otherwise controlled by any Russian natural or legal person, entity or body from landing in, taking off from, or overflying, the territory of the EU.
The package also extends the suspension of broadcasting licences of Russian media outlets in the EU under the permanent control of the Russian leadership and the prohibition against broadcasting their content to further stations. The prohibition in Article 2f Regulation (EU) 833/2014 is intended to prevent the distribution of Russian war propaganda and now also covers Russian state media for Arabic-speaking countries, namely RT Arabic and Sputnik Arabic.
VI. Further facilitation of withdrawal from the Russian market and disengagement from “listed” shareholders
The tenth package does more than merely tighten sanctions, however. The EU is also making it easier to withdraw from the Russian market in compliance with sanctions, in particular with regard to support services. And the window in which to disengage from sanctioned shareholders has been extended again:
The ninth sanctions package introduced Article 12b Regulation (EU) 833/2014, and a new paragraph 2a has now been added. Under this paragraph, competent authorities may continue to authorise the performance of services specified in Article 5n Regulation (EU) 833/2014 until 31 December 2023 if these services (i) are strictly necessary for the divestment from Russia or the wind-down of business activities in Russia, (ii) such services are provided to and for the exclusive benefit of the legal persons, entities or bodies resulting from the divestment; and (iii) the competent authorities deciding on requests for authorisations have no reasonable grounds to believe that the services might be provided, directly or indirectly, to the Government of Russia or a military end-user or have a military end-use in Russia.
After an authority has issued authorisation, this provision will enable companies to continue offering IT services, for example, that were previously performed on behalf of an EU company’s Russian subsidiary after that subsidiary has been sold, though no later than 31 December 2023.
The EU has also extended the period in which frozen shareholdings in European companies held (directly or indirectly) by persons listed in Annex I of Regulation (EU) 269/2014 can be released in order to be sold. The shareholdings can still be unfrozen if they are sold by 31 May 2023 (Article 6b(3) Regulation (EU) 269/2014). The requirement that revenue generated by such sales must stay frozen remains in force.
The U.S. has also announced new sanctions on the “anniversary” of Russia’s war of aggression against Ukraine. The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has added numerous entries to the Specially Designated Nationals and Blocked Persons List (“SDN List”) in recent weeks, which now encompasses more than 2,500 targets. The latest entries include, in particular, additional Russian banks and financial services institutions as well as companies in the technology, electronics and metals and mining sectors.
The new U.S. sanctions are in particular aimed at preventing circumvention of the sanctions, e.g. by providing weapons or financial resources. The U.S. therefore recently listed 30 additional persons and companies suspected of engaging in (or aiding and abetting) circumvention – including German citizens and Chinese companies. The aforementioned listing of additional Russian financial institutions was also done for this purpose, among others, i.e. to prevent sanctioned parties from turning to smaller banks and continuing to gain access to the international financial market.
The G7 countries are also planning to introduce a coordination mechanism to enforce sanctions. According to information from the White House, the U.S. wants to chair the new committee – which will share information on and coordinate further sanctions – for the first year.
Practical consequences and outlook
The measures included in the tenth sanctions package – new significant expansions of personal sanctions and the lists of goods underlying the import and export restrictions, on the one hand, and further facilitation of complete withdrawal from the Russian market, on the other – make it clear: European companies that continue to do business in Russia will face more and more risks under sanctions law. Conversely, the EU is trying to reduce the obstacles to a complete withdrawal from the Russian market – including those created by sanctions. At present, there are no signs of this situation (withdrawal of restrictions or impediments to withdrawal) being reversed.
European companies that continue to maintain business relations with Russia (whether they import or export products) should carefully check whether the additions to the lists of goods in Regulation (EU) 833/2014 are relevant for their business. Otherwise, “surprises” may be lurking, especially in Annexes XXIII (export) and XXI (import), which need to be ruled out – particularly in view of the penalties for possible infringements.
The provision in Article 5n of Regulation (EU) 833/2014 is proving to be very problematic in daily practice, not only for consulting firms but also for service providers (especially in the IT sector). Considerable uncertainties persist in this area, including with respect to the question of when services are provided to Russian companies indirectly. Strict caution is also necessary here, and, in case of doubt, the Federal Office for Economic Affairs and Export Control (BAFA) should be consulted.
Finally, on the positive side, it must be noted that even after one year, the EU sanctions, on the one hand, and the U.S. and UK sanctions, on the other, are largely consistent. Unlike the sanctions against Iran, the Western countries are essentially united in their approach, so there is no problematic tension for EU companies in this respect.