Trade Compliance: EU ratchets up the pressure on Russia with robust new sanctions

Background

Many Western countries have responded to the Russian invasion of Ukraine in a coordinated way, by putting in place consecutive waves of sanctions as the war has continued.  The escalation of events with the decision by Russia to annex four regions of Ukraine (Donetsk, Luhansk, Kherson and Zaporizhzhia) spurred the EU to reconsider and add an essentially new wave to its set of sanctions packages.

On 6th October 2022, the EU agreed and passed into law its 8th package of sanctions imposed on Russia in response to its continued invasion of Ukraine ("8^th EU sanctions package"). (1) The 8^th  EU sanctions package is considerably more robust than previous measures, including establishing trade embargoes affecting a long list of goods and prohibitions on supply of services.  However, there are also some elements in it, which are similar to the U.S. approach to sanctions, such as new criteria for blacklisting any persons known to circumvent or facilitate circumvention of EU sanctions, and prohibitions of shipments of oil to third countries.

This represents a change in direction for the EU, which has previously criticised the US sanctions policy for having extraterritorial effects.

Key elements of the 8^th EU Sanctions Package

The 8^th  EU sanctions package includes:

• extending the criteria for blacklisting (legal grounds for initial imposition of sanctions on) natural persons and legal entities. Included within scope are those who assist in the circumvention of EU sanctions.  This new element of the EU's 8^th sanctions package mirrors a similar approach undertaken in the US, which includes imposing sanctions on facilitators of US sanctions evasion. (2) Moreover, there appears to be an extraterritorial aspect in this new criterion, since the envisaged "natural or legal persons, entities or bodies" are not limited to citizens or residents of EU or Russia, thus extending the scope to include citizens and residents of non-EU and other third countries, other than Russia;

• increasing the geographical scope of EU sanctions imposed on the non-government controlled areas in Ukraine – now including the non-government controlled areas in the regions of Donetsk, Luhansk, Kherson and Zaporizhzhia. Previously only the non-government controlled areas within the Donetsk and Lugansk regions were covered.  The new sanctions include prohibition of EU imports of goods originating from those non-government controlled areas, as well as a number of EU export prohibitions affecting those areas;

• creating a prohibition on export of items from the EU that might contribute to Russia’s military and technological enhancement or to the development of its defence and security sector. The prohibited exports include certain chemical substances, nerve agents and goods which have practical use for capital punishment, torture or other cruel, inhuman or degrading treatment or punishment, or which could be used for those purposes;

• a prohibition on maritime transport of Russian oil to third countries and maritime services for the transport of Russian oil and petroleum goods. This prohibition also potentially contains an extraterritorial element, as the enforcement of such prohibition is likely to take place outside EU territory and affect third country imports;

• a prohibition on the sale, supply, transfer or export of firearms and their components and parts, as well as ammunition;

• a wide prohibition on EU imports of various Russian industrial and consumer goods worth EUR 7 billion, including a wider range of steel products (including those from third countries, which are the result of processing Russian steel products, with effect from 30 September 2023 – which appears to be another extraterritorial element), coal, woodpulp and paper, precious stones and precious metals, machinery, industrial chemicals, plastics, cosmetics, home items, and cigarettes;

• an extended EU export prohibition on goods and machinery, which may contribute to the enhancement of Russian industrial capacities, and additional restrictions on the sale, supply, transfer or export of goods for the aviation sector;

• a new prohibition on EU nationals preventing them from holding any director posts in the governing bodies of legal persons, entities or bodies who are Russian government owned or controlled.  This prohibition is likely to affect many Russian energy and infrastructure companies;

• additional sanctions and various prohibitions on the Russian Maritime Register of Shipping, as well as on vessels certified by it, with effect from 8 April 2023. For instance, such vessels are now subject to a prohibition on port access and lock in the territory of the EU;

• extending the existing prohibition on the provision of crypto-asset wallet, account or custody services to Russian persons and residents. As a result, any such services are now prohibited, including low value services (this appears to be an anti-circumvention provision); and

• a prohibition on EU persons from engaging in supply of professional and business services to Russian entities, whether government-controlled or privately held. The long list of prohibited services includes accounting, auditing, including statutory audit, bookkeeping or tax consulting services, or business and management consulting or public relations services architectural and engineering services, IT consultancy services, as well as legal advisory, including commercial transaction services (with the exception of legal administrative representation and litigation, arbitration or mediation).  Such services are defined in accordance with the UN's Central Products Classification (CPC) of 1991.

Exemptions from the 8^th EU sanctions package

The 8^th EU sanctions package includes a number of exemptions from sanctions prohibitions.  In many cases, such exemptions will be provided on a case-by-case basis by the national enforcement authorities of EU Member States.

There are exemptions concerning civil nuclear facilities and ensuring nuclear safety.  This recognises the importance of the goods necessary for the functioning and safety of civil nuclear capabilities including the continuation of design, construction and commissioning required for the completion of new civil nuclear facilities; the supply of precursor material for the production of medical radioisotopes and similar medical applications, or critical technology for environmental radiation monitoring, as well as for civil nuclear cooperation, in particular in the R&D field.

Whilst the 8^th EU sanctions package imposed a prohibition on maritime transport of Russian oil to third countries (with likely exterritorial effects), there is also a potential exemption related to maritime transport of crude oil or petroleum products from Russia, as well as from the prohibitions to provide technical assistance, brokering services or financing or financial assistance (also possibly with some extraterritoriality in obtaining the exemption).  Such exemptions are conditional on (third countries) making purchases of Russian oil at a price below a certain oil price cap, negotiated in principle by the Price Cap Coalition (the Group of Seven or G7).  Such an exemption is intended to mitigate consequences on energy supply to third countries and reduce energy prices, while limiting Russian revenues from export of oil and petroleum products.  However, the details of such a price cap on oil have not yet been finally determined by the Member States within the Council of the EU at the time of writing.

The key exemptions relating to the prohibition on provision of professional services include services intended for the exclusive use by Western-controlled entities established in Russia.  Those entities are to be understood as legal persons or entities that are owned by, or solely or jointly controlled by entities incorporated or constituted under the law of a Member State, a country member of the European Economic Area, Switzerland or EU's designated partner countries, including the UK.  The 8^th EU sanctions package provides several other general and specific exemptions.

Concluding remarks

The 8^th EU sanctions package is in many ways unprecedented by its breadth and reach.  For the first time there appear to be extraterritorial elements in EU sanctions, something of which the EU has been highly critical in U.S sanctions policy, and has also been on a defensive strategy with a previously proposed EU approach to "unlawful" anti-extraterritorial effects of sanctions. (3) The EU has also been pioneering in prohibiting the provision of non-contentious legal advice among other professional services to Russian legal entities.

(1) See Offficial Journal of the European Union, L 259I, 06.10.2022.

(2) U.S. Treasury Designates Facilitators of Russian Sanctions Evasion, US Department of the Treasury, Press Releases, April 20, 2022, https://home.treasury.gov/news/press-releases/jy0731

(3) "Key action 15: The Commission will consider additional policy options to further deter and counteract the unlawful extra-territorial application of unilateral sanctions by third countries to EU operators, including a possible amendment of Regulation (EC) No 2271/96" in Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions, The European economic and financial system: fostering openness, strength and resilience, Brussels, 19.1.2021 COM(2021) 32 final.