On 6 October 2022, the EU again tightened economic sanctions against Russia in response to its illegal annexation of Ukrainian territory based on sham “referenda”, its partial mobilisation, and its renewed threat to use weapons of mass destruction. The eighth package – which the EU again calls a sanctions package – builds on the “maintenance and alignment” package of measures of 21 July 2022 (newsletter of 28 July 2022) and the sanctions packages of 3/4 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 eighth sanctions package is designed – as European Commission President Ursula von der Leyen put it – to “make the Kremlin pay” for escalating the conflict, and both introduces additional import and export bans and further expands the list of personal sanctions. The geographical scope of the sanctions has also been extended to cover the four Ukrainian territories annexed by Russia: Donetsk, Luhansk, Kherson and Zaporizhzhia. In addition, the eighth sanctions package lays the groundwork for the introduction of the G7’s “oil price cap”.
The EU is not alone in significantly tightening its sanctions: The U.S. and UK also expanded their measures – and Russia its countermeasures – before the EU’s sanctions package came into force.
The EU’s latest sanctions package (Regulations (EU) 2022/1903, 2022/1904 and 2022/1905 and Implementing Regulation (EU) 2022/1906) tightens and modifies the existing sanctions against Russia – in particular, the personal sanctions in Regulation (EU) 269/2014 and the financial and trade sanctions in Regulation (EU) 833/2014.
The EU has added 30 individuals and seven entities to the list of personal sanctions, which now has more than 1,300 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). In the package of measures adopted on 21 July 2022 (newsletter of 28 July 2022), the EU expanded these personal sanctions to include a reporting requirement for listed persons, entities or bodies; these parties are now required to report any assets they have in the EU to ensure that these are frozen and to prevent circumventions.
- The current sanctions package adds the persons and entities involved in ordering and organising the illegal referenda in the occupied regions of Ukraine – including political decision-makers and members of the Central Election Commission (and the Commission itself) – to the list in Annex I to Regulation (EU) 269/2014. A number of new names on the list come from the Russian defence sector, including Alan Lushnikov (the largest shareholder of arms manufacturer JSC Kalashnikov Concern), several defence companies, and certain members of the Russian Armed Forces. Finally, the list now includes individuals who have deliberately spread disinformation about the war, such as prominent singer Yulia Chicherina and well-known “philosopher” Aleksander Dugin.
Financial and trade sanctions
The EU also adopted extensive further measures expanding and tightening financial and trade sanctions:
- Comprehensive new import and export restrictions have been added to the goods-related sanctions. The expansion of these export restrictions is primarily aimed at curbing Russia’s access to goods that can aid its military and technological capabilities or its defence, security or industrial sectors. To this end, export bans on coal, specific electronic components, technical items used in the aviation sector, certain chemicals, and small arms have been imposed or tightened. Import restrictions (Article 3i Regulation (EU) 833/2014) have been vastly broadened to include a wide variety of goods which, from the EU’s perspective, contribute to substantial revenues for the Russian Federation. While the new import restrictions on certain steel products, machinery and vehicles come as no surprise, the same cannot be said for the inclusion of other products. Oddities such as “mica”, “beauty preparations” or “pouffes” and even toilet paper and buildings have made it onto the list in Annex XXI.
- However, the EU has also created further exemptions from the import restrictions: According to the newly introduced paragraph 3a of Article 3i Regulation (EU) 833/2014, the import restrictions now no longer apply if the goods are necessary for diplomatic purposes or for the personal use of nationals of Member States and their immediate family members. Furthermore, import licences can be issued for goods related to the civilian use of nuclear power.
- The import restrictions laid down in Article 3g Regulation (EU) 833/2014 on the iron and steel products listed in Annex XVII have also been expanded. On the one hand, the import bans now also cover certain steel products processed in third countries using products originating in Russia as listed in Annex XVII. On the other, various new transitional arrangements apply to different iron and steel products.
- The services bans set out in Article 5n Regulation (EU) 833/2014 have also been expanded. In addition to prohibiting the provision of auditing, business and management or public relations services to the Russian government or to legal persons, entities and bodies established in Russia, these now also prohibit the provision of IT consultancy, legal advisory, architectural and engineering services to these institutions.This is intended to further weaken Russia’s industrial capacities because they are highly dependent on services from EU states. Services that are strictly necessary for the termination before 2 January 2023 of contracts concluded before 7 October 2022 or of ancillary contracts necessary for the execution of such contracts will however be exempt from these service bans for a limited transitional period. Furthermore, these bans do not apply to certain services necessary to ensure access to the judicial system. The exemption for Russian subsidiaries of EU companies still applies.
