Following Russia’s invasion of Ukraine, the EU has adopted a much more severe sanctions package against Russia than the measures adopted on February 23, 2022 (see our previous previous blog post). The new measures provide for various restrictions, including additional targeted restrictions against specified individuals; expanded financial measures aiming at cutting Russia’s access to the EU capital markets; trade restrictions targeting the energy and aviation sectors and banning most exports of dual-use items, as well as certain semiconductors and cutting-edge technologies from the EU to Russia.
The key aspects of the new sanctions imposed by the EU are summarized below. Unless otherwise specified, references to Annexes in the below overview refer to Annexes to Council Regulation (EU) No 833/2014 (as amended or inserted by Council Regulation (EU) 2022/328 of February 25, 2022).
Additional designations of key individuals in Russia and Belarus
The new sanctions provide for another round of listings of individuals. Also, the EU has now designated Russian President Vladimir Putin and Foreign Affairs Minister Sergey Lavrov, along with members of the Russian Security Council who supported Russia’s immediate recognition of the two non-government-controlled areas of the Donetsk and Luhansk oblasts of Ukraine as independent entities. The blacklisting has also been extended to the remaining members of the Russian State Duma, who ratified the government decision of the Treaty of Friendship, Cooperation and Mutual Assistance between the Russian Federation and the two entities. Furthermore, the EU has also sanctioned individuals who are considered to have facilitated the Russian military aggression from Belarus.
The EU has refrained from designating banks, such as Sberbank or VTB bank, in addition to the three banks it had designated on February 23, 2022.
As usual under EU sanctions, such designations involve an asset freeze and a prohibition on making any funds or economic resources available, directly or indirectly, to or for the benefit of the listed individuals and entities. That prohibition is very broad and essentially precludes virtually any type of business with the listed individuals or entities, as well as with anyone owned or controlled by such blacklisted individuals or entities. (For more information on the notion of ‘ownership’ or ‘control’ under EU sanctions, reference is made to our earlier blog post.) The newly listed individuals are also subject to an EU travel ban, except for President Vladimir Putin and Foreign Affairs Minister Sergey Lavrov to whom this restriction does not apply.
The criteria for designating individuals have also been amended. These now include, for instance, persons or entities supporting or benefitting from the Government of Russia, as well as “leading businesspersons” in economic sectors providing a substantial source of revenue to the Russian government.
Trade restrictions in relation to the energy sector
The EU’s second package considerably strengthens the existing sanctions against Russia’s oil sector by introducing an export ban on certain oil-refining goods and technology. By taking this measure, the EU intends to hit the Russian oil sector, and make it more difficult and costlier for Russia to upgrade its oil refineries.
The sanctions that have been in place since 2014 already require operators to obtain a prior authorization for the sale, supply, transfer or export of certain products used for oil exploration and production in Russia. They also prohibited the provision of services (e.g. drilling) necessary for deep-water oil exploration and production, arctic oil exploration and production and shale oil projects in Russia.
With its current package, the EU adds to these measures by imposing a prohibition on the sale, supply, transfer or export to anyone in Russia, or for use in Russia, of specific goods and technologies that are used in oil refining (as listed in Annex X), along with a prohibition on the provision of related services and financing. The prohibition applies to these goods whether or not they originate in the EU.
This restriction is subject to two exemptions:
- Pre-existing contracts: the prohibition does not apply to the execution until May 27, 2022 of contracts concluded before February 26, 2022, or ancillary contracts necessary for the execution of such contracts.
- In cases of emergency: Member States may authorize the export of goods and/or the provision of related services as described above, if they determine that this is necessary for the urgent prevention or mitigation of an event likely to have a serious impact on human health and safety or the environment. In duly justified cases, the export may proceed without prior authorization, provided that the exporter notifies the competent authority within five working days and gives reasons for the export without prior authorization.
Trade restrictions relating to the aviation sector
One of the measures that the EU expects to have a particularly significant impact on Russia’s economy, and the country’s connectivity, is the ban on export of all aircraft, as well as spare parts and equipment that are necessary for the maintenance of Russian fleets. According to the Council’s press release, these measures could mean that many of Russia’s aircrafts could soon be grounded as three quarters of Russia’s current aviation fleet were built in the EU, the United States, and Canada.
The EU sanctions prohibit the sale, supply, transfer or export, directly or indirectly, of goods and technology “suited for use in aviation or the space industry”, whether or not originating in the EU, to anyone in Russia or for use in Russia. This concerns all goods falling under CN Code 88: Aircraft, spacecraft, and parts thereof.
