12th EU sanctions package: Companies need to take action

On 18 December 2023, EU Member States agreed on a 12th package of sanctions against Russia. Once again, particular attention is paid to preventing the circumvention of sanctions. For instance, exporters will be required to include reexport clauses in supply contracts (A.). The EU is also trying to counter Russian action against Russian subsidiaries of EU companies (B.). Import and export restrictions are being expanded, for example through the ban on importing diamonds, which was announced early on (C.). The EU is also tightening the price cap on crude oil (D.) and adding 147 new entries to the sanctions lists (see E.). The 12th sanctions package is implemented by Regulation (EU) No 2023/2873, Regulation (EU) No 2023/2878 and Implementing Regulation (EU) No 2023/2875, amending Regulations (EU) No 269/2014 and No 833/2014 which set out sanctions on Russia for individuals, goods and sectors. The amendments to these Regulations came into force on 18 and 19 December.

A. Focus still on circumvention of sanctions and third-country business

The EU’s focus remains  on preventing the circumvention of its sanctions against Russia. The most far-reaching impact for exporters will be the new obligation to include a clause prohibiting buyers from reexporting certain goods to Russia. Following on from the obligation to provide evidence for iron and steel imports introduced in the 11th sanctions package, the EU is once again obligating companies to take extensive action in this area.

The new Article 12g(1) of Regulation (EU) No 833/2014 stipulates that exporters must contractually prohibit reexport to Russia or reexport for use in Russia when selling, supplying, transferring or exporting certain goods and technologies to third countries from 20 March 2024. The goods and technologies concerned are those listed in Annexes XI (aerospace industry), XX (jet fuels) and XXXV (firearms) of the Regulation; firearms and ammunition as listed in Annex I of Regulation (EU) No 258/2012; and common high priority goods as listed in Annex XL of the Regulation.

The partner countries listed in Annex VIII of the Regulation – currently USA, Japan, UK, South Korea, Australia, Canada, New Zealand, Norway, and Switzerland – are excluded from the scope of application. According to Article 12g(2) of Regulation (EU) No 833/2014, the obligation does not apply to contracts concluded before 19 December 2023 that are fulfilled by 20 December 2024 at the latest or expire before then.

In the same vein, the ban on transit through Russia was expanded again. Transit is now prohibited for goods and technology listed in Annex XXXVII of Regulation (EU) No 833/2014 which are exported from the European Union.

In addition, another 29 entries were added to the list of end users of the Russian military-industrial complex and their suppliers in Annex IV of Regulation (EU) No 833/2014. Foreign companies, e.g. from Uzbekistan and Singapore, were once again added to the list.

B. EU opposes coercive measures against subsidiaries of EU companies in Russia

The EU is also using the new sanctions package to respond to the increasing Russian restrictions on European companies leaving Russia, the increase in the costs of such exits, and Russia using such transactions to reward power elites loyal to the government.

Article 3(1)(j) of Regulation (EU) No 269/2014 introduces a new basis for listing persons. This now allows the listing of Russian companies that were previously owned or controlled by EU companies if the Russian government has forced the transfer of ownership or control. Natural persons and companies that have benefited from such a forced transfer can also be listed.

In addition, a separate exemption is created for the new listing ground in the new Article 5b of Regulation (EU) No 269/2014. Accordingly, EU Member States can authorise the release of certain frozen funds and resources or provision to such companies in individual cases subject to conditions. To do so, however, Member States must establish that the resources are to be used as consideration – either contractually agreed or determined by the Russian government – in a forced company transfer.

No companies or subsidiaries known in the market have been listed so far in the 12th sanctions package on this new legal basis. Therefore, the introduction of the new listing ground seems to be above all a political move.

C. Additional restrictions on the flow of goods and capital

The Member States have agreed on a ban on the direct or indirect import, purchase or transfer of diamonds of Russian origin. This far-reaching ban applies to diamonds originating in Russia as well as diamonds exported from Russia as well as to diamonds that have been transported through or processed in Russia. The bans will generally apply from 1 January 2024, with the indirect ban on imports from third countries to be introduced gradually from 1 March to 1 September 2024.

The ban is based on Article 3p of Regulation (EU) No 833/2014 and applies to diamonds and products containing diamonds listed in Annex XXXVIIIA, Parts A to C.

The list of goods in Annex VII has also been expanded. These are relevant to Article 2a of Regulation (EU) No 833/2014 and could help boost Russia’s military and technological clout or help the development of its defence and security sector and are therefore subject to an export ban. The list includes lithium batteries, thermostats, DC and servomotors for unmanned aerial vehicles, machine tools and machine parts.