- Finally, the ban in Article 5b(2) Regulation (EU) 833/2014 on providing crypto-asset wallet, account or custody services to Russian natural or legal persons has also been tightened by removing the previous threshold of EUR 10,000 and applying the ban irrespective of value.
Energy sector sanctions
The new measures on crude oil and petroleum are a key part of the eighth sanctions package. In particular, the EU has paved the way for the much-publicised “oil price cap” agreed by the G7 countries.
- While the exact price limit still has to be negotiated by the EU and the G7 countries, the basic oil price cap mechanism has been laid down. In addition to the prohibition already in force under Article 3n(1) Regulation (EU) 833/2014 on providing technical assistance, brokering services or financing or financial assistance related to the maritime transport to third countries of crude oil or petroleum products which originate in or are exported from Russia, there is now also a prohibition on the transport itself, including through ship-to-ship transfers. According to the new Article 3n(4) Regulation (EU) 833/2014, the transportation of crude oil (from 5 December 2022) and of certain petroleum products (from 5 February 2023) originating in or exported from Russia to third countries, including through ship-to-ship transfer, will be prohibited. However, according to paragraph 5, this prohibition will only come into force once the price cap has been set.
According to the new provision on the oil price cap in Article 3n(6) Regulation (EU) 833/2014, European companies are to be allowed to export crude oil and petroleum products by ship to third countries despite the aforementioned prohibitions if the price remains below a predefined price cap. The aim is to strike a balance between the conflicting interests of reducing Russia’s revenues and keeping global energy markets stable. It should also limit inflation and the rise in energy prices. The price cap will be set by the Price Cap Coalition and then reflected in Annex XXVIII of Regulation (EU) 833/2014. In practice, the price cap mechanism will be implemented through an attestation process, which will enable operators in the supply chain to provide proof of the purchase price they have paid. The EU intends to issue guidance on the complex questions surrounding the price cap as soon as possible in order to facilitate uniform application and enable a level playing field in the EU and globally.
- The nuclear energy sector continues to be exempt from restrictions. The EU explicitly points out that none of the envisaged measures seeks to undermine the safety of civil nuclear capabilities or civil nuclear cooperation, in particular in the field of research and development, or to undermine the planning or construction of new nuclear facilities or the maintenance or fuel supply of existing facilities. This includes allowing services and commercial activities to continue that are aimed at maintaining the safety of the nuclear power plant in Zaporizhzhia. Another exemption has also been added to the transaction ban under Article 3k Regulation (EU) 833/2014, specifying that the authorities can approve a transaction if it is necessary for the maintenance and expansion of nuclear power plants.
New sanctions categories
A completely new aspect of the complex web of sanctions is the possibility to add persons who circumvent existing sanctions or who facilitate or support circumvention by others to sanctions lists. This also applies to circumvention by EU citizens. One form of circumvention, for example, is purchasing goods in the EU, initially delivering them to third countries and then, after that, to Russia. The EU hopes this will have a deterrent effect.
Finally, the EU has also prohibited nationals of its Member States from holding positions on supervisory boards and other governing bodies of certain state-owned companies in Russia after 22 October 2022 (Article 5aa(1a) Regulation (EU) 833/2014). As a result, persons who already hold such positions will likely be obliged to resign. This regulation supplements existing bans on transactions with the Russian state-owned companies concerned. The German government in particular had advocated for this step in view of ex-Chancellor Gerhard Schröder’s many years of work on the supervisory board of Russian oil company Rosneft, for which he had been harshly criticised.
On 26 September 2022, the UK also imposed new sanctions on Russia – some of which match the new EU sanctions – in response to the annexations and sham “referenda”. These are mainly personal sanctions against the individuals and entities involved in carrying out the sham “referenda”, as well as against decision-makers of various state-controlled companies, including Gazprombank, Sberbank and Sovcombank, and “Putin’s favourite PR agency”, IMA Consulting. As a result, more than 1200 individuals and 120 entities are now also subject to UK sanctions. The United Kingdom additionally prohibits the provision of IT and legal advisory services, as well as architectural and engineering services. Finally, export restrictions have also been imposed on some 700 other goods that Russia needs for its industrial and technological capabilities.
