The twelfth package of EU-Russia sanctions

1. The twelfth EU sanctions package against Russia – further changes to EU sanctions law

 On 18 December 2023, the EU member states once again agreed on a comprehensive package of sanctions in response to Russian aggression and the war waged by Russia in Ukraine. Since 19 December 2023, these regulations have come into full force and thus both extensions of trade-related and personal sanctions, which have led to changes under the existing EU Regulations 833/2014 and 269/2014.

In addition to the response that the package of measures has received regarding the ban on direct or indirect trade in diamonds of Russian origin, the focus on further preventing circumvention transactions should be emphasised in particular.

The media focus on the ban on diamond trading entails the risk of not taking note of other new regulations that are relevant for other business areas. This article attempts to counteract this, at least for key regulations.

In business transactions in particular, it is advisable to analyse the new regulations and implement them in compliance systems.

Import and export bans have been extended again. These regulations are explained in more detail under 2. In section 3, we highlight key regulatory areas that affect the maritime industry. In section 4, we will shortly turn our attention to the broad field of dealing with investments in Russia, which under the twelfth sanctions package is particularly related to the expansion of the list of sanctioned companies and individuals. The challenges for legal advisors will also be outlined shortly.

The additions to the sanctions lists reflect in particular the fact that the measures known as counter-sanctions against Russian subsidiaries of companies based in the EU have led to enormous profits for profiteers in Russia, usually with close ties to the Kremlin, who were able to take over production sites at favourable prices in the course of expropriations or otherwise benefit from Russia’s state measures. Further explanations can be found under 5.

2. Trade-related sanctions

No-Russia-Clause

Exporters are advised to check whether they are exporting goods or technologies listed in Annexes XI (aerospace industry), XX (aviation turbine fuels) or XXXV (firearms), firearms and ammunition according to the list in Annex I of EU Regulation No. 258/2012 or high-priority goods listed in Annex XL of the Regulation. In accordance with the now applicable Art. 12g para. 1 of EU Regulation 833/2014, a second step must then be taken to check whether the export is destined for one of the listed partner countries. The USA, Japan, Great Britain, South Korea, Australia, Canada, New Zealand, Norway and Switzerland are currently listed as such partner countries. In all other cases, the trading partner must be obliged to submit a declaration of discontinuance for re-export to Russia. This obligation (also known as the “no-Russia clause“) applies from 20 March 2024, i.e. with a very short lead time, and only affects contracts concluded from 20 December 2023.

Infringement reporting obligation

In the event of a breach by a contractual partner based in a third country, the regulation stipulates that the EU-based exporter must report the breach as soon as it becomes known. It is advisable to provide for a corresponding process structure in the company’s compliance requirements.

Transit ban

Parallel to the export bans, the ban on the transit of goods and technologies through Russia has been extended; Annex XXXVII of EU Regulation 833/2014 lists the goods and technologies to be observed. Exporters are advised to ensure that the goods they export are not listed accordingly or to ensure that no transit through Russia takes place.

Import bans – especially diamond trade, metals and LPG

The aforementioned ban on the diamond trade in diamonds from Russia will apply to natural and synthetic diamonds, the direct diamond trade, from 1 January 2024. With lead time, so that a certification system can be established, it has been announced that indirect trade, for example in jewellery produced in third countries, will be banned; the deadline for this is 1 September 2024. In view of the volume of Russia’s revenue, criticism has been voiced for not having imposed these restrictions on the diamond trade earlier, especially as the trade in natural diamonds is essentially a monopoly business of the predominantly state-owned Alrosa Group. The global diamond trade is estimated to generate annual revenues of four billion euros for Russia. Alrosa has now been added to the sanctions list on 3 January 2024. Overall, it is particularly important to note for the diamond trade that the traceability of circumvention transactions and bans is a challenge. Providing practical proof of origin from Russia is a difficult endeavour, especially after cutting; without a strict certification system, it would be all too easy to circumvent the bans.

Further import bans in the 12th EU sanctions package relate to trade in metals or raw materials for steel production and liquefied natural gas. The EU estimates Russia’s annual revenue from this business area at one billion euros. The revised paragraph 4 of Art. 3l of the regulation also lists the elements titanium, aluminium, copper, nickel, palladium and the raw material iron ore. The EU had established that Russia had increased its exports of these goods to the EU.

