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EU’s Eighth Russian Sanctions: unprecedented bans - third countries and legal advice in the spotlight

International Trade and Investment Alert™ | October 25, 2022

Introduction

On 6 October 2022, the EU issued its eighth sanctions package against Russia. The eighth package responds to Russia’s illegal annexation of four Ukrainian regions, following staged referendums last month. These new measures result in an unprecedented jurisdictional power grab by the EU, with new powers granted to impose sanctions on entities and transactions outside of the EU or Russia, where they facilitate circumvention of the EU rules.

The EU’s eighth package comprises three broad new bans, and the extensions of existing bans:

  1. New power for the EU to impose sanctions on individuals and entities that facilitate circumvention of the EU sanctions, even if located outside the EU (or Russia) and showing no obvious Russian nexus.
  2. New bans on providing services to Russian entities, including an unprecedented ban on legal advisory services (also covering in-house counsel), IT consultancy and engineering services.
  3. New ban of third country imports into the EU that incorporate banned Russian iron and steel products.
  4. Extension of the Ukraine trade embargos over Crimea, Donetsk and Luhansk to the newly annexed regions of Kherson and Zaporizhzhia.

The entire EU’s Russia sanctions package now runs to thousands of pages across several legal texts, making compliance increasingly complex. This alert summarizes its key features.

Timeline of Russia Sanctions
  1. Financial sanctions: paving the way for facilitation offenses

The EU’s eighth package confers powers to the European Commission to take direct action against EU and non-EU entities that bypass the EU’s sanctions; instead of having to rely on national authorities to enforce sanctions.

To do so, the EU extended its power to designate individuals or entities for sanctions to those “facilitating infringements of the prohibition against circumvention of the provisions of the [EU’s Russia sanctions].”[1] Such EU powers are unprecedented. Previously, the EU could only impose sanctions on those directly involved in the Russian invasion and their supporters.[2] Now, the EU could impose sanctions on individuals/entities even where domiciled in third countries where the EU has concerns that they are “facilitating” the circumvention of sanctions.

To illustrate: an entity domiciled in a jurisdiction that has no domestic sanctions against Russia (e.g. in the Middle East or Asia regions) imports EU goods with the intention to resell them to Russian customers. To date, national export control authorities of EU Member States could investigate only if (1) such entity is subject to EU jurisdiction (e.g. by virtue of having trading relationships with the EU) and (2) the resale constitutes an intentional circumvention attempt of EU sanctions. Given the jurisdictional and evidentiary hurdles to prosecute such a pattern, investigations have remained rare. Instead, now the EU can directly sanction facilitators by imposing asset freezes.

  1. Prohibitions on provision of professional services (architectural/engineering, legal, IT consultancy)

The eighth package contains new prohibitions on the provision of professional services in: (i) architectural and engineering services, (ii) legal advisory services (including from in-house counsel) and (iii) IT consultancy services.[3] A number of carve-outs apply to those new rules, including: (i) an exemption for service to individuals, (ii) a wind-down period until 8 January 2023 for the fulfillment of contracts concluded before 7 October 2022, and (iii) an exemption for services provided to Russian subsidiaries controlled by entities domiciled in “friendly” jurisdictions (i.e. EEA, Switzerland, UK, USA, Japan or South Korea).[4]

In practice, this means that there is now an important distinction for international groups operating in the EU and with Russian subsidiaries:

  1. Where the (direct/indirect) parent of the Russian subsidiary is domiciled in a “friendly jurisdiction,” it remains possible to provide (external or in-house) legal advice to the Russian subsidiaries.
  2. However, where the parent is not domiciled in a “friendly jurisdiction,” the prohibition applies, and even in-house counsel can no longer provide advice to their Russian subsidiaries.

The new ban will create issues primarily for non-EU companies that previously did not follow EU sanctions but still punctually relied on service providers from the EU; in particular, corporate groups with minimal presence in the EU and, conversely, large Russia exposures could be pushed to cut ties with the EU to stay out of the jurisdictional reach of the new ban.

The eighth package has also strengthened financing and governance restrictions[5] on Russian entities by prohibiting (i) EU operators[6] from holding a seat on governing bodies of certain Russian entities, and (ii) the supply of all crypto wallet services, without any maximum threshold (whereas before, there was a EUR 10k/USD 9.7k cap) where those are provided to Russian nationals, persons located in Russia and Russian entities.[7]

  1. Trade sanctions: new and extended prohibitions on import/export of goods

The eighth package introduces a new prohibition on the import of specific iron and steel goods from any third country, if those products contain banned Russian iron and steel inputs.

The new ban aims to close another potential pathway to circumvention, where parties would purchase banned goods from outside Russia (and therefore previously not caught by EU sanctions), but which were produced using banned Russian input materials. In practice, this new ban restricts imports from unsanctioned third countries, if they have not equally banned iron and steel imports from Russia.