The sanctions also prohibit the provision a range of related services and activities: insurance and reinsurance, overhaul, repair, inspection, replacement, modification or defect rectification of an aircraft or component, technical assistance, and financing.
The prohibition does not apply to the execution until March 28, 2022 of contracts concluded before February 26, 2022, or ancillary contracts necessary for the execution of such contracts.
Trade restrictions relating to dual-use goods and technology
The new EU sanctions prohibit the sale, supply, transfer or export of dual-use goods and technology as listed in Annex I to the Dual-Use Regulation, whether or not originating in the EU, to any natural or legal person, entity or body in Russia or for use in Russia.
Moreover, the sanctions prohibit financing, technical and financial assistance, brokering services and other services related to dual-use goods and technology and on the provision, manufacture, maintenance and use of those goods and technology to anyone in Russia or for use in Russia.
These very far-reaching prohibitions do not apply if the items are for non-military use and for a non-military end user, intended for:
- humanitarian purposes, health emergencies, the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health and safety or the environment or as a response to natural disasters;
- medical or pharmaceutical purposes;
- temporary export of items for use by news media;
- software updates;
- use as consumer communication devices;
- ensuring cyber-security and information security for persons and entities in Russia except for its government and undertakings directly or indirectly controlled by that government; or
- personal use of natural persons travelling to Russia or members of their immediate families travelling with them, and limited to personal effects, household effects, vehicles or tools of trade owned by those individuals and not intended for sale.
In most of the aforementioned situations, however, this is subject to certain conditions relating to the inclusion of certain mentions in the customs declaration as well as a notification of the competent authorities of the first use of the relevant exception within 30 days from the date when the first export took place.
Furthermore, derogations may be granted by the competent Member State authorities if the dual-use goods or technology or the related services are intended for:
- cooperation between the EU, the governments of Member States and the government of Russia in purely civilian matters;
- intergovernmental cooperation in space programmes;
- the operation, maintenance, fuel retreatment and safety of civil nuclear capabilities, as well as civil nuclear cooperation, in particular in the field of research and development;
- maritime safety;
- civilian telecommunications networks, including the provision of internet services;
- the exclusive use of entities owned, or solely or jointly controlled by a legal person, entity or body which is incorporated or constituted under the law of a Member State or of a partner country;
- the diplomatic representations of the Union, Member States and partner countries, including delegations, embassies and missions.
Authorizations may also be granted for the execution of contracts concluded before February 26, 2022, or ancillary contracts necessary for the execution of such a contract, provided that the authorization is requested before May 1, 2022.
Importantly, neither of the abovementioned kind of authorizations can be granted if there are reasonable grounds to believe that: (i) the end-user might be a military end-user, a natural or legal person, entity or body in Annex IV or that the goods might have a military end-use; or (ii) the supply is intended for aviation or the space industry.
Trade restrictions relating to semiconductors, cutting-edge technologies and other goods for the defense sector
The new EU sanctions prohibit the sale, supply, transfer or export of specific goods and technology which might contribute to Russia’s military and technological enhancement, or the development of the defense and security sector, to any natural or legal person, entity or body in Russia or for use in Russia. The relevant goods and technology are listed exhaustively in Annex VII. As with the rest of the trade restrictions, this prohibition applies to these goods whether or not they originate in the EU
Moreover, the sanctions prohibit financing, technical and financial assistance, brokering services and other services related to the specific goods and technology in Annex VII or to the provision, manufacture, maintenance and use of those goods and technology to anyone in Russia or for use in Russia.
These prohibitions are subject to similar derogations as the prohibition in relation to dual-use goods.
Restrictions on access to capital markets and loans or credit
The prohibition on dealing with transferable securities and other money-market instruments that already existed under the EU’s sanctions on Russia has been extended as follows:
- For entities that were already listed in Annex III (certain credit institutions and institutions with certain explicit mandates, including Sberbank, VTB Bank and Gazprombank), Annex V (military equipment companies) or Annex VI (state-owned oil companies), the prohibition has been extended to any transferable securities and money market instruments issued after April 12, 2022 (whereas previously the prohibition was limited by reference to a maturity threshold).
- The prohibition on dealing with transferable securities and other money-market instruments (without any maturity threshold) has also been extended to new lists of credit institutions and state-owned institutions (as listed in Annex XII) and other state-owned entities (as listed in Annex XIII).
