Foreign trade law update: new EU and U.S. sanctions against Russia enter into force; Russian countermeasures

The EU has imposed further economic sanctions on Russia in light of the continuing attacks on Ukraine: On 9 April 2022 the EU’s fifth package of sanctions came into force. This package of sanctions builds on those of 24 and 26 February 2022 (newsletter of 28 February 2022), 28 February/2 March 2022 (newsletter of 7 March 2022) and 16 March 2022 (newsletter of 18 March 2022); the EU’s intention is to ramp up the pressure on the Russian government and economy and to limit the resources available to the Kremlin.

The new measures include various bans on the import of Russian products such as wood, cement, fertilisers and coal into the EU, restrictions on the transport of goods by Russian ships and vehicles, and further export bans, especially on machinery and computer equipment. The existing personal sanctions have also been extended. A ban on transactions by a number of major Russian banks and the closing of loopholes around sanctioned payments are also among these latest measures.

The U.S. has also adopted additional sanctions in coordination with the EU and the G7: On 6 and 7 April 2022, the U.S. government issued a ban on Russian investment, the strictest financial sanctions to date against Sberbank, Russia’s largest state-owned bank, and Alfa-Bank, its largest private bank; it also placed further Russian government officials and their family members on the SDN List. These measures follow on the heels of the ban already imposed on 4 April 2022 on using money held in accounts with U.S. financial institutions to repay Russian state debts.

Russia is also launching new countermeasures. In addition to possible criminal consequences for company management bodies that comply with Western sanctions, these concern most notably restrictions on the protection of intellectual property rights to the detriment of rights holders from “unfriendly states”.

 

EU sanctions

In its fifth sanctions package (Regulations (EU) 2022/581 and 2022/576) of 8 April 2022, the EU has again amended and tightened Regulations (EU) 269/2014 and 833/2014.

• The EU has added a further 200 entries to the list of personal sanctions, bringing the current total to 1,110 individuals and 83 entities. The new Annex I to Regulation (EU) 269/2014 now also includes companies whose products or technologies played a role in the invasion. Key “oligarchs” and businessmen, high-ranking Kremlin officials, proponents of disinformation and information manipulation who systematically spread the Kremlin’s narrative around Russia’s war of aggression against Ukraine, and family members of already sanctioned individuals now also find themselves on the list. The aim here is to avoid assets being transferred as a means of circumventing EU sanctions. As already explained in our newsletter of 7 March 2022, the listed persons are banned from entering and transiting EU territory, and all their assets are being frozen. In recent announcements, the EU Commission indicated that the rule banning European companies from providing funds or economic resources to listed persons is clearly also intended to apply to non-listed companies that, overall, are majority-owned by (multiple) listed persons. The Commission is therefore adding together the company shares held by listed persons; this means, for instance, that companies 30% of whose shares are held by one listed person and 25% by another are also considered to be controlled by a listed person. In the legal opinion of the Commission, which is admittedly non-binding in this respect, trading with a company of this kind may therefore constitute a breach of the ban on the indirect provision of funds or economic resources.

• With Annex I to Regulation (EU) 269/2014 now also listing four major Russian banks as sanctioned entities, the fifth sanctions package is introducing a complete ban on transactions by major Russian banks. The banks concerned are VTB Bank, Otkritie FC Bank, Novikombank and Sovcombank, which together make up 23% of the market share in the Russian banking sector; contrary to some assumptions, Sberbank is not affected by this ban. These banks have already been excluded from the SWIFT system, but this transaction ban goes further – their assets are now being frozen, cutting the banks off completely from the EU markets.

