EU Imposes Additional Sanctions Against Russia and Belarus

EU Imposes Additional Sanctions Against Russia and Belarus

July 1, 2024, Covington Alert

On 24 June 2024, the Council of the European Union (the "Council") adopted a new package of economic sanctions against Russia. This 14th package of sanctions introduces a broad range of new prohibitions, including new export and import sanctions, new services restrictions, new sanctions designations, and further measures targeting the Russian financial and energy sectors. The 14th package also includes measures relating to the circumvention of existing EU-Russia sanctions, including the imposition of a new, affirmative obligation for EU companies to address diversion and circumvention risks both within their own operations as well as the operations of their non-EU based subsidiaries. Finally, the new Russia measures include a number of provisions intended to facilitate efforts of parties subject to EU sanctions jurisdiction to pursue legal claims in relation to Russia.

Finally, the new Russia measures expand the powers of courts within Member States to hear damages claims arising from the actions of Russian companies related to "sanctions implementation and expropriation."

The new EU measures were adopted shortly after the United States and the United Kingdom adopted new Russia related export controls and sanctions, which we summarize in this alert.

Separately, on 30 June 2024 the EU passed a broad new set of sanctions relating to Belarus, including various measures intended to bring the EU-Belarus sanctions more closely in line with similar Russia-related measures.

Asset-freezing Designations

Council Implementing Regulation (EU) 2024/1746 designates additional individuals and entities to the EU asset-freezing list. The new designations target the Russian military sector but also include entities-and owners and senior managers of companies-operating in other sectors of the Russian economy, such as Russia's largest shipping company, Sovcomflot, and OJSC Ural Airlines.

In addition, Council Regulation (EU) 2024/1739 amends the principal EU-Russia asset-freezing regulation-Council Regulation No. 269/2014-to introduce new provisions allowing Member State authorities to grant case-by-case licenses to release funds that were frozen due to the involvement of a sanctioned (intermediary) bank in the transfer of the funds from Russia to the EU, under the conditions that the transfer is between two non-sanctioned natural or legal persons, entities, or bodies and is carried out using accounts at non-sanctioned credit institutions.

Export / Import Controls and Services Restrictions

Council Regulation (EU) 2024/1745 which amends Council Regulation (EU) No 833/2014 ("Regulation 833"), introduces new trade sanctions in relation to Russia and expands existing ones. Those measures include the following, among other changes:

Export / Supply Controls

The regulation includes new items in the following annexes to Regulation 833:

• Annex VII, which lists "goods and technology which might contribute to Russia's military and technological enhancement, or the development of the defense and security sector";
• Annex XXIII, which lists "goods which could contribute to the enhancement of Russian industrial capacities"; and
• Annex XL, which lists "common high priority items" that the EU has determined-in coordinating with the United States, UK, and other international partners-to be particularly sought-after by Russia in connection with its defense sector.

EU persons are prohibited from directly or indirectly selling, supplying, transferring, or exporting items falling within those annexes to Russia, or to any other jurisdiction if intended for use in Russia. The foregoing prohibitions are accompanied by independent restrictions on the provision of any services in relation to restricted goods, or extending intellectual property ("IP") rights or trade secrets in connection with restricted goods.

The regulation also adds new entities to Annex IV of Regulation 833, which designated entities for enhanced export controls regarding dual-use and Annex VII items. The export of controlled items (or associated services) to the newly-designated parties previously required licensing, but the new regulation limits the authority of EU Member State regulators to issue case-by-case licensing for the supply of restricted goods or services to them.

Import Controls

Further items have also been added to the list of items listed on Annex XXI to Regulation 833 ("goods which generate significant revenues for Russia") which are subject to import, purchase, and third country transfer restrictions, including helium falling under CN codes 28042910 and 284540.

Russian Diamond Restrictions

The regulation introduces several changes to the existing prohibition against the importation of Russian diamonds, including the following:

• The import ban on jewelry processed outside of Russia consisting of Russian origin diamonds, which was set to come into force on 1 September 2024, was suspended and will only come into force after the Council has agreed on a new date of implementation.
• The regulation clarifies that the import ban on Russian diamonds does not apply to Russian diamonds that were located in the EU or in a third country (other than Russia), or were polished or manufactured in such third country, before the relevant restrictions came into force (which depend on the type of diamond product and the carat weight of the diamond).
• The regulation also amends and introduces new evidence and traceability requirements.

