Sunday, July 21, 2024

EU’s 14th Package of Sanctions on Russia | JD Supra

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On 24 June 2024, the EU adopted its 14th package of sanctions against Russia. The latest measures include:

  • The designation of 116 additional individuals and entities across a number of industries for their responsibility in undermining Ukraine’s territorial integrity, sovereignty, and independence.
  • A limited ban on contracts with Russian state energy companies and additional support for countries with energy needs to curb reliance on Russia.
  • Anti-circumvention measures, including requirements for EU parent companies to use “best efforts” to ensure that non-EU subsidiaries do not undermine EU sanctions.
  • A ban on the use of “System for Transfer of Financial Messages” (SPFS) (a Russian equivalent of SWIFT) by EU entities operating outside of Russia and a new power for the EU to designate third-country users of SPFS outside of Russia, which will then be subject to a transaction ban.
  • Comprehensive bans on port access by vessels contributing to Russian warfare, non-scheduled flights by controlled by Russian entities, and road transport of goods with 25% or more Russian ownership.
  • An amendment to the existing import-related restrictions concerning Russian diamonds.
  • Further import and export controls impacting Russia’s military-industrial complex and cultural property goods from Ukraine.
  • A requirement for the rejection of intellectual property rights applied for by Russian residents, nationals or entities.
  • A prohibition on accepting funding from the Russian state and its proxies by EU political parties, foundations, NGOs and media service providers.
  • An exemption to the ban on providing software services to Russia in cases where entities are controlled by an EU parent company and other select regions or services are provided by employees who were hired prior to February 2022.
  • A requirement for enhanced reporting, confidentiality requirements, and the promotion of voluntary self-disclosures.
  • Measures to allow EU operators to claim compensation in EU commercial and civil courts for damages caused by Russian companies further to sanctions.

These measures are summarized in further detail below.

Asset Freeze Measures

  • The names of 69 individuals and 47 entities have been added to the comprehensive list of asset freeze targets (with listed individuals also subject to travel bans).
  • The new targets are in a number of industries including aviation, transport, oil and gas, state and military (both Russian and its allies), and electronics exports and imports. The following entities, amongst others, are named in the list:
    • Aviation: Ural Airlines, LLC; Novaport Holding; JSC “Aeroelektromash”; JSC Moscow Machine-Building Plant “Vpered”.
    • Transport: Sovcomflot, PV Bridge; Volga Dnepr Airlines; Volga Dnepr Group.
    • Oil and gas: Neftegazpromstroy LLC; Siberian Service Company JSC.
    • Electronics importers and suppliers: JSC Compel; Inkotech.
  • Two new licensing grounds allowing the release of frozen funds have been introduced, the purpose of which is to release, in certain limited circumstances, funds or payments that have been frozen due to the involvement of a sanctioned intermediary bank or issuing bank, provided all other parties and banks are not sanctioned.

Energy Measures

  • From 26 July 2024, and thereafter on a monthly basis, reports will need to be submitted on all unloading transactions and imports into the EU of Russian-originating liquified natural gas (LNG).
  • A new prohibition has been introduced on reloading services provided in relation to Russian LNG in the EU territory for the purpose of transshipment to third countries. This covers ship-to-ship and ship-to-shore transfers and prevents transit of Russian LNG to third countries by way of the EU (as opposed to acting as an import ban on LNG for the EU market). Exemptions and licensing grounds may be available, including exemptions:
    • until 26 March 2025 for contracts concluded before 25 June 2024;
    • for reloading services necessary for the bunkering of LNG-fuelled vessels; and
    • for associated services for vessels requiring a place of refuge, for maritime safety and saving life at sea, for the urgent prevention or mitigation of a serious and significant event, and as a response to natural disasters.
  • Import restrictions have been placed on Russian LNG through EU terminals not connected to the natural gas system. This is a targeted measure only affecting specific facilities in certain Member States. The execution of contracts concluded before 25 June 2024 until 26 July 2024 is permitted.
  • A ban has also been placed on new investments and the provision of certain items and services for the completion of LNG projects under completion (including Artic LNG 2 and Murmansk LNG). Some exemptions and licensing grounds are available.
  • A price cap exemption for the Sakhalin-2 (Сахалин-2) Project has been extended to 28 Jun 2025 to ensure that Japan’s energy security needs are met. A new licensing ground has also been implemented for exporting certain controlled items to the Sakhalin-2 (Сахалин-2) Project.
  • An exemption is also available in respect of the nuclear project Parks II.