On the import side, the ban on goods that generate significant revenue for Russia has been expanded in Article 3i in conjunction with Annex XXI of Regulation (EU) No 833/2014 to include liquefied propane gas, pig iron and spiegeleisen, copper wire, aluminium wire, foil and pipes.

With regard to payments, Article 5r of Regulation (EU) No 833/2014 introduces a notification procedure for payments of over EUR 100,000 from within the EU. The notification obligation will apply from 1 May 2024 to legal entities, organisations or institutions established in the European Union, of which over 40% is directly or indirectly held by Russian legal entities or natural persons or by individuals living in Russia. Furthermore, according to Article 5(2) of Regulation (EU) No. 833/2014, there is a parallel reporting obligation for credit and financial institutions for such transfers of funds from 1 July 2024.

D. Crude oil price cap

As part of the price cap on Russian oil products, the obligations to provide evidence in the provision of European services for (external) trade in the oil products concerned are now being tightened up. The existing embargo/sanction aims to cap the (global) purchase price of Russian oil products by requiring market-relevant EU service providers to verify via a certification procedure within the supply chain that Russian (pre)products were purchased from third parties, i.e. non-EU citizens, at a price within the price cap.

To combat circumvention mechanisms, the 12th sanctions package expands the obligation for EU companies to provide evidence. According to Article 3n(6)(a) of Regulation (EU) No 833/2014, EU service providers must now request itemised price information on ancillary costs in the supply chain, especially insurance and freight costs, if the EU service providers do not have the actual purchase price.

The mechanism is also supplemented by the introduction of a new sectoral embargo on trade in tankers for oil transport. According to the new Article 3q(1) of Regulation (EU) No 833/2014, such ships may no longer be sold to, or ownership transferred to, Russian individuals. For sales of such ships to third countries, a reporting obligation is also introduced in the form of Article 3q(4) of Regulation (EU) No 833/2014. Past sales of tankers to Russia or third countries between 5 December 2022 and the entry into force of the 12th sanctions package must be reported to the competent authorities by February 2024 in accordance with Article 3q(5) of Regulation (EU) No 833/2014.

E. Addition of sanctioned parties

The 12th sanctions package again expands the list of individually sanctioned persons and entities in Annex I of Regulation (EU) No 269/2014, adding 61 individuals and 86 entities, in particular from the Russian military, defence and IT sectors.

F. Import of iron and steel products

For European importers of iron and steel products, regulations have been established with regard to Russian products with the Combined Nomenclature (CN) codes 7207 12 10 and 7224 90, which provide for a gradual phase-out of Russian products by 2028.

For iron and steel products with these two CN codes, direct imports and purchases from Russia are facilitated by extending the time-limited exemptions in Article 3g(4) and (5a) of Regulation (EU) No 833/2014 until 30 September 2028. However, the authorised import quantities will decrease every year.

In addition, the transitional period is extended in Article 3g(1)(d) of Regulation (EU) No 833/2014 for relevant imports from third countries if the imported goods contain Russian iron and steel products under the two CN codes. For such third-country imports, the import ban will only apply from 1 October 2028 – no import quotas (even decreasing quotas) are planned until then. A new Annex XXXVI of Regulation (EU) No 833/2014 defines Switzerland and Norway as “partner countries for importation of iron and steel”. According to the definition in Article 1(zc) of Regulation (EU) No 833/2014, those countries have imposed “materially” equivalent regulations to the EU restrictions on iron and steel in Article 3g of Regulation (EU) No 833/2014, and therefore no proof of the country of origin of the iron and steel pre-products is required for imports from those two countries.

G. Conclusion

Overall, the 12th sanctions package covers a wide range of topics. In particular, the new mandatory reexport clause in Article 12g of Regulation (EU) No 833/2014 is likely to require companies to take action, as the scope of application covers all third countries with the exception of a few partner countries.

There are clear signs of increased efforts by the EU to increase the effectiveness of its Russia sanctions, especially by updating and, with respect to the oil price cap, expanding anti-circumvention measures.

The activation of the third-country regulation of the 11th sanctions package in Article 12f in conjunction with Annex XXXIII of Regulation (EU) No 833/2014, which had been expected in some quarters, has not materialised, so it remains unapplied and thus a mere threat. The new regulations on compulsory transfers of Russian subsidiaries should also be seen as a political warning signal from Brussels for the time being.

While trade will be further restricted due to new bans, particularly in relation to Russian diamonds, the new regulations in the iron and steel sector instead facilitate trade.