Anti-Circumvention Measures

The regulation introduces a number of important new measures aimed at preventing the circumvention of existing EU Russia sanctions:

• It introduces a new obligation-which has not previously been included in any EU sanctions regulation-for EU companies to undertake their "best efforts" to ensure that any non-EU company they own or control does not participate in activities that "undermine" the restrictions contained in Regulation 833. Notably, a similar provision was not added into the EU-Russia asset-freezing sanctions (Regulation 269/2014).

This new provision is set out in Article 8a of Regulation 833. The regulation does not clearly describe what it means to "undermine" EU sanctions restrictions. Based on prefatory language in the regulation, the "best efforts" standard requires companies to undertake all actions that are "suitable and necessary," which can include for example "the implementation of appropriate policies, controls and procedures to mitigate and manage risk effectively, considering factors such as the third country of establishment, the business sector and the type of activity of the legal person, entity or body that is owned or controlled by the Union operator." The prefatory language adds that "best efforts should be understood as comprising only actions that are feasible for the Union operator in view of its nature, its size and the relevant factual circumstances, in particular the degree of effective control over the legal person, entity or body established outside the Union. Such circumstances include the situation where the Union operator, due to reasons that it did not cause itself, such as the legislation of a third country, is not able to exercise control over a legal person, entity or body that it owns."

• The regulation introduces an obligation, set out in Article 12gb of Regulation 833, for EU operators that sell, supply, transfer, or export items listed on Annex XL of Regulation 833 ("common high priority items") to conduct risk assessments concerning the risk of their products being diverted to Russia, and implement appropriate risk mitigation controls. The regulation notes that the assessments and controls should be implemented "proportionately" to the "nature and size" of the entity in question. The foregoing requirements do not apply to companies that supply Annex XL items only within the EU or to partner countries listed in Annex VIII of Regulation 833.

The regulation further requires EU parties to ensure, effective 26 December 2024, that any non-EU entities that they own or control and that are involved in transactions concerning Annex XL items implement equivalent risk assessments and compliance controls.

• The regulation introduces amendments to the anti-circumvention prohibition in Article 12 of Regulation 833, which establish that EU persons are prohibited from participating "knowingly and intentionally, in activities the object or effect of which is to circumvent prohibitions." The regulation clarifies that a violation of the anti-circumvention prohibition may occur "by participating in such activities without deliberately seeking that object or effect but being aware that the participation may have that object or effect and accepting that possibility." That standard does not represent a fundamental change in the EU sanctions, as it is generally consistent with the 2011 Court of Justice of the EU decision in Afrasiabi and Others, in which the Court had interpreted the liability standard for the anti-circumvention prohibition in the EU Iran sanctions (EU Case C-72/11).

Equivalent changes have been implemented in the anti-circumvention standard in the EU-Russia asset-freezing sanctions (Regulation 269/2014).

• The regulation introduces a new exemption from the "No Russia clause" requirement in Article 12g of Regulation 833 for the execution of contracts in relation to certain items listed falling under Annex XL of Regulation falling under CN codes 8457 10, 8458 11, 8458 91, 8459 61, 8466 93, as well as for public contracts concluded with a public authority in a third country or with an international organisation.

Moreover, the regulation introduces a new "no Russia" contractual requirement, similar to those previously reflected in Article 12g, for contracts involving the sale, licensing, transfer, or use of IP rights or trade secrets concerning items included in Annex XL to Regulation 833. This new requirement is effective 26 December 2024, and requires the implementation of a clause contractually prohibiting counterparties and their sublicensees from using IP rights or trade secrets in connection with Annex XL items intended for transfer to or use in Russia. This new requirement is subject to an exclusion, until 26 June 2025, for performance of contracts pre-dating 25 June 2024.

• The regulation introduces a new prohibition on engaging in any transaction with entities designated in Annex XLV to Regulation 833, who are determined to have been involved in facilitating the supply of restricted goods to Russia. However, this new measure essentially only creates a framework for the future designation of parties, as there are currently no entities designated under Annex XLV.

