Foreign Trade Law

Foreign trade law update: 13th package of EU sanctions against Russia and new developments following 12th package

Two years into Russia’s war of aggression against Ukraine, the EU has adopted further economic sanctions against Russia that took effect on 24 February 2024.

The 13th sanctions package tightens the existing sanctions from the previous packages, most recently from 18 December 2023 (article of 21 December 2023). The main aim of the new measures is to make it even harder for Russia to procure the unmanned aircraft and drones crucial to its war effort. Alongside expanding some of the trade-related restrictions, the new package adds considerably to the list of persons and entities sanctioned. Compared with the last set of sanctions, this package is relatively small in scope and has more of a symbolic significance given that it was adopted on the second anniversary of the invasion.

There have also been developments regarding two much-discussed changes introduced by the 12th sanctions package. Firstly, the Federal Office for Economic Affairs and Export Control (BAFA) has issued its General Export Authorisation No. 42, which allows services and business software to be provided to EU subsidiaries based in Russia. Secondly, the European Commission has published its long-awaited interpretation of Article 12g Regulation (EU) 833/2014 – including proposed wording for the “No Russia clause”, whose practical implementation has been controversially discussed following its introduction by the 12th sanctions package.

I. New EU sanctions 

The EU’s 13th sanctions package (Regulation (EU) 2024/745 and Implementing Regulation (EU) 2024/753) further tightens and adapts the existing sanctions against Russia. The measures affect in particular the personal sanctions in Regulation (EU) 269/2014 and the trade-related sanctions in Regulation (EU) 833/2014. New rules on handling income from frozen Russian funds already came into force in the shape of Regulation (EU) 2024/576 of 12 February 2024.

1. Personal sanctions

The sanctions list of 18 December 2023 has been extended to include a further 106 individuals and 88 entities, making this the EU’s most extensive package of personal sanctions against Russia yet. Regulation (EU) 269/2014 freezes funds and economic resources belonging to, owned or held by the persons and entities listed in Annex I to the Regulation. The Regulation remains unaltered in substance: It continues to prohibit the provision (including indirect provision) of funds or economic resources to sanctioned individuals or entities (see our articles of 7 March 2022, 12 April 2022 and 9 June 2022). The individuals and entities added to the sanctions list, which now has over 2,000 entries, include the following:

  • 140 companies and individuals from within Russia’s military-industrial complex account for the largest share of additions. The focus here is on companies that trade various key components for drones.
  • Companies and individuals that help circumvent sanctions or otherwise support the Russian war effort have also been included. Judges and public officials in the occupied Ukrainian territories are also among the persons added to the list.

2. Making it harder for certain companies to procure drones

As part of the trade-related restrictions, Annex IV to Regulation (EU) 833/2014 has been extended to include 27 more Russian and third-country companies. This Annex lists persons, entities and bodies within Russia’s military-industrial complex or which otherwise support the Russian defence and security sector, making them “military end-users”. The added companies supply the Russian arms industry with important components for drones or have been linked to drone procurement. Until now, Annex IV listed mostly Russian persons and entities and only a few individuals or companies from Iran, Uzbekistan, Syria, the United Arab Emirates, China (Hong Kong) and Singapore. Ten further companies have now been added, from China, Kazakhstan, India, Serbia, Thailand, Sri Lanka and Turkey. 

In some cases, dual-use goods and goods and technologies listed in Annex VII which could contribute to the technological enhancement of Russia’s defence and security sector can be granted exemptions for export to non-military end-users in Russia for non-military purposes, or for use there. If the end-user is listed in Annex IV, however, such an authorisation generally does not apply.

3. UK as new partner for importation of iron and steel

The UK has been added to the list of partner countries for importation of iron and steel, as were Switzerland and Norway under the 12th sanctions package. These partner countries have implemented import restrictions on iron and steel similar to those in the EU. For listed iron and steel products, therefore, no proof of the country of origin is required when they are imported from the UK (article of 21 December 2023).

4. Income from interest on frozen Russian funds

Between its 12th and 13th sanctions packages, the EU also introduced new rules on handling the income from interest on frozen Russian funds to little media attention on 12 February 2024. Regulation (EU) 2024/576 makes it clear that balance sheet management transactions linked to frozen assets and reserves of the Central Bank of Russia are permitted. The income such transactions generate must be registered separately by central security depositories holding total assets in excess of EUR 1 million, and may not be distributed to shareholders or third parties. 

This new rule is a first step towards the EU’s goal of making the income from frozen Russian funds available to Ukraine. Given the mass of funds frozen in the EU (over EUR 200 billion), this could generate income running into single-figure billions. The statutory changes needed for this, however, have not yet been adopted.

II. Update following 12th sanctions package

Although the 13th sanctions package has already entered into force, last week saw the publication of new information relating to changes introduced by the 12th package on 19 December 2023.

1. New General Export Authorisation to provide services to EU companies’ Russian subsidiaries

On 20 February 2024, the Federal Office for Economic Affairs and Export Control (“BAFA”) published General Export Authorisation No. 42 concerning the bans on providing certain services and business software under Article 5n Regulation (EU) 833/2014. A general Export Authorisation is a special form of export licence which automatically authorises all exports that meet its requirements. 

