The EU Adopts its 14th Sanctions Package Against Russia

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On June 24, 2024, the EU adopted its 14th sanctions package of economic and individual restrictive measures (sanctions) against Russia.

The measures were adopted through (i) Council Regulation (EU) 2024/1739 of 24 June 2024 amending Regulation (EU) No 269/2014 and (ii) Council Regulation (EU) 2024/1745 of 24 June 2024 amending Regulation (EU) No 833/2014.

Both the EU Council and the EU Commission have issued a press release explaining the new measures. In addition, the EU Commission has issued a Frequently Asked Questions document which aims to provide further detailed information relating to the sanctions package.

We outline below the main elements of the sanctions package:

New designations

A total of 116 additional listings have been made, relating to 69 individuals and 47 entities. These listings impose asset freezes, and – in the case of the individuals – additional travel bans. Listings affect a number of sectors of the Russian Federation’s economy, including companies active in defence and armament manufacture, space engineering, chemicals and explosives, as well as leading Russian energy companies. The listings also include certain transport and communication companies.

Furthermore, two individuals and two entities were designated for “significantly frustrating the provisions of” Regulation (EU) No 269/2014 and Regulation (EU) No 833/2014 by being involved in import of restricted goods to Russia. This demonstrates the focus of the EU on combatting circumvention of restrictive measures.

Energy-related sanctions

For the first time, the EU has targeted the Liquefied Natural Gas (LNG) sector. Up to now, the EU had not targeted imports of Russian LNG into the EU, in order to secure Europe’s energy supply. However, the new restrictions include:

• Prohibition on new investments, as well as the provision of goods, technology and services for the completion of LNG projects under construction, such as Arctic LNG 2 and Murmansk LNG;

• Prohibition on the transshipment of Russian LNG. This covers both ship-to-ship transfers and ship-to-shore transfers, as well as re-loading operations (and the related ancillary services). The prohibition does not affect import of LNG but only re-export to third countries via the EU; and

• Prohibition on the import of Russian LNG into specific terminals which are not connected to the EU gas pipeline network. This is a targeted measure which only affects specific facilities in certain EU Member States. It does not impede imports of Russian LNG through other facilities in the Union in any way, and does not have any adverse effects on the Union’s gas market and on its security of supply, including on available volumes and prices.

Anti-circumvention and due diligence

• The anti-circumvention clause has been amended to clarify that circumvention includes not only the case where a person deliberately seeks the object or effect of circumventing restrictive measures, but also where a person participates in an activity without deliberately aiming to circumvent the sanctions programme, but can be shown to have been aware that participation could have that effect, and accepted that possibility.

• There will now be an obligation on EU parent companies to make their “best efforts” to ensure that their subsidiaries in third countries do not take part in any activities that could undermine EU sanctions:

o This obligation applies to the entities owned or controlled by EU natural and legal persons. Note: preamble (28) to Council Regulation (EU) 2024/1745 of 24 June 2024 amending Regulation (EU) No 833/2014 states that “ownership” means a possession of 50% or more of the proprietary rights or having a majority interest therein. It remains to be seen how this clarification will impact assessment of the ownership and control – at least in the context of Regulation (EU) No 833/2014-- as the EU has historically considered “ownership” to mean the possession of an interest greater that 50% (by contrast to the U.S.).

o “Best efforts” is defined as taking all possible steps that are feasible for the EU operator in view of its nature, its size and the relevant factual circumstances, in particular the degree of effective control over the entity established outside the EU.

• The EU has also clarified the need for appropriate due diligence. According to preamble (3) of Regulation (EU) No 269/2014, the EU operator cannot invoke protection against liability if it failed to carry out appropriate due diligence. For example, the EU operator cannot invoke such protection when it is accused of breaching the sanctions but had failed to carry out simple checks or inspections.

• The EU will now require a “No Russia” clause to appear in contracts relating to Intellectual Property Rights (IPR) on transfers of certain Common High Priority (CHP) goods being exported to third countries, prohibiting their re-export to Russia.

• EU companies will now be required to perform due diligence to prevent the re-export of CHP goods to Russia or for use in Russia, and to ensure that their foreign subsidiaries trading in CHP goods do the same.

Financial sector measures

• EU entities operating outside of Russia (including EU financial institutions) will be prohibited from connecting to, and carrying out transactions using, the Financial Messaging System of the Central Bank of Russia (SPFS) or equivalent specialized financial messaging services set up by the Central Bank of Russia. SPFS is an initiative of the Central Bank of Russia aimed at replacing the SWIFT system. Currently approximately 160 banks in the world are connected to SPFS.

• Transactions with third-country banks using SPFS are now prohibited. In particular, EU operators are prohibited from engaging with any of the listed third-country banks. It is prohibited for EU operators to engage with any of the third-country banks listed in Annex XLIV to Regulation (EU) No 833/2014.

• There is now a prohibition in place on transactions with banks and crypto asset providers in Russia and third countries that facilitate transactions which support Russia’s defence-industrial base. In particular, it is prohibited for EU operators to engage with any of the third-country banks listed in Annex XLV to Regulation (EU) No 833/2014.

Trade-related measures

Exports

• The export restrictions on dual use/advanced technology items have been extended (additional items include, for instance, quadbikes, microwave and aerial amplifiers and digital flight data recorders).

• The current export bans on industrial goods have been reinforced, focusing on four sectors which are key to Russia’s economy: chemicals, plastics, vehicle parts and machinery. The measures are broadening several of the existing 6-digit bans to full 4-digits. This will make it easier for customs officials to check compliance of exports with sanctions.