Professional Services Restrictions

The regulation extends the current exemption in Article 5n of the regulation for the provision of the restricted professional services for the exclusive use of subsidiaries of EU companies, and companies established in certain other partner jurisdictions listed in Annex VIII, until 30 September 2024 (the exemption was set to expire on 20 June 2024). After that date, EU companies providing any restricted professional services under Article 5n to Russian entities, including their Russian affiliates, will need specific licensing from a competent EU Member State authority. Professional services captured by Article 5n include: business and management consulting, accounting, auditing, including statutory auditing, bookkeeping or tax consulting services, legal advisory services, and IT consultancy services. Article 5n also contains a provision against the provision of software for the "management of enterprises and software for industrial design and manufacture" as listed in Annex XXXIX to Regulation 833, which includes: software for "supply chain management" ("SCM") or "enterprise resource planning" ("ERM").

The winding down of the foregoing exemption was first implemented in the 12th package of EU sanctions in December 2023, which provided for a six-month wind-down period ending on 20 June 2024. Given that licensing under Regulation 833 is handled by individual EU Member States, the wind-down of the exemption has led to a substantial volume of license requests to different EU Member State agencies, with many companies seeking licensing from multiple Member States to ensure that all of their relevant EU entities and EU nationals were licensed. The wind-down of the exemption appears to have caught many EU Member State regulators, and the European Commission, off-guard. Licensing authorities struggled to respond in a timely manner to license requests, and some licensing agencies did not even have licensing processes in place at the time the wind-down period initially expired.

As a consequence, while EU policymakers had initially signaled that there would be no extension to the 20 June date, it was ultimately deemed necessary to extend the timeline to 30 September. That timeframe gives companies a better opportunity to secure appropriate licensing under Article 5n. Given the still-unresolved challenges exhibited in the licensing processes of many Member States, companies are encouraged to pursue necessary licensing as soon as possible.

Separately, the new regulation also introduces an exemption from the prohibition in Article 5n for EU nationals who are residents of Russia and were so before 24 February 2022, and who provide restricted professional services in their capacity as employees of Russian subsidiaries of companies established in the EU or jurisdictions listed in Annex VIII. This exemption is not subject to a wind-down period.

Financial Sector Measures

Pursuant to a new Article 5ac of Regulation 833, EU entities operating outside of Russia are now prohibited, subject to certain limited exemptions, from connecting to the "System for Transfer of Financial Messages" ("SPFS") of the Central Bank of Russia or equivalent specialised financial messaging services set up by the Central Bank of Russia or the Government of Russia. SPFS is a Russian financial messaging system developed by the Central Bank of Russia. It is intended to serve as an alternative to the Society for Worldwide Interbank Financial Telecommunication ("SWIFT") network, from which a number of Russian banks have been cut off. These measures do not apply to entities established and operating in Russia, including subsidiaries of EU based entities.

Article 5ac also renders it prohibited, subject to limited exemptions, for EU persons to engage, directly or indirectly, in any transaction with a legal person, entity, or body established outside Russia as listed in Annex XLIV. Annex XLIV-which does not yet contain any names-will include legal persons, entities, or bodies established outside Russia that use the SPFS of the Central Bank of Russia or equivalent specialised financial messaging services set up by the Central Bank of Russia or the Government of Russia.

Energy Related Measures

The regulation introduces new measures targeting trade involving Russian liquified natural gas ("LNG"):

• EU persons are now prohibited, subject to certain exemptions, from providing reloading and ancillary services for the purposes of transshipment operations of LNG falling under CN code 2711 11 00 originating in Russia or exported from Russia.
• EU persons are also now prohibited, subject to certain exemptions, from purchasing, importing, or transferring LNG falling under CN code 2711 11 00 originating in Russia or exported from Russia through LNG terminals in the EU that are not connected to the interconnected natural gas system.
• EU persons are now further prohibited from selling, suppling, transferring, or exporting any goods, technology, or services to any person or entity in Russia, if intended for the completion of LNG projects such as terminals and plants.
• Pre-existing prohibitions in Article 3a of Regulation 833 on Russian energy sector investments have been extended to include investments in entities operating in relation to "projects under construction for the production of liquified natural gas[.]"