Article 5n Regulation (EU) 833/2014 constitutes a general ban on rendering certain services (auditing, bookkeeping, business and management consulting, IT consulting etc.) and supplying software for the management of enterprises or software for industrial design and manufacture to legal persons, entities or bodies established in Russia. To date, however, a “subsidiary privilege” applied, under which an exemption was made for the services and software listed if they are used solely by the Russian subsidiary of an EU company or a company from a partner country. The new General Export Authorisation only became necessary when the 12th sanctions package took effect, as this abolished the privilege with effect from 20 June 2024. From this date on, a licence must be obtained to provide services and software to the Russian subsidiaries of EU companies. 

The BAFA sees no need to monitor the provision of services and software to Russian subsidiaries of EU companies or companies from partner countries by licencing them individually, hence its issuance of the new General Export Authorisation No. 42. This also applies where the services are needed for the work of diplomatic or consular representations of the EU, its Member States or partner countries. The General Export Authorisation covers all services, software and activities listed in Article 5n(1) to (3b) Regulation (EU) 833/2014. The General Export Authorisation only specifies few exceptions where it does not apply and an individual licence is required, such as where the software itself is subject to export restrictions, the recipient of the services is on a sanctions list, or the recipient manufactures certain weapons or armaments. 

Companies that wish to make use of the General Export Authorisation must register with the BAFA as users of General Export Authorisation No. 42 upon first use or within thirty days thereof. They can register using the ELAN-K2 online portal or by e-mail. Notification must only be made the first time a service or piece of software is provided, which further simplifies the procedure. Subsequent services or software provided to the same recipient need not be reported, even if the services or software are different.

2. FAQ and proposed wording for “No Russia clause”

Article 12g was also added to Regulation (EU) 833/2014 as part of the 12th sanctions package, requiring exporters to contractually prohibit their customers from re-exporting certain particularly sensitive goods and technology to Russia or for use in Russia. Because this is a new export control measure and the wording of Article 12g leaves considerable room for interpretation, there was much uncertainty as to how this provision should be handled in practice.

On 22 February 2024, the European Commission published its FAQ on Article 12g Regulation (EU) 833/2014, which also contains proposed wording for the “No Russia clause”. In this respect, it is positive to note that the European Commission explicitly references EU exporters in its guidance. The Commission’s FAQ is a further indication that the obligation to include a “No Russia clause” only applies to contracts for the export of goods from the EU to third countries – and not, for example, to non-European supply relationships governed by Regulation (EU) 833/2014. However, the Commission’s proposed wording is very broad, requiring, for example, the counterparty to use its best efforts to ensure that other companies further down the commercial chain do not re-export the goods to Russia or for use in Russia. To that end, the counterparty should obtain monitoring mechanisms so as to verify whether companies along the commercial chain are meeting this obligation, it says. By way of example, the Commission specifies the right to terminate and contractual penalties as “adequate remedies” for breach of the re-export ban. It remains to be seen how contractual partners in third countries will react to the prospect of incorporating such a far-reaching clause. Nonetheless, the Commission’s FAQ makes clear that where it is not possible to agree a “no Russia” clause, no contract should be entered into. 

Despite these clarifications by the Commission, there is still room for interpretation. The wording proposed by the Commission is explicitly recommended for contracts with contractual partners who pose a high risk of circumvention. This suggests that the Commission’s proposed wording may not need to be fully implemented in less risky circumstances. The minimum requirements for a “No Russia clause” in such lower-risk circumstances remain unclear, even following publication of the Commission’s FAQ. 

In its FAQ, the Commission further reiterates its view that, depending on the inherent risks of a company’s business model, a clause banning the re-export of goods to Russia or for use in Russia may be required beyond the scope of Article 12g Regulation (EU) 833/2014 to ensure sanctions compliance. 

III. U.S. sanctions

The United States also announced further sanctions against Russia on 23 February 2024, prompted by both the second anniversary of Russia’s invasion of Ukraine and the death of Kremlin critic Alexei Navalny. Some of the new sanctions therefore target individuals connected to Navalny’s death. This latest U.S. sanctions package is also aimed at further preventing circumvention, which is why some measures also target companies in third countries.

IV. Outlook 

The 13th package of sanctions requires less action on the part of companies than previous packages did. It introduces no new sanctions instruments, but instead expands the instruments that already existed. That means that companies only need to check the new lists of sanctioned persons and companies and the limited additions to sanctioned goods.

The new General Export Authorisation represents a major simplification for all EU companies that have Russian subsidiaries and provide them with services or business software. Instead of applying for multiple individual licences for the various services they provide, they will now only be required to perform one-off registration. In contrast, the implementation of the requirements for the “No Russia clause” will continue to require a great deal of effort. While the proposed wording does provide guidance on the interpretation of the statutory requirements, EU companies will still be left to make difficult risk assessments – in particular in lower-risk circumstances where potential counterparties are likely to oppose the incorporation of such broad wording.

Compliance with EU sanctions against Russia will continue to pose challenges for companies in future. The sanctions must be observed not only for exports to Russia, but for any transactions involving foreign countries. With no end in sight to Russia’s war of aggression, further sanctions packages and thus further changes to the legal situation are to be expected.