Anti-Circumvention Measures

  • The sanctions package implements a requirement for EU parent companies to undertake best efforts to ensure that third-country subsidiaries do not engage in activities that undermine sanctions.
  • Due diligence mechanisms by EU operators must be implemented to identify and mitigate risks of re-exportation of battlefield goods to Russia.
  • The 14th package requires the inclusion of contractual provisions to prevent the transfer of industrial know-how for battlefield goods to Russia.
  • The package includes several clarifications:
    • For contracts concluded before 19 December 2023, the “no Russia” clause requirement is satisfied where a contract contains a general clause that prohibits exportation and re-exportation of the goods and technology to EU sanctioned countries. This exemption will potentially be extended to non-EU subsidiaries; and
    • If EU parent companies assert decisive control over their non-EU subsidiaries, they may be liable for the actions of that subsidiary and so are responsible for preventing that subsidiary from carrying out such breaches. Regard should be had to the parent company’s size, nature and factual circumstances (such as degree of effective control or inability to exercise control).

Finance Measures

  • A ban has been set on the use of SPFS (a specialized financial messaging service developed by the Russian Central Bank and which is the Russian equivalent to SWIFT) by EU financial institutions. Some exemptions and licensing grounds are available. A list of third-country users of SPFS with which any direct or indirect transaction will be prohibited is included in Annex XLIV of the EU Russia Regulations. Exemptions to this rule include:
    • The execution of contracts concluded before 24 March 2024 until 26 September 2024;
    • Receiving payments pursuant to contracts before 24 March 2024;
    • Connecting to the SPFS for the purpose of transactions relating to: (i) natural gas, titanium, aluminium, copper, nickel, palladium, iron ore, oil, pharmaceutical, medical, agricultural and food products; (ii) repaying debts due to an EU national or entity; (iii) paying a pension scheme to a person in the EU; or (iv) making payments from or to the Jewish Claims Conference; and
    • Engaging in transactions with Annex XLIV targets is permitted for certain transactions relating to (i) pharmaceutical, medical, agricultural and food products; (ii) access to judicial, administrative or arbitral proceedings in the EU and the recognition or enforcement of judgment or arbitration award rendered in the EU; (iii) humanitarian purposes; (iv) the repayment of a debt due to an EU national or entity; (v) dependence on an Annex XLIV target to provide correspondent banking services; or (vi) payment by an EU national or entity under a loan agreement concluded by a Member State.
  • The EU’s new powers include the ability to impose a full transaction ban on credit and financial institutions and crypto asset providers facilitating support for Russia’s defense-industrial base.

Funding of Political Parties and Other Organizations

  • A prohibition has been implemented on accepting funding from the Russian state and its proxies by political parties, foundations, NGOs, and media service providers in the EU.

Transport Measures

  • The 14th package includes a port access ban and service provision ban on specifically listed vessels contributing to Russia’s warfare, including those transporting military equipment, stolen Ukrainian grain, LNG components, and tankers involved in deceptive shipping practices. As part of this, 27 Russian-linked vessels have been listed, with some exemptions and licensing grounds available.
    • Exemptions include authorizations for vessels which are declared abandoned and subject to forced sale prior to 24 February 2022 and which were physically located in the EU at the time of the forced sale.
  • The EU flight ban has been expanded to include non-scheduled flights controlled by Russian entities. EU operators must also provide any information requested by Member States’ national competent authorities about non-scheduled flights (including ownership of the aircraft and in some cases passengers).
    • Some exemptions and licensing grounds are available, including exemptions for certain smaller aircraft and non-corporate flights within the EU for recreational purposes or for training for private pilot licenses and related ratings with EU training providers.
  • The ban broadens the prohibition on road transport of goods within the EU by operators owned 25% or more by Russian entities, unless such 25% Russian owner is also a national or resident of the EU, in particular:
    • A prohibition (from 25 June 2024) to be applied to transport goods by road within the EU, including in transit; and
    • A prohibition (from 26 July 2024) for road transport undertakings established in the EU after 8 April 2022 to transport goods by road within the EU, including in transit.

Amendments to Diamonds-Related Sanctions

  • New exemptions in connection with previously implemented sanctions on Russian diamonds have been set and relate to:
    • Diamond products which were physically located in the EU prior to restrictions becoming applicable and which were then exported to a third-country other than Russia;
    • Diamond products which were physically located, polished or manufactured in a third country other than Russia before the restrictions came into force;
    • Products which incorporate diamonds (including jewelry, goldsmiths, silversmiths, and watches) and which were manufactured before 1 September 2024 and temporarily imported into the EU from a third country other than Russia or were imported after a temporary exportation to a third country other than Russia under temporary admission, inward processing or outward processing customs procedures;
  • In order for exemptions to apply, certain evidence needs to be demonstrated, such as evidence of imports and evidence of final processing.
  • Further, importers are still required to provide evidence of the country of origin for diamond products used for inputs and for the processing of diamond products in third countries. Requirements have been simplified such that:
    • All diamond products processed in third countries will require traceability evidence, although this will only need to be provided from 1 March 2025; and
    • Unsorted and non-industrial unworked or sawn, cleaved or bruted diamonds, although need to be submitted for specific authority and require verifications to be carried out in accordance with the Kimberley Process, are exempt where such products have previously undergone this verification procedure and this is proven by traceability-based evidence.