New Restrictions Relating to Legal Claims Against Russian Counterparties

The new EU sanctions introduce measures intended to counter the recent trend of Russian litigants invoking the recently-enacted Article 248 of the Russian Arbitrazh Procedural Code. As discussed in our prior alert, this provision of Russian law allows Russian commercial courts to: (i) assert exclusive jurisdiction over disputes arising out of the imposition of sanctions on Russian individuals or entities (notwithstanding any contrary exclusive jurisdiction agreement between the parties); and (ii) in such cases, to issue injunctions restraining claims brought outside of Russia, under threat of penalties equivalent to the claimed value of the restrained proceedings.

The latest EU sanctions include three principal responsive measures:

• Under the new Article 5ab to Regulation 833, it will be prohibited, subject to limited exceptions, to engage in any transaction with parties designated in a new Annex XLIII to Regulation 833, which will have been determined to have lodged claims before a Russian court pursuant to Article 248 or equivalent Russian legislation. No parties have, however, as of yet been actually designated under Annex XLIII.
• Under the newly-introduced Article 11a to Regulation 833, EU persons are allowed to bring claims before Member State courts for damages, including legal costs, incurred as a consequence of claims lodged with "courts in third countries" by Russian litigants, parties designated in annexes to Regulation 833 (or affiliates thereof), or anyone acting on behalf or at the direction of the foregoing, in connection with any contract or transaction which has been affected by the measures imposed by the regulation. EU litigants who have been brought into proceedings before the Russian courts pursuant to Article 248 will thus be able to bring claims for the losses suffered as a result of such proceedings.

An equivalent provision has been introduced in Article 11a of Regulation 269/2014, in connection with claims lodged with courts in third countries by parties subject to asset-freezing sanctions under that regulation.

• Under the newly added Article 11b(1) to Regulation 833, EU persons may claim damages caused by any persons "that benefitted from a decision pursuant to the Decree of the President of the Russian Federation No. 302 of 25 April 2023" or "Russian legislation related or equivalent to it." As explained in our prior alert, this decree laid the groundwork to expropriate, damage, or otherwise impair the investments of companies from "unfriendly" counties.[1] Such claims are only available if the relevant decision is unlawful as a matter of customary international law or violates a bilateral investment treaty "entered between a Member State and Russia." This new feature of Regulation 833 appears to be designed to capture any further measures, including claims brought under Article 248, which do not fall within Article 11a. The effect of Article 11b(1) will likely be to give EU persons the option of electing whether to bring claims for breaches of international law (such as expropriation) before an arbitral tribunal or a Member State court.

Additional Measures

• Vessel sanctions. The regulation introduces targeted measures against certain specifically-designated vessels as listed in Annex XLI to Regulation 833. Listed vessels are subject to a port access ban, and a prohibition on a broad array of maritime services and others services such as financing and financial assistance including insurance and brokering flag registration, technical assistance, bunkering, and ship supply services (among other services).

The regulation also introduces other minor changes to existing restrictions, set out in Article 3ea of Regulation 833, on Russian vessels accessing EU ports and locks.