• Sixty-one Russian and third-country entities have been added to the list of entities associated with Russia’s military-industrial complex (including 33 entities registered in third countries: 19 in China/Hong Kong, 9 in Turkey, 2 in Kyrgyzstan, 1 in India, 1 in Kazakhstan, 1 in the UAE) (Additions to Annex IV to Regulation (EU) No 833/2014).

Imports

• An import ban has been put in place on helium. Russia is making substantial investment in its (energy-intensive) production of this component, which is key for the semiconductor and health industries. The aim of the ban is to avoid the creation of new dependencies on Russia, or to create revenue potential for Russia (Annex XXI to Regulation (EU) No 833/2014).

• The import ban on diamonds has been clarified. The ban does not apply to diamonds already located in the EU or a third country when the ban entered into force. The sunrise period after which the full-traceability scheme for imports of rough and polished natural diamonds will become mandatory has been prolonged by six months (until 1 March 2025).

• The Common High Priority (CHP) list has been extended to include five HS codes concerning computer numerical control (CNC) machine tools used for weapons production (Annex XL to Regulation (EU) No 833/2014).

Provision of services

• The period of exemption has been extended to 30 September 2024 for the provision of restricted services intended for the exclusive use of entities established in Russia which are owned or controlled exclusively or jointly by an entity incorporated or constituted under the law of a Member State, a member country of the European Economic Area, Switzerland or an EU partner country.

• An exemption has been added to the prohibition on providing certain services to the Government of Russia or to legal persons, entities or bodies established in Russia for Union nationals who resided in Russia before the invasion of Ukraine in February 2022 and who are employed by Russian entities meeting the ownership or control conditions set out in the preceding bullet.

Transport measures

• Aviation: A prohibition is now in place on non-scheduled flights if a Russian person or entity decides the origin or destination (regardless of ownership and control over the aircraft). In addition, a new uniform obligation has been introduced which requires flight companies to provide advance information about non-scheduled flights upon the request of national authorities, including : (i) the actual ultimate beneficial owner of the aircraft and the person or company ultimately chartering the aircraft; and (ii) (where reasons exist to suspect circumvention) the passengers on the flight, including documents such as a general declaration, passenger manifest and other official documents.

• Road: Current EU road transport undertakings in which Russian persons have a 25% ownership stake will no longer be allowed to transport goods. In addition, companies owned 25% or more by Russian persons will no longer be allowed to become EU road transport undertakings.

• Maritime: A prohibition is now in place on port access and services for listed vessels. There are 27 vessels named on this list, identified for their contribution to Russia in various sectors such as the transport of military equipment, transport of Ukrainian grain, transport of Russian oil, and support for the development of Russia’s energy sector, for instance through the transport of LNG infrastructure components or LNG transshipments. The list can be found as Annex XVI to Regulation (EU) No 833/2014.

Protection of EU operators

• Legal basis for compensation claims in Member States’ courts: when EU companies terminate a contract, they are shielded from any claims brought by their Russian counterparties in the EU. However, EU companies are not protected from claims brought by Russian counterparties in the territory of Russia. The new instrument establishes a specific legal basis for EU companies to recover such damages from their Russian counterparties’ assets in the EU. An additional provision has also been adopted to allow EU companies to recover damages from those who benefit from the temporary management imposed by the Russian Government on subsidiaries of EU companies in Russia.

• A transaction ban has been adopted to protect arbitration/litigation: earlier in 2020, the Russian Commercial (Arbitrazh) Procedural Code (the “APC”) was amended to provide Russian courts with exclusive jurisdiction over disputes affected by sanctions, i.e., where a party is subject to sanctions or the subject-matter of the dispute has been affected by sanctions. The amendment (Articles 248, 248.1. and 248.2 of the APC) allowed Russian parties to refer their disputes to Russian courts and/or seek an anti-suit injunction restraining the foreign proceedings if the arbitration/jurisdiction clause in the relevant contract became inoperable/invalid due to sanctions -- for example, where a Russian party does not have access to justice in the pre-agreed forum. New Article 5ab of Council Regulation 833/2014 prohibits EU operators from engaging directly or indirectly in any transaction with the entities which lodged a claim before a Russian court to obtain an injunction, order, relief, judgment or other decision of a Russian court, in connection with any contract or transaction, performance of which has been affected by EU sanctions. The restriction is subject to certain caveats.

• Protection for EU nationals and companies that have suffered damages: to protect the interests of EU nationals and companies whose rights may have been impaired in Russia, the EU has introduced provisions granting EU nationals and companies a right to claim compensation if damages stemmed from a decision that is illegal under international customary law or under a bilateral investment treaty (“BIT”) entered into between an EU Member State and Russia, and provided that the EU national or company does not have effective access to other remedies, for example under the relevant BIT. Compensation may be claimed before EU courts in accordance with applicable national law regarding jurisdiction and court procedures in civil and commercial matters.

Measures protecting intellectual property rights

• EU and Member States’ intellectual property offices and authorities are prevented from accepting applications for registration of, among others, new trademarks and patents requested by Russian persons and persons resident in Russia.

Additional measures

• Political parties and foundations, non-governmental organizations, including think tanks, or media service providers in the EU are no longer permitted to accept funding coming from the Russian State and its proxies.

• The prohibition on EU and Member States funding has been expanded to cover all Russian entities – not only state-owned ones as was previously the case. Limited derogations apply, in particular for Member States’ cultural and educational centers, or civil society organizations still operating in Russia.

• A prohibition has been introduced on the purchase, import, transfer or export of Ukrainian cultural property goods and other goods of archaeological, historical, cultural, rare scientific or religious importance, where there are reasonable grounds to suspect that the goods have been unlawfully removed from Ukraine.