• The focus of the sanctions is once again the amendment of Regulation (EU) 833/2014, adding further financial and trade-related sanctions:
  • The ban on exports and investments imposed by Articles 3, 3a, 3b and 3c now also applies to coal and other fossil fuels, to goods and technologies capable of being used in the liquefaction of natural gas, as well as to aviation turbine fuel and fuel additives (special authorisations may be granted for aircraft financial lease agreements). This means that in addition to the oil refining sector, the gas industry is now also being targeted, with the legislator explicitly limiting the export ban in Article 3b to goods and technologies for the liquefaction of natural gas. The ban therefore still does not cover other goods and technologies for natural gas treatment/processing that do not involve the liquefaction of natural gas.
  • In addition, various lists of goods affected by already existing import and export bans have been revised. Export bans now also extend, for example, to quantum computers and advanced semiconductors, high-value electronic products, software, other sensitive high-tech machinery, certain liquid gas technologies and vehicles.
  • Under the new Article 3ea, providing any vessel registered under the Russian flag access to ports in the territory of the Union is prohibited. The new Article 3l prohibits road transport undertakings established in Russia or Belarus (cf. Article 1zc of Regulation (EC) 765/2006) from transporting goods by road within the territory of the Union, including in transit. In certain cases, the prohibitions only apply from 16 April 2022; authorities may grant special authorisations for the import of permitted goods.
  • The new Articles 3i, 3j und 3k of Regulation (EU) 833/2014 introduce trade restrictions worth a total of more than EUR 20 billion according to EU Commission estimates. The import into the Union of certain products originating in Russia is now banned, such as:
    • Coal and other solid fossil fuels, which are listed in detail in the new Annex XXII to Regulation (EU) 833/2014. A wind-down period has been agreed, meaning that through 10 August 2022 this ban does not apply to the execution of contracts concluded before 9 April 2022. The previously open-ended exemption from the comprehensive ban on transactions under Article 5aa of Regulation (EU) 833/2014 (see our last newsletter newsletter of 18 March 2022) for transactions involving these goods therefore now only applies until 10 August 2022.
    • The products listed in detail in the new Annex XXI to Regulation (EU) No 833/2014 (such as wood, cement, tyres, glass, fertilisers, seafood and spirits) may also no longer be imported (there are quotas for certain goods). Here too, a wind-down period applies, meaning that through 10 July 2022 this ban does not apply to the execution of contracts concluded before 9 April 2022.
  • Many new export bans also apply:
    • The goods listed in the new Annex XXIII to Regulation (EU) 833/2014, which could contribute in particular to enhancing Russia’s industrial capacities, may no longer be exported (new Article 3k). This very wide-ranging and extensive list includes, for instance, certain plants, earths, chemical raw materials, fabrics, stones, glass, machines and other products. A wind-down period also applies in this case, meaning that through 10 July 2022 this ban does not apply to the execution of contracts concluded before 9 April 2022. Exceptions may be made, especially for products needed for humanitarian purposes. This is an “explosive” rule – Annex XXIII is heterogeneous and far-reaching with a shotgun effect. Tying the export ban (Article 3k(1)) to the usual “ban on services” (Article 3k(2)(a)) is likely to affect a large number of transactions that were previously unregulated. There is considerable legal uncertainty here. Affected companies should therefore take a critical look at their business activities (involving Annex XXIII goods and related services) to start with and where possible await clarification by the Federal Ministry for Economic Affairs and Climate Action/Federal Office for Economic Affairs and Export Control.
• The prohibition in Article 5b of Regulation (EU) 833/2014 on accepting deposits of more than EUR 100,000 is being extended to include cryptowallets. The ban on the sale of banknotes and transferable securities in Article 5f of Regulation (EU) 833/2014 now applies not only to euros but to all official currencies of the EU Member States.

• The new Article 5k of Regulation (EU) 833/2014 prohibits Russian companies from participating in public tenders in EU Member States.

• Lastly, the new Article 5l of Regulation (EU) 833/2014 also prohibits all financial support for public entities in Russia. Public entities are legal persons, entities or bodies established in Russia with over 50% public ownership or public control. Exceptions apply in particular in the area of intergovernmental cooperation.

 

U.S. sanctions

On 4 April 2022, the U.S. government also announced that it was imposing further sanctions that were closely coordinated with its allies and partners.

The U.S. administration estimates that Russia’s GDP will contract up to 15 percent this year, wiping out the last fifteen years of economic gains.

The U.S. has now adopted the following measures:

• As from 4 April 2022, Russia is banned from making dollar debt payments with Russian government funds subject to U.S. jurisdiction. Although the considerable sums of Russian money invested in U.S. financial institutions had already been essentially frozen, these could however still be used to pay debts to bondholders. The new ban means that in order to repay its sovereign debt Russia must drain its remaining dollar reserves, generate new revenue, or default. The measure is directly linked to the date of 4 April 2022 when major payments mature.