• Aviation sanctions. The regulation introduces several amendments to pre-existing restrictions, set out in Article 3d of Regulation 833, on allowing Russian aircraft access to the EU or EU airspace to cover Russian-owned or registered aircraft, or aircraft operated by Russian air carriers. The new provisions introduce certain targeted exemptions and new reporting requirements on EU aircraft operators (including, among other information, "credible and satisfactory information regarding the actual ultimate beneficial owner of the aircraft and, where applicable, of the natural or legal person, entity or body ultimately chartering the aircraft").
• Ukrainian cultural property. The regulation introduces new restrictions on transactions concerning "Ukrainian cultural property goods and other goods of archaeological, historical, cultural, rare scientific or religious importance," in circumstances where there are reasonable grounds to suspect that the goods have been removed from Ukraine without the consent of their legitimate owner or have been removed in breach of Ukrainian law or international law.
• IP restrictions. A new Article 5s of Regulation 833 restricts EU IP agencies from extending certain types of IP rights and protections to Russian persons or entities.
• EU public contracts. The regulation extends pre-existing restrictions, in Article 5l of Regulation 833, on using benefits arising under EU public contracts for the benefit of Russian state entities to extend to any Russian entity or majority-owned subsidiary thereof.
• Acceptance of economic benefits from Russia. A new Article 5t to Regulation 833 prohibits the acceptance of donations, "economic benefits or support" directly or indirectly from the Russian government, or state-owned entities thereof.
• Road transport restrictions. The regulation amends the existing prohibition on the transport of goods by road within the EU, including in transit, by Russian road transport undertakings to now also capture EU road transport undertakings that are owned 25% or more by a Russian natural or legal person.
• Voluntary self-disclosure. The regulation clarifies that when considering penalties for the violation of the EU Russia sanctions, Member State authorities may take the voluntary self-disclosure of the violation into account as a mitigating factor.
• Exemptions and licensing provisions. The regulation includes targeted amendments to various provisions in Regulation 833 allowing Member States to issue case-by-case licenses for restricted activities-including several new licensing provisions intended to facilitate EU parties in divesting from pre-existing Russian business operations-as well as certain new licensing exemptions.
• Broadcast restrictions. Finally, pursuant to a separate measure-Regulation 2024/1776-the broadcasting-related sanctions set out in Article 2f of Regulation 833 now apply to following entities: Voice of Europe, RIA Novosti, Izvestija, and Rossiiskaja Gazeta. Those entities were added to Annex XV of Regulation 833 in May pursuant to Council Regulation 2024/1428, however that regulation deferred implementation of Article 2f sanctions against the entities in question pending further action from the Council.

New Belarus Sanctions

On 29 June 2024, the Council imposed additional sanctions measures on Belarus in response to Belarus's support of the Russian invasion of Ukraine. Council Regulation (EU) 2024/1865 expands upon pre-existing Belarus sanctions established in Council Regulation (EC) No 765/2006 ("Regulation 756"). Most of the new measures are broadly similar to-and in some respects substantively identical to-pre-existing EU-Russia sanctions, and are intended to bring the Belarus and Russia sanctions closer in line with one another and, in particular, reduce the risk of Russia sanctions being diverted through exports to Belarus.

Export / Supply Controls

The regulation introduces the following new Annexes to Regulation 756 consisting of items which were previously restricted for supply to Russia:

• Annex XVIII, which lists goods that could "contribute to the enhancement of Belarusian industrial capacities";
• Annex XXV, which lists "luxury goods";
• Annex XXIV, which lists "maritime navigation goods and technology"; and
• Annex XX, which lists "goods and technology suited for use in oil refining and liquefaction of natural gas."

The regulation also adds additional items to Annex Va which lists "goods and technology which might contribute to Belarus's military and technological enhancement, or to the development of its defence and security sector."

The regulation, further, introduces new restrictions on extending / providing IP rights or trade secrets in connection with restricted goods, and new transit restrictions prohibiting the shipment of those goods to third countries via Belarus.

Import Controls

The regulation introduces new restrictions concerning the purchase, import or transfer of products listed in Annex XXVII (revenue generating goods) and Annex XXI ("gold"), and expands import-related controls on mineral products through the inclusion of new items in Annex VII.

Anti-Circumvention Measures

• No Belarus clause. The regulation introduces a "no Belarus clause" requirement which mirrors the "no Russia clause" requirement in Article 12g of Regulation 833. EU operators that export certain items subject to restrictions under Regulation 765 to any country (other than partner countries listed in Annex Vba to Regulation 765) will be required to seek contractual assurances from their counterparties that the restricted item will not be re-exported to Belarus. Restrictions apply to items listed in Annex XVII ("aviation or the space industry goods"), Annex XXVIII ("which is a new Annex that lists different types of items that are critical to Russia's military capabilities"), Annex XXX ("common high priority items") or firearms and ammunition as listed in Annex XVI to Regulation 756 and firearms listed in Annex I to Regulation (EU) No 258/2012.
• Best effort standard in relation to non-EU subsidiaries. Consistent with the new Russia measures, EU operators will also be required to undertake their best efforts to ensure that any legal person, entity, or body established outside the EU that they own or control does not participate in activities that undermine the restrictive measures provided for in Regulation 765.
• Risk assessment concerning common high priority items. Again consistent with the new Russia measures, the regulation introduces an obligation for EU operators that trade in common high-priority items listed in Annex XXX to Regulation 765 (which lists the same items listed in Annex XL of Regulation 833) to conduct risk assessments concerning the risk of their products being diverted to Belarus, and implement appropriate risk mitigation controls. The regulation further requires EU parties to ensure, effective 2 January 2025, that any non-EU entities that they own or control and that are involved in transactions concerning Annex XXX items implement equivalent risk assessments and compliance controls.