The 12th EU sanctions package also extends transitional periods for the complete ban on imports of iron and steel products into the EU as an amendment to Art. 3g and 5a of EU Regulation 833/2014, with quantities being gradually reduced over an extended period of four years. This extension takes into account the very specific needs of parts of the EU steel industry.

3. Spotlight on regulations that affect the maritime industry

Price cap and containment of circumvention transactions

Oil and gas are a key source of income for Russia. The previous sanctions packages – we refer to our articles on the sixth, eighth and ninth sanctions packages – have resulted in the oil price cap, among other things, in order to curb revenues while taking global demand into account. The circumvention of the relevant prohibitions plays an important role in the regulations of the 12th EU sanctions package.

To appreciate these regulations, it is first necessary to explain the extent of the challenges presented. The concepts of shadow fleet, spoofing and STS play a role here and should therefore be briefly explained.

First of all, the term “shadow fleet”, although concise, is not so clearly defined.

The regulations to maintain a cap on oil from Russia and restrictions on related services, the so-called oil price cap, and the contrary demand situation on the global markets have allowed the circumvention of the oil price cap to become a business segment.

The impact of this business area and its risks are of enormous importance for many and should therefore be emphasised politically, particularly to those countries that benefit from circumventing the oil price cap alongside Russia.

The term “shadow fleet” was coined in connection with ships that are used to circumvent the oil price cap.

Some of these are older tankers. Complex questions arise in the event of oil pollution from these tankers or in the event of a collision with such a tanker.

Windward, a Maritime AI™ Intelligence platform, has made a distinction between a dark and a grey fleet of ships (https://windward.ai/knowledge-base/illuminating-russias-shadow-fleet/). While the latter is characterised by conspicuous commercial activities such as changing flags at short intervals and using front organizations, the dark fleet is characterised by targeted activities aimed at circumventing sanctions, known as deceptive shipping practices.

The extent of these activities reflects Russia’s dependence on income from the oil business. According to Winward, +1,800 ship units can be assigned to the dark fleet, with a further +700 ships falling into the grey fleet category. The business volume and, at the same time, the risks of this business segment are enormous. Technical refinements appear to be worthwhile for the players. This will be explained below, with the terms STS and spoofing playing a role.

First of all, it should be recalled that since the 11th EU sanctions package, or rather since 24 July 2023, it has been prohibited to grant access to EU ports and locks to ships carrying out ship-to-ship (STS) transfers if the competent authority of the EU Member State has reasonable grounds to suspect that the ship is either in breach of the ban on the import of Russian crude oil and petroleum products by sea into the EU or is transporting Russian crude oil or petroleum products in breach of the price cap.

An STS requires two ships to be in close proximity to each other in order to transship the cargo. In order to disguise such operations, at least one of the two ships may switch off its automated identification system (AIS) so that the STS cannot be detected in order to circumvent EU sanctions.

In parallel and as an alternative, spoofing can be used to conceal offences. This utilises the fact that the GPS system depends on the reception of signals. These are deliberately jammed so that false coordinates are shown for an object in real time. It is obvious that this alone creates an increased risk situation for shipping traffic. If you also consider the risks associated with STS operations, especially in stormy seas, and add to this the age-related risks of the tonnage deployed, it quickly becomes clear that, in the absence of insurance cover for the ships deployed, the coastal states and ultimately the individual taxpayers of these coastal states face a considerable financial risk when it comes to cleaning up the environmental pollution that can be caused by this practice. Nor can it be ruled out per se that ships involved in operations in breach of sanctions may not have an insurance certificate from an established insurer after all. This entails risks for the insurer of having to settle a claim made directly against it, namely due to oil pollution or wreck removal.

With the now valid Art. 3na of EU Regulation 833/2014, the EU has created an instrument to attempt at least to keep relevant ships out of EU territory. To this end, a regular exchange of information is envisaged between the Commission and the Member States. It should be noted that environmental protection on the high seas cannot be directly served by this instrument and that potential oil pollution on the high seas can still prove to be a challenge for individual coastal states. Against this background, it seems desirable that the problem of the shadow fleet be addressed at international level.