On 30 September 2022, the U.S. also tightened its sanctions. The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has now added around 300 new entries to its specially designated nationals and blocked persons list (“SDN List”), including members of the Russian armed forces and Russian legislative bodies (for more on the legal consequences of the listing, see our newsletter of 7 March 2022). Similar to the new EU regulation – under which EU citizens must also fear being listed themselves if they circumvent the sanctions or assist in such circumventions – the U.S. has also announced that any support for the war of aggression in Ukraine will also lead to comparable consequences in the U.S. The U.S. has once again stressed that the OFAC sanctions do not apply to the sale or transport of Russian crude oil, petroleum products, LNG and coal products of Russian origin, except if such products are imported into the U.S. On 15 September 2022, the U.S. Bureau of Industry and Security (“BIS”) also tightened export controls under the Export Administration Regulations (“EAR”), by listing additional items affecting many industrial sectors, and extending the scope to Belarus.
Russia has responded to the comprehensive sanctions imposed by the EU and U.S. by taking further countermeasures and extending existing measures.
It has already enforced measures to preserve financial stability for some time, including a ban on cash exports exceeding USD 10,000 that it introduced on 2 March 2022. No cash or financial instruments in foreign currency exceeding the equivalent of USD 10,000 may be taken out of the country. This measure has now been extended until 9 March 2023. It has also banned transfers abroad from Russian accounts by non-resident natural and legal persons from those states that have levied sanctions against Russia – a measure that will apply until 31 March 2023. This means that Russia now has a wide range of capital controls in place.
In addition, Russia has ordered further export restrictions in the form of export quotas for sulphur (which is needed for fertiliser production), recycled paper, cardboard and precious metal waste. Russia has also extended its personal sanctions, which primarily comprise bans on entering the Russian Federation, to cover other military personnel, politicians and actors from Western countries.
Moreover, a presidential decree entered into force on 8 September 2022 making legal transactions that directly or indirectly concern the establishment, modification or termination of rights to own, use or dispose of shares in Russian limited liability companies (Russian: OOO) subject to approval by the Government Commission on Monitoring Foreign Investment with immediate effect. This will make it more difficult for Western companies to sell their Russian subsidiaries and stop doing business in Russia.
Conclusion and outlook:
Response to the sanctions
The EU believes that its sanctions have had a positive effect so far, arguing that Russia’s economy is clearly suffering as a result, with its capacity to manufacture and maintain weapons and other means of war having been weakened, in particular.
Yet for some Member States, such as Lithuania, the sanctions still don’t go far enough, especially given the numerous exemptions from certain prohibitions. In some cases, however, these were specifically introduced due to pressure from other Member States that had made their consent to the sanctions packages contingent on such exemptions because of concerns about their own sources of supply and economies.
Contrary to the demands by some Member States and Ukrainian President Zelensky, the EU has largely exempted the Russian nuclear industry from sanctions. Russian uranium and nuclear technology may still be imported into the EU. Considered by some as a major gap in the sanctions structure, others see it as a reasonable step given that the EU continues to be dependent on Russia in these areas and would be “shooting itself in the foot” if it were to impose sanctions here.
Practical consequences and outlook
The import and export bans are now so wide-ranging and complex – also covering “unlikely” goods (for example, under Article 3i or the related Annex XXI) – that particular caution is required. Companies that have business dealings with Russia should reclassify their goods and materials from scratch based on the new lists of goods. Unfortunately, the EU has only added a very limited number of exceptions to existing import bans. This has done little to alleviate the problem – already addressed in our last newsletter of 28 July 2022) – of critical infrastructures and industries within the EU being affected by the import restrictions.
Businesses also need to be wary of the Russian government’s new approval requirements for shares in limited liability companies, which have so far (unlike stocks) been freely transferable, when contemplating reorganisation or withdrawal from business dealings with Russia.
There is currently no end in sight to the war of aggression – or to the resulting sanctions. The EU has in the meantime extended its sanctions until 15 March 2023. Companies need to monitor the complicated web of EU and U.S. sanctions as well as Russian countersanctions, and adapt their business operations accordingly. We will continue to keep you posted on future developments.
Update on EU criminal sanctions law
After the EU had already laid the groundwork for the introduction of uniform EU criminal sanctions legislation on 7 July 2022 (see our newsletter of 28 July 2022), the Bundestag adopted a corresponding bill on 29 September 2022. Once the Bundesrat approves this bill and the law enters into force, the Council Decision extending EU criminal law powers to cover violations of sanctions can also be adopted, opening the way for an EU harmonisation directive. We will continue to report on further developments in this area.