Professional Service Sanctions

The regulation introduces new professional service sanctions similar to those implemented in Article 5n of the EU-Russia sanctions. However, unlike in the EU Russia sanctions regulation, which prohibit the provision of the restricted services both to the Government of Russia and other entities in Russia, the EU Belarus measures only prohibit the provision of the restricted professional services to the "Republic of Belarus, its Government, its public bodies, corporations or agencies; or any natural or legal person, entity or body acting on behalf or at the direction of the foregoing persons." Those professional services sanctions do not, therefore, currently prohibit the provision of restricted professional services to Belarusian entities that are not affiliated with the Belarusian Government.

Restricted professional services include, consistent with the Russia sanctions:

• accounting services, auditing services, including statutory audit, bookkeeping services, tax consulting services, business and management consulting services, and public relations services;
• architectural and engineering services, as well as IT consultancy services and legal advisory services;
• advertising, market research and public opinion polling services, as well as product testing and technical inspection services; and
• the provision of software for the "management of enterprises and software for industrial design and manufacture" as listed in Annex XXVI to Regulation 765.

Additional Measures

• Diamond restrictions. The regulation introduces new restrictions concerning the purchase, import or transfer of diamonds and products incorporating diamonds if they originate in Belarus or have been exported from Belarus. These restrictions are broadly similar to the EU Russia diamond restrictions. However, the EU Belarus diamond restrictions do not contain restrictions concerning diamond and diamond products processed in a third country consisting of or incorporating Belarusian diamonds.
• Restriction on energy sector investments. The new measures prohibit new investment activities involving any entity "operating in the energy sector in Belarus," including: (1) acquiring or extending new interests in such entities, (2) granting or being part of arrangements to make new loans or credits available, or otherwise providing financing (including equity capital), to such entities; (3) creating a new joint venture with such entities; or (4) providing investment services directly related to the foregoing activities.
• Divestment from Belarus. The regulation introduces new licensing provisions allowing Member State authorities to issue licenses allowing, under certain conditions, restricted sales, imports, or services necessary for the divestment from Belarus or the wind-down of business activities in Belarus. This derogation is subject to a wind-down period until 31 December 2024.
• Road transport restrictions. Consistent with the EU Russia sanctions, the regulation amends the existing prohibition on the transport of goods by road within the EU, including in transit, by Belarusian road transport undertakings to now also capture EU road transport undertakings that are owned 25% or more by a Belarusian natural or legal person.
• Miscellaneous amendments. Finally, the regulation includes a variety of amendments to existing exemptions and licensing provisions to aspects of the import and export provisions of Regulation 765.

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We are closely monitoring developments concerning the U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have.

Covington's International Trade Controls team-which includes lawyers in the firm's offices in the United States, London, and Frankfurt-regularly advises clients across business sectors, and is well-placed to provide support in connection with the evolving Russia sanctions and export controls. Our trade controls lawyers also work regularly with Covington's Global Public Policy team-consisting of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia-many of whom have had substantial government experience in sanctions and export controls matters, and who regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders. Moreover, as the Ukraine crisis continues to unfold, Covington is exceptionally well-positioned to assist clients in navigating their most complex challenges, drawing on the multidisciplinary capabilities of additional practices in areas such as international arbitration and disputes, cybersecurity, anti-money laundering, insurance, and corporate restructuring.

If you have any questions concerning the material discussed in this client alert, please contact the members of our team.

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