Further, the EU extended existing import and export bans:[8]

  1. The import ban, which already covers iron and steel products, coal and other solid fuels, oil and petroleum products, gold, and other goods that generate significant revenues for the Russian economy (from caviar to fertilizers),[9] now also includes further iron and steel products, and revenue generating goods (e.g. cigars and washing machines).[10]
  2. The export ban, which already covers a variety of goods (from roses to missiles),[11] now also covers further advanced technologies (e.g. semiconductors, microcircuits, cameras), as well as aviation goods (e.g. certain hydraulic oils) and industrial goods (e.g. peat, coke and chemicals).[12]

In most cases, the eighth package provides for a “wind-down period”—providing some flexibility for ongoing trades—allowing for the fulfillment of existing contracts until 8 January 2023,[13] provided those contracts were concluded prior to 7 October 2022.

  1. Territorial sanctions expanded into newly annexed regions

The EU’s eighth package also extends existing trade embargos to the two newly annexed regions of Kherson and Zaporizhzhia.[14] The EU has already had comprehensive trade embargos in place on Ukraine’s annexed territories since 2014, when Russia invaded Crimea.[15] These sanctions were extended in March 2022 when Russia invaded the regions of Donetsk and Luhansk.[16] The embargo now covers Crimea, Donetsk, Luhansk, Kherson and Zaporizhzhia, and prohibits (i) the import of any goods originating from the sanctioned regions, (ii) investments in those regions (e.g. into local real estate or entities), (iii) the export of specific products (e.g. military technology, as well as key goods for infrastructure projects), and (iv) imposes a ban on providing tourism activities. As a result, businesses that have continued trading with Ukraine will need to consider their customs procedures to ensure that they are not contravening the extended trade embargos.

Conclusion

The annexation of two additional regions in Ukraine is a significant geopolitical event. It is therefore appropriate that the eighth package is one of the most intensive and comprehensive packages of EU sanctions to date. Aside from capturing new goods and services, the EU is now clearly focused on extending compliance to those market actors with even an indirect EU nexus. It achieves this de facto, “exporting” its sanctions rules outside the EU via tools that (i) ban Russian imports of goods processed using certain Russian goods, and (ii) allow the direct sanctioning of entities that act as a circumvention hub. In both cases, the EU will look to assert itself even where local laws for the non-Russian counterparties would not prohibit the transaction.

Thematically, the eighth sanctions package could therefore be understood as a commensurate geopolitical event: as Russia seeks to extend its reach over Ukraine, the EU extends its reach over any third party that Russia could use to support its extension. Although certain international corporates are currently afforded some shelter from this struggle, it is clear that the number of businesses affected by the conflict is growing.

 


[1] See new Article 3(1)(h) introduced by Regulation (EU) 2022/1905.

[2] When the EU originally imposed financial sanctions in response to Crimea, they could only designate individuals/entities that were directly involved with the Russian government’s war efforts. Once Russia annexed Donetsk and Luhansk and invaded the rest of Ukraine, the EU responded by extending its designation power to “leading businesspersons or legal persons, entities or bodies involved in economic sectors providing a substantial source of revenue to the Government of the Russian Federation” (see Regulation (EU) 2014/811 and Regulation (EU) 2022/330).

[3] See recital 19, and paragraphs 3 to 9 of the new Article 5n, of Regulation (EU) 2022/1904.

[4] The new ban on professional services inserts itself into an already extensive list of services prohibited by the EU, including a ban on accounting and management consultancy services, transport services, technical and financial assistance services, and business administration services. See Articles 3l, 3n, 5n and various subrogated prohibitions to the prohibition in trade in goods listed in Regulation (EU) 2014/833.

[5] Including bans on trading euro securities, dealing with shares held in European depositories, and trading in newly issued shares. See Articles 5 to 5h of Regulation (EU) 2014/833.

[6] EU operators include: EU residents, nationals, entities or foreign entities carrying out business in the EU.

[7] See Article 5aa(1a) introduced by Regulation (EU) 2022/1904 and the updated Annex XIX.

[8] The EU also introduced a (i) new ban on selling particular types of munitions and firearms to Russia, whether or not those munitions actually originated in the EU, and (ii) the mechanism for a new price cap on importing Russian oil, regardless of destination (yet to be introduced) (See new Article 2aa and amended Article 3n, introduced by Regulation (EU) 2022/1904).

[9] As listed in Annexes XVII, XXI, XXII, XXV and XXVI of Regulation (EU) 2014/833.

[10] See the new product lists in Annexes I, II, IV, VI and VII of Regulation (EU) 2022/1904.

[11] Specifically, weapons, dual use goods and technology, advanced technology (e.g. microprocessors, computing hardware, lasers), products used in the oil and gas industry (e.g. pipeline equipment), goods for use in the aviation and space industry, maritime navigation goods (e.g. radio equipment, navigation computers), luxury goods (from champagne to luxury cars), and goods pertaining to Russia’s industrial capability (from roses to chemicals and packing materials). As listed in Annexes II, VII, X, XI, XVI, XVIII, XX and XXIII of Regulation (EU) 2014/833.

[12] See footnote 7.

[13] The exact wind-down periods vary depending on the type of good.

[14] Regulation (EU) 2022/1903 amends the definition of “specified territories” in Regulation (EU) 2022/263.

[15] See our previous alert here.

[16] See our alert here.


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