In a similar vein, the prohibition on directly or indirectly making or being part of any arrangement to make new loans or credit available has been extended as follows:
- For entities that were already listed in the aforementioned Annex III (certain credit institutions and institutions with certain explicit mandates, including Sberbank, VTB Bank and Gazprombank), Annex V (military equipment companies) or Annex VI (state-owned oil companies), the prohibition has been extended to any loan or credit as of February 26, 2022 (whereas previously the prohibition was limited to loans or credit exceeding a certain maturity threshold).
- The prohibition (without any maturity threshold) has also extended to the aforementioned new lists of credit institutions and state-owned institutions (as listed in Annex XII) and other state-owned entities (as listed in Annex XIII).
Of note, there are a number of derogations from the prohibition to directly or indirectly make or be part of any arrangement to make new loans or credit available, namely for:
- drawdown or disbursements made under a contract concluded before February 26, 2022, provided that certain conditions are met;
- loans or credit that have a specific and documented objective to provide financing for non-prohibited imports or exports of goods and non-financial services between the Union and any third State, including the expenditure for goods and services from another third State that is necessary for executing the export or import contracts; or
- loans that have a specific and documented objective to provide emergency funding to meet solvency and liquidity criteria for certain EU legal persons.
Importantly, as was already the case under the existing sanctions relating to Russia, the above prohibitions do not only apply to the entities listed in the annexes, but also to these entities’ subsidiaries established outside the EU (which are owned more than 50% by one of the entities listed in the aforementioned annexes) as well as to entities acting on behalf or at the direction of any of the entities listed in the aforementioned annexes. According to the EU, the financial sanctions target 70% of the Russian banking market, in addition to key state-owned companies.
The new sanctions package also prohibits the listing and provision of services as of April 12, 2022 on EU trading venues for the transferable securities of any legal person, entity or body established in Russia and with over 50 % public ownership.
Prohibition of public financing of any trade of investment
Furthermore, public financing or financial assistance for trade with, or investment in, Russia, is prohibited. This restriction on public financing or financial assistance is not limited to trade that is restricted pursuant to the aforementioned trade restrictions in relation to specific products and technology. Rather, it covers any investment in or trade with Russia and therefore has a very broad scope of application.
The notion of financing or financial assistance includes various actions whereby action whereby funds or economic resources are disbursed or have been committed to be disbursed. This includes, for instance, grants, loans, guarantees, suretyships, bonds, letters of credit, supplier credits, buyer credits, import or export advances and all types of insurance and reinsurance, including export credit insurance. Importantly, the restriction is limited to ‘public’ financing or financial assistance.
There are some exceptions to the latter prohibition, specifically:
- The prohibition does not apply to binding financing or financial assistance commitments established prior to February 26, 2022.
- The provision of public financing or financial assistance up to the total value of 10,000,000 EUR per project to EU small and medium enterprises (SMEs) is exempted.
- The prohibition does not cover the provision of public financing or financial assistance for trade in food, and for agricultural, medical or humanitarian purposes.
Restrictions in connection with deposits and euro-denominated securities
Another important element of the new EU sanctions concerns the prohibition to accept any deposits from Russian nationals and residents or legal persons established in Russia, if the total value of deposits exceeds 100,000 EUR. This prohibition does not apply to:
- EU nationals or temporary or permanent EU residents.
- Deposits which are necessary for non-prohibited cross-border trade in goods and services between the EU and Russia.
- The acceptance of deposits in certain defined circumstances, for instance if this is deemed necessary to satisfy the basic needs of natural or legal persons or for humanitarian purposes, subject to a prior authorization by the competent authorities.
Finally, the EU sanctions now prohibit the holding of accounts of Russian clients by the EU Central Securities Depositories as well as the selling of euro-denominated securities to Russian clients.
Suspension of facilitated issuance of visa
The new EU sanctions suspend the application of certain provisions of the EU-Russia Agreement on the facilitation of the issuance of visas. Russian businesspersons as well as diplomats and other officials will no longer be able to benefit from visa facilitation provisions, which allow privileged access to the EU. Ordinary Russian citizens are not affected by this decision.
What are the legal instruments and when do they enter into force?
The EU’s sanctions are laid down in:
Council Regulation (EU) 2022/328 of February 25, 2022 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine.
Council Regulation (EU) 2022/330 of February 25, 2022 amending Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.
Council Implementing Regulation (EU) 2022/332 of February 25, 2022 implementing Regulation (EU) No 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.
Council Decision (CFSP) 2022/327 of February 25, 2022 amending Decision 2014/512/CFSP concerning restrictive measures in view of Russia’s actions destabilizing the situation in Ukraine.
Council Decision (CFSP) 2022/329 of February 25, 2022 amending Decision 2014/145/CFSP concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.