The certification system known as the Blue Card offers a starting point here. This is because the certificates identify both the owner and the liability insurer of a ship by name.

An insurance obligation exists in accordance with the International Convention on Civil Liability for Oil Pollution Damage of 1969 and/or the Protocol of 1992 on Civil Liability for Oil Pollution Damage (Oil Liability Convention) and the International Convention on Civil Liability for Bunker Oil Pollution Damage of 2001 (Bunker Oil Convention). Furthermore, Article 12 of the 2007 Wreck Removal Convention stipulates an insurance obligation for ships of 300 GT or more flying the flag of a contracting state.

What all these conventions have in common is that they do not apply universally, but that the main flag states are contracting states.

The Contracting States to the Oil Liability Convention are bound to allow a ship flying their flag and carrying more than 2000 tonnes of oil (1000 tonnes if the Bunker Oil Convention applies) to trade only if a certificate of insurance has been issued.

Within the framework of these Conventions, any Contracting State may also at any time request consultation with the issuing or certifying State (the State of the ship’s registry) if it considers that the insurer or guarantor named in the certificate is financially unable to fulfil the obligations arising from this Convention.

As this will have to be questioned for all ships that can be assigned to the shadow fleet, it is important to gain knowledge and quickly exchange information about which ships are involved. This is because it can be assumed that not all ships that can be assigned to the shadow fleet are registered exclusively in Russia.

In this respect, there is an existing instrument with the help of which both the ownership and the insurance relationship of a ship can be illuminated if the state in which it is registered is a contracting state to one of the aforementioned conventions.

Furthermore, with the 12th sanctions package, the EU has tightened the requirements for verifying compliance with the oil price cap for private actors. Parties that are not directly involved in the purchase contract should have itemised price information on ancillary costs. This price information must be taken into account when certifying the conformity of an oil transport with the provisions on the price cap.

Shipowners and insurers should be able to collect and share the disaggregated cost information provided by the actors closer to the origin of the information as part of their due diligence procedures. When processing claims, it is therefore necessary to bear in mind the existing legal situation with regard to EU sanctions! This refinement of existing regulations clearly demonstrates the importance the EU attaches to compliance with the oil price cap mechanism it has developed. Ultimately, this is consistent, as Russia’s revenues from the oil business are also of considerable importance for its capacity to continue waging war.

Tanker sales from 05 December 2022

In this context, the new provision of Art. 3q of EU Regulation 833/2014 should be considered in more detail.

The central purpose of the provision is to limit Russia’s ability to build up an enlarged tanker fleet in order to undermine the oil price cap. Therefore, vessels intended for the transport of crude oil or petroleum products listed in Annex XXV and classified under HS code ex 8901 20, whether or not originating in the Union, may not be sold or transferred for use in Russia, directly or indirectly, to any natural or legal person, entity or body in Russia. The sale of such a vessel to any third country is subject to a reporting obligation. This reporting obligation is retroactive and also applies to all sales from 5 December 2022.

Pilotage services

Art. 12d contains an exception to the prohibition provisions serving the safety of maritime traffic, according to which necessary pilotage services are expressly permitted. A pilot will therefore not first have to carry out extensive checks in order to provide assistance on a regular basis subject to limited periods of time.

4. De-Investment

The twelfth EU sanctions package is a response to the developments observed with regard to investments made in Russia in the past by foreign companies and Russia’s handling of these investments.

A company’s decision on how to deal with past investments in Russia is linked to a number of complex issues. To put it simply, the risk of far-reaching losses in value if the investment is withdrawn from Russia must be weighed against the risk of a loss of reputation. In particular, companies that have increased their profits through business in Russia after the start of the war are in the public eye.

In this context, it is worth mentioning that the EU has set itself the goal of effective sanctions, “smart sanctions”, which should not affect the Russian population to the same extent as the Kremlin’s power apparatus and its beneficiaries.

The new Art. 12b of EU Regulation 833/2014 is dedicated to the deduction of investments and provides for extensive exemptions from otherwise applicable prohibitions for an investment deduction until 30 June 2024, provided that authorisation has been granted. For many companies, these regulations will foreseeably trigger a need for advice in view of the threat to investments in Russia, so that they can incorporate the advantages conceptually designed within the framework of Art. 12b into their consideration of how best to deal with investments in Russia.