• On 6 April 2022, the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury published an extended SDN List. In addition to other state-owned companies, Russia’s largest financial institution, Sberbank – along with 42 of its subsidiaries – and Russia’s largest private bank, Alfa-Bank – including 6 of its subsidiaries – are now also listed. In 2014 the U.S. already imposed sanctions on Sberbank in response to Russia’s illegal annexation of Crimea (cutting Russia off from long-term borrowing on U.S. financial markets). On 24 February 2022, further sanctions were imposed on Sberbank and, for the first time, Alfa-Bank: U.S. financial institutions have since been prohibited from opening or maintaining accounts for these banks or processing transactions on their behalf. Their inclusion on the SDN List means that these banks are now subject to full blocking sanctions: With the exception of three general licences, which authorise certain clearing and settlement transactions during a wind-down period, the banks and their subsidiaries are now fully blocked from interacting with U.S. financial institutions.

• Further natural persons were also added to the SDN List, which now includes President Putin’s adult children, Foreign Minister Lavrov’s wife and daughter, and members of Russia’s Security Council including former President and Prime Minister of Russia Dmitry Medvedev and Prime Minister Mikhail Mishustin. All assets of the listed persons located in the U.S. or owned or controlled by U.S. persons are blocked (regarding the legal consequences of the listing see our newsletter of 7 March 2022).

• As regards the ban on dealing with SDN-listed persons and companies (and in some cases their subsidiaries), it should be noted that U.S. law can in some cases go beyond the restrictions and prohibitions under EU law. For example, the ban on transactions under Article 5aa of Regulation (EU) 833/2014 in conjunction with Annex XIX does not apply to subsidiaries of the persons listed in Annex XIX, provided they have their registered office in the EU (see our newsletter of 18 March 2022). There is no such restriction on the scope of application under U.S. law, however. German and European companies therefore need to bear in mind that a planned transaction permissible under EU law may nevertheless fall foul of US rules and regulations (with potentially serious consequences).

• On 6 April 2022, President Biden also signed an executive order prohibiting new investment in Russia, expanding existing investment bans affecting certain industries, in particular the energy sector. As a result, all new investment in Russia by U.S. persons (i.e. U.S. citizens, U.S. residents and entities organized in the United States or under the laws of the United States) or any person located in the U.S. is banned. U.S. persons are also prohibited from providing support services for such investments.

• The Secretary of the Treasury may, together with the Secretary of State, ban the provision of services to any person located in the Russian Federation by U.S. persons. This allows bans to be imposed not only on specific companies from certain service sectors, but on entire service industries.

None of the enacted U.S. sanctions (see our previous newsletters of 18 March 2022, 7 March 2022 and 28 February 2022) is intended to affect humanitarian activities that benefit the Russian people and people around the world: U.S. companies can continue to operate in Russia if their activities concern the availability of basic foodstuffs and agricultural commodities, safeguard access to medicines and medical equipment, and enable telecommunications services to support the flow of information and access to the internet (which provides outside perspectives to the Russian people). To prevent the disruption of such activities, OFAC issued General License 6A on 24 March 2022, which authorises the (re)exportation of agricultural commodities, medicine, medical devices, replacement parts and components for medical devices, as well as software updates for medical devices to, from, or transiting the Russian Federation and transactions required for the prevention, diagnosis, or treatment of COVID-19.

 

No more carnets for Russia and Belarus

• Due to the EU’s financial sanctions against Russia and Belarus, guarantee payments can no longer be made to these countries if carnet operations are suspended (see the Association of German Chambers of Commerce and Industry (DIHK)’s announcement for further details). This means that it is not currently possible to obtain carnets secured through the DIHK for Russia and Belarus. Carnets can still be obtained for Ukraine, but they require additional written risk assumption declarations from the carnet applicants.

 

Further Russian countermeasures

• Russia in turn is introducing further countermeasures (see our newsletters of 7 March 2022 and 18 March 2022). According to a current draft bill, executives of companies that take steps to implement foreign sanctions against Russia can expect to be subject to criminal sanctions in the future. Examples of such steps include refusing to fulfil outstanding obligations or suspending deliveries due to export control limitations (link).

• Restrictions on the protection of IP rights of right holders from “unfriendly states” are again being tightened and specified in greater detail (see our newsletter of 18 March 2022):

• For example, in cases of “extreme necessity” (such as ensuring the defence and security of the state or protecting the life and health of its citizens), the Russian government is basically entitled to decree that a patent, utility model or design can be used without the consent of the right holder. In such cases, it is generally intended that the right holder should receive adequate compensation. However, Decree No. 299 of the Russian government issued on 6 March 2022 provides that no such compensation is to be paid to right holders from “unfriendly states”. Such a quasi-compulsory licence without adequate compensation likely violates the provisions of the TRIPS Agreement (cf. Article 31 letter (h)).