Council Decision (CFSP) 2022/331 of February 25, 2022 amending Decision 2014/145/CFSP concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine.
Council Decision (EU) 2022/333 of February 25, 2022 on the partial suspension of the application of the Agreement between the European Community and the Russian Federation on the facilitation of the issuance of visas to the citizens of the European Union and the Russian Federation.
Council Regulation (EU) 2022/328 and Council Decision (CFSP) 2022/327 entered into force on the day following that of their publication in the Official Journal of the European Union. Since they were published just before midnight on February 25, they entered into force on February 26, 2022.
The other aforementioned legal acts entered into force on the day of their publication or the day of their adoption, both being February 25, 2022.
Other actions at European level
In reaction to Russian invasion, the Council of Europe has suspended Russia’s rights of representation in the Committee of Ministers and in the Parliamentary Assembly. Specifically, in a Decision of February 25, 2022, the Committee of Ministers agreed to suspend the Russian Federation from its rights of representation in the Council of Europe in accordance with Article 8 of the Statute of the Council of Europe. The suspension does not impact Russia’s membership of the Council of Europe as such. Russia also remains a party to the relevant Council of Europe conventions, including the European Convention on Human Rights. The judge elected to the European Court of Human Rights in respect of Russia also remains a member of the Court, and applications introduced against Russia will continue to be examined and decided by the Court.
The European Broadcasting Union has also announced that no Russian act will participate in this year’s Eurovision Song Contest. Also, European sport events scheduled to take place in Russia have been rescheduled or cancelled. The UEFA Executive Committee decided to relocate the final of the Men’s Champions League from Saint Petersburg to France and Formula One has cancelled the Russian Grand Prix.
Expected next steps including possible exclusion of certain Russian banks from SWIFT
As Russia’s invasion of Ukraine intensifies and the EU is closely working with its allies and partners around the world, the EU’s second package of sanctions will not be its last. The EU High Representative for Foreign Affairs and Security Policy Josep Borrell had indicated that the latest round of sanctions could be followed by a third, if this is deemed necessary in light of the continuing military escalation. In a similar vein, the EU’s Finance Ministers also proclaimed in a statement released on Friday afternoon that the second round of EU sanctions “will be complemented by additional decisions” if needed.
Moreover, although the second package is broader and harsher than the last, it is still not as ambitious as some, most of all Ukraine, might have hoped. Following the first set of measures adopted, Ukraine’s top politicians were critical of EU leaders for not going further in their sanctions against Russia and they pleaded, in particular, for Russia to be excluded from the SWIFT international payments system. Despite these calls, such a measure remains controversial and was eventually not included in the EU’s second package. While several Member States had come forward in favour of such a ban, other EU countries had expressed reservations and argued that cutting Russia off SWIFT should be the very last resort.
However, soon after agreement was reached on the second package, the EU’s Finance Ministers have asked the European Commission and the ECB to deliver an assessment of the consequences of cutting further the access of Russian institutions to the financial system – indicating that a SWIFT measure might be in the works. According to their statement, “all options are on the table.” Also, EU leaders that were previously skeptical of a SWIFT ban have now reportedly indicated that they would be in favour of a (targeted) SWIFT exclusion.
On February 26, the leaders of the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States issued a joint statement committing to five specific measures to be adopted “within the coming days”:
- Removing “selected Russian banks” from the SWIFT messaging system. This would thus not concern a complete Russian exclusion from SWIFT, and it remains to be seen if the list of banks targeted will go beyond those already targeted by the existing sanctions of the EU and its allies.
- Preventing the Russian Central Bank from deploying its international reserves in ways that undermine the impact of existing sanctions.
- Limiting the sale of citizenship, i.e. so called golden passports, that let wealthy Russians connected to the Russian government become citizens of other countries and gain access to their financial systems.
- Launching this coming week a transatlantic task force that will ensure the effective implementation of the financial sanctions by identifying and freezing the assets of sanctioned individuals and companies that exist within our jurisdictions. As a part of this effort, the partners have also committed to employing sanctions and other financial and enforcement measures on additional Russian officials and elites close to the Russian government, as well as their families, and their enablers to identify and freeze the assets they hold in the respective jurisdictions. The statement also anticipates engagements with other governments to address the possibility for such individuals to hide their assets in jurisdictions across the world.
- Stepping up coordination against disinformation and other forms of hybrid warfare.
An increasing number of EU Member States are also looking into or implementing a flight ban, with calls for action at EU level also on this issue.
Steptoe’s Economic Sanctions team in Brussels, London, and Washington are closely following developments and are able to assist with any sanctions related issues. Further updates will follow as warranted.