In connection with advice to companies, an outline of the problems relating to the services of a lawyer is required.

It is undisputed that a service provided by a lawyer cannot be regarded as an economic resource, otherwise the permission to pay legal defence costs even from frozen accounts would be contradictory. Art. 5n of EU Regulation 833/2014 and the prohibition on providing legal advice enshrined therein can lead to difficult demarcation issues in legal practice, for example when it comes to questions of the liquidation of investments by independent subsidiaries in Russia, whereby it is essential for both the banks involved and EU-based parent companies as well as the legal advisors involved to comply with the existing EU sanctions. A reversal of investments made in Russia may well make it necessary, for example, to reach agreement with Russian financing banks on certain contractual details. The extent to which legal services are also provided to the contractual partner may be disputed, at least in individual cases. If the delimitation initially appears to be tangible through the definition of the client relationship, it is not necessarily guaranteed that such an understanding will be unconditionally shared by an investigating public prosecutor’s office.

A detailed examination of the beneficiaries of possible consultancy services is therefore essential in individual cases, even if the Regulation itself endeavours to provide clarity in that Art. 5n para. 7 provides for an exemption for all legal persons, entities or bodies established in Russia that are owned or controlled solely or jointly by a legal person, entity or body incorporated or registered under the law of a Member State, a country belonging to the European Economic Area, Switzerland or a partner country listed in Annex VIII, i.e. currently the United States of America, Japan, Norway, the United Kingdom, South Korea, Australia, New Zealand and Canada.

The provision of legal advice on planned deductions for investments is therefore possible in principle, but a sense of proportion and caution are essential when providing advice

5. The expansion of the sanctions lists

The individual sanctions lists aimed at companies and individuals are assigned to EU Regulation 269/2014. They have been significantly expanded once again, with more than 140 new entries added as part of the 12 EU sanctions package.

For the effectiveness of the measures directed against these persons, the clarification that has now been made is welcome; the names can remain listed after death and measures can also be implemented in relation to the inheritance.

Companies listed as end users of the military industrial complex can now be found not only in Russia, Uzbekistan, Iran, Syria, the United Arab Emirates and China, but also in Singapore. The corresponding list of companies in Annex IV of EU Regulation 833/2014 now comprises 622 entries.

6. Further information

The Federal Ministry for Economic Affairs and Climate Protection (BMWK) has published a non-binding guidance document that is only intended to assist with compliance tasks and can be downloaded from the following website: https://www.bmwk.de/Redaktion/DE/Downloads/S-T/sanktionsumgehung-hinweispapier-fuer-unternehmen.pdf?__blob=publicationFile&v=8 .

This guidance paper emphasises that the fulfilment of sanction-related due diligence obligations requires a company-specific and case-by-case identification and analysis of the existing risk parameters and names some risk indicators to be taken into account.

At European level, a political agreement has been reached on standardising the rules on the application of penalties for sanction violations by the end of the year. A corresponding EU directive is expected to come into force shortly. The competence to prosecute offences under criminal law will remain with the member states, but the EU directive will set standards for the imposition of penalties in the event of an offence being detected.

7. Comment

The EU sanctions against Russia are robust, unprecedented regulations with an enormous level of detail. Continuously minimising the risk of circumvention is to be welcomed, but the downside is an increasing burden on corporate compliance tasks. In view of the depth of detail of the regulations, legal advice should be sought in the event that a need for advice is identified; overview-type publications cannot replace advice in individual cases. This also applies to this article. In trade with certain raw materials whose origin is not easily traceable, there are still recognisable challenges with regard to the effective implementation of the sanctions regulations. Russia’s main sources of income are covered. Sensible measures have been taken to curb the income of the Russian power apparatus. Various exemptions clarify the extent to which individual EU member states or certain branches of industry are exempt from trade with Russia, particularly in the procurement of raw materials. Companies, especially those operating in the maritime industry or in global trade in goods, are advised to familiarise themselves with the regulations and ensure that they are effectively complied with.

Do you have further questions on these or other topics? Our experts will be happy to support you with solutions tailored to your individual needs.