• Even though this decree does not yet apply to trademark rights and copyrights of right holders from “unfriendly states”, the EU Commission considers it likely that restrictions on the use of these IP rights will be similarly lifted (https://intellectual-property-helpdesk.ec.europa.eu/news-events/news/russia-suspending-some-ip-rights-and-peppa-pig-trade-mark-infringement-2022-03-17_en). For example, in trademark infringement proceedings concerning the well-known British cartoon character Peppa Pig, a Russian court – in light of the sanctions imposed by Western countries – recently held that the British right holder’s claim for damages constituted an abuse of rights and thus dismissed it. It is likely that other Russian courts will also use this decision as a basis for their rulings.

• Furthermore, Article 18(13) of the Federal Law of 8 March 2022 N 46-FZ (as amended on 26 March 2022) now provides that the Russian government may draw up a list of goods that, temporarily, will not be subject to certain statutory provisions on the protection of exclusive IP rights. According to Resolution No. 506 of the Russian government dated 29 March 2022, the Russian Ministry of Industry and Trade can draw up a list of those goods that may be imported into Russia even without the consent of the holder of the patent rights, utility models, designs or trademark rights that exist in Russia; they are thus deemed to have been placed on the market in Russia with the right holder’s consent (parallel imports). This means that the right holder would be powerless to prohibit original goods or counterfeits from third countries from being imported into Russia. The corresponding list is to be published soon.

• The Russian Patent and Trademark Office (Rospatent) also lists a large number of trademark applications for signs that are confusingly similar to some trademarks of Western companies that are protected in Russia (e.g. McDonald’s, IKEA). According to a statement by Rospatent, however, these are only published trademark applications. Rospatent claims that a trademark right in these applications will not arise until after it has carried out a substantive examination, including an assessment of the possible likelihood of confusion with existing earlier trademarks. However, given the current developments in Russia’s policy towards “unfriendly states”, it seems more likely that Rospatent will reject the notion of such a likelihood of confusion with the already existing trademark rights of Western right holders.

• The validity of trademarks of Western companies currently registered in Russia could be further jeopardised if the distribution of the goods and services in Russia is discontinued. If a registered trademark is not used on the Russian market for a period of three years, its trademark protection may expire prematurely.

 

Conclusion and outlook: Implementation measures and financial support for affected companies

• The expansion of the EU and U.S. sanctions and the announcement that further measures will be enacted as required once again highlight the need for companies to review internal compliance structures and carefully examine all business with Russia.

• The German and EU authorities have meanwhile not only recognised the need for effective implementation of the adopted measures, but have also laid the foundations for providing financial support to EU companies affected by the sanctions:
  • The Federal Government has set up a “sanctions task force” to ensure – together with the federal states – that the adopted sanctions are effectively and consistently enforced and not circumvented.
  • On 1 April 2022, the EU Commission (Directorate-General for Taxation and Customs Union) published a “Notice to economic operators, importers and exporters” in the Official Journal of the European Union (CI 145/1). In this notice, the Commission emphasises that the sanctions also apply to the knowing and intentional participation in the circumvention of imposed import and export bans. In the Commission’s view, a particular risk arises in the case of exports to third countries from which goods can easily be diverted to Russia or Belarus. Imports from third countries from which the goods in question can easily be diverted to the EU also pose a risk. The Commission recommends that economic operators take adequate due diligence measures in order to minimise these risks of circumvention. In particular, they should introduce provisions in import and export contracts to ensure that any imported or exported goods are not subject to the restrictions (for details of recommended compliance measures, see our newsletter of 28 February 2022).  
  • Following the EU Commission’s adoption of the “Temporary Crisis Framework for State Aid for Economic Support in the wake of Russia’s aggression against Ukraine” on 23 February 2022, which established the legal framework for Member State subsidies (see our newsletter of 25 March 2022), the German government announced that it would provide low-interest KfW loans to affected German companies. The federal and state governments are to discuss further aid.
• In view of Russian countermeasures and the dynamics of the proposed restrictions, holders of IP rights are advised to revise and adapt their IP strategy for Russia on an ongoing basis. For example, right holders should examine individual cases for any opportunities to take action against IP rights infringements in Russia and ensure the continued existence of the rights there. Given the emerging increase in parallel imports of goods from third countries (e.g. China, India) to Russia that infringe IP rights, affected companies should also take steps to exhaust all available options in the third country to prevent the export of such (counterfeit) goods to Russia.