Import-Export Controls and Restrictions

  • 61 entities have been added to the list of those supporting Russia’s military-industrial complex, subject to tighter export restrictions (i.e., a presumption of denial for EU export control licenses). Such entities are located both within and outside of Russia, including China, Kazakhstan, Kyrgyzstan, Turkey, and the UAE.
  • The list of restricted items that could enhance Russia’s defense and security sector has been expanded, including certain machine tools and certain terrain vehicles. The list of Common High Priority Items has also been expanded.
  • Further restrictions on exports contributing to Russian industrial capabilities and the import of helium from Russia has been imposed. The list of banned industrial items has been expanded to include chemicals (manganese ores and compound rare-earth materials), plastics, excavation machinery, monitors, and electrical equipment.
    • Applicable exemptions relate to certain contracts concluded prior to 25 June 2024 until: (i) 26 July 2024 for items falling under CN code 2602; (ii) 26 September 2024 for items listed in Annex XXIIIC; and (iii) 26 December 2023 for items falling under CN codes 8481 80 and 8708 99.
    • Other exemptions relate to goods for non-military use which are intended for health emergencies, to urgently prevent or mitigate 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.
    • Authorizations are also available for goods falling under specific CN codes relating primarily to the repair or maintenance of medical devices, households of natural persons in Russia, and goods sold for the production of food for human consumption in Russia.
  • A ban has been placed on purchasing, importing, transferring and exporting Ukrainian cultural property goods and other goods of archaeological, historical, cultural, rare scientific or religious importance suspected of being unlawfully removed from Ukraine. Any related services including technical assistance, brokering services, financing, financial assistance and others are equally prohibited.
    • Applicable exemptions relate to (i) goods exported from Ukraine prior to 1 March 2014; and (ii) goods being safely returns to their legitimate owners in Ukraine.

Intellectual Property Restrictions

  • Any applications for the registration of intellectual property rights and any requests or submissions relating to intellectual property rights made by Russian nationals, residents or entities must now be rejected.
  • Member States must also use best efforts to ensure that intellectual property right registration organizations, such as the European Patent Office, the World Intellectual Property Organization, and the IP Office, refuse any requests for the unitary effect of intellectual property rights and any applications for registration of intellectual property rights where these have been filed by Russian nationals, residents or entities.
  • EU, EEA and Swiss nationals and residents are exempted from these intellectual property restrictions.

Provision of Software Services to Russia

  • The provision of certain business services, enterprise management, and software and industrial design to the Russian government and entities established within Russia was already prohibited.
  • An exemption was available for the provision of such services for the exclusive use of Russian entities that are controlled by a parent in the EU, EEA, Switzerland, or a partner country. This exemption was renewed and is now available until 30 September 2024.
  • A new exemption has come into force allowing the provision of such services to any relevant subsidiaries by EU nationals who, prior to 24 February 2022, became Russian residents.

Expansion of Partner Countries

  • The list of partner countries has been expanded to include Liechtenstein and Iceland (in addition to the US, Japan, the UK, South Korea, Australia, Canada, New Zealand, Norway and Switzerland). Such partner countries are entitled to benefit from exemptions or derogations under Regulation 833/2014.

Confidentiality and Self-Disclosure Rules

  • Member States are required to inform one another and the European Commission of penalties applied for infringements of EU sanctions against Russia and to ensure that information exchanged or documents prepared in connection with upholding sanctions rules are subject to professional secrecy and are afforded the same protection as that available to EU institutions.
  • A voluntary self-disclosure mechanism has not been established but penalties may take into consideration the voluntary, complete and timely self-disclosure of regulatory breaches.

Liability and Protection of EU Operators

  • Measures have been implemented to allow EU operators and individuals to claim compensation in EU Member States’ commercial and civil courts for damages caused by Russian laws which placed assets owned by such investors under temporary administration, provided such decision to do so is illegal under international customary law or provided that the operator does not have effective access to remedies under the relevant jurisdiction, such as bilateral investment treaties.
  • EU operators and individuals are equally entitled to seek damages in connection with a contract or transaction, the performance of which has been impacted by EU sanctions and which otherwise would not be satisfied in the EU due to the presence of a “no claims” clause subject to such claimant not having recourse to remedies under the relevant jurisdiction.
  • A number of clarifications have been provided for, including:
    • A clarification that the EU’s “no knowledge and no reasonable cause to suspect” defense to liability for EU sanctions violations cannot be invoked where a party has failed to conduct appropriate due diligence; and
    • A clarification that EU operators face liability for sanctions circumventions not only when they know and intend to circumvent but also where they are aware of and accept those risks.
  • The EU has gained new powers to impose a full transaction ban on Russian companies that interfere with arbitration and court competence where the basis of the dispute is sanctions.

With thanks to Anahita Shahrokh for her assistance in drafting this blog post.

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