The EU and UK adopt further sanctions against Russia
Dr Udo Herbert Olgemöller
Frankfurt am Main
Dr Tim Nikolas Müller
Frankfurt am Main
10 January 2023
At the close of 2022, and with the war in Ukraine entering its tenth month, the EU and the UK adopted further sanctions packages against Russia.
The latest sanctions packages include further asset freezes, an EU transaction ban on the Russian Regional Development Bank, an extension of export restrictions to capture additional goods and technologies and further professional business services restrictions.
In this article, we provide an overview of the key points for consideration.
On 15 December 2022, the UK Government published the Russia (Sanctions) (EU Exit) (Amendment) (No. 17) Regulations 2022 (the Amending Regulations). The Amending Regulations contained the following key measures:
- the existing restrictions on dealing with transferable securities or money market instruments, and making new loans and credit arrangements, were extended to capture arrangements involving non-Russian entities where the issuance of the security/money market instrument, or the extension of a new loan/credit, is for one of the following purposes:
(a) directly acquiring any ownership interest in land located in Russia;
(b) indirectly acquiring any ownership interest in land located in Russia for the “purpose mentioned in paragraph (3)” (see below);
(c) directly acquiring any ownership interest in or control over a person, other than an individual, connected with Russia;
(d) indirectly acquiring any ownership interest in or control over a person, other than an individual, connected with Russia for the “purpose mentioned in paragraph (3)”;
(e) directly or indirectly acquiring any ownership interest in or control over a relevant entity for the “purpose mentioned in paragraph (3)”;
(f) directly or indirectly establishing any joint venture with a person connected with Russia;
(g) opening a representative office or establishing a branch or subsidiary located in Russia; or
(h) providing investment services directly related to an activity referred to in sub-paragraphs (a) to (g),
where the “purpose mentioned in paragraph (3)” is making funds or economic resources available directly or indirectly to a “person connected with Russia” or for the benefit of a “person connected with Russia”;
- the existing loan and credit restrictions were further extended to prohibit the making available of funds or economic resources to a third party entity for the purposes of enabling such third party entity to grant otherwise prohibited loans;
- a prohibition was introduced on providing trust services to or for the benefit of either (a) certain designated persons or (b) persons “connected with Russia”, unless (in the case of the latter only) pursuant to an ongoing arrangement that was in place immediately before the sanctions came into force. For these purposes, trust services are provided for the benefit of a person where such person is a beneficiary of the trust, a potential beneficiary, or a person who might otherwise be reasonably expected to obtain a significant financial benefit from the trust. Various associated derogations are also established, including derogations for certain pension schemes and authorised unit trust schemes;
- a prohibition on directly or indirectly providing the following services to a person connected with Russia: (a) advertising services; (b) architectural services; (c) auditing services; (d) engineering services; or (e) IT consultancy and design services, with the scope of services being prescribed in schedules to the UK’s Russia sanctions regulations (again, various associated derogations are also created); and
- new items were added to the existing list of critical-industry goods/technology and defence and security goods/technology, which are subject to Russian export bans. Newly targeted items include camouflage-related, and oil production and mining-related, equipment, as well as various chemicals, including sulphur, calcium carbide and carbon monoxide.
It is notable that the UK has further extended the scope of its prohibitions on lending and dealings with Russian-related securities – now effectively targeting non-Russian entities that are involved with Russian investments. The UK’s sanctions in this regard continue to be wider than the equivalent EU sanctions.
Even more notably, and following earlier announcements, the UK has followed the EU’s lead by introducing restrictions on the provision of trust services and additional professional and business services. In doing so, the UK Government appears to have reacted to some of the difficulties raised by the broad scope of the equivalent EU sanctions. For instance, the UK introduced exemptions at the outset for certain trust services, such as registered pension schemes (whereas the EU had to introduce a licensing ground with a similar scope after the introduction of its original trust services sanctions). The UK has also included prescriptive legislative definitions establishing the scope of the professional and business services, compared to the EU, which did not expressly define certain terms directly within the legislative text itself, but instead provided clarification by way of recitals and non-legally binding guidance only.
Shortly after the UK’s package, on 16 December 2022, the EU adopted its ninth sanctions package against Russia. The latest package contained the following key measures:
- the imposition of an asset freeze against two additional Russian banks, the Credit Bank of Moscow and Dalnevostochniy Bank. Additional winding down derogations were created, subject to licences being obtained from the competent authorities;
- the imposition of asset freezes on a number of new entities and individuals, including the Russian Armed Forces (and some of its military units), the National Guard and individual Russian officers;
- the addition of the Russian Regional Development Bank (RRDB) to the list of Russian State-owned or controlled entities that are subject to a full transaction ban. There is a limited wind-down derogation until 18 March 2023 for the execution of contracts concluded with the RRDB before 17 December 2022, or of ancillary contracts necessary for the execution of such contracts. The prohibition also does not apply to the receipt of payments due from the RRDB pursuant to contracts performed before 18 March 2023;
- existing export bans on industrial goods (as specified in Annex XXIII of EU Regulation 833/2014) and goods/technology which might contribute to the Russia’s military and technological enhancement (as specified in Annex VII of EU Regulation 833/2014) have been expanded. Newly targeted items under Annex XXIII include medium and heavy oils; data processing machines; processing units; optical readers; generators; soldering irons; radio equipment; printed circuits; lenses for cameras etc.; and plastic toys incorporating motors;
- an existing export ban on aviation and space industry goods and technology has been expanded to include aircraft engines and their parts. The Commission has elaborated that this prohibition will apply to both manned and unmanned aircraft, meaning that there will now be a ban on the direct exports of drone engines to Russia and any third country that could supply drones to Russia;
- the introduction of a ban on the provision of market research and public opinion polling services, technical testing and analysis services, and advertising services to the Government of Russia and Russian entities;
- an expansion of the prohibition targeting new investments in the Russian energy sector by additionally prohibiting new investments or participations in the Russian mining and quarrying sector, with the exception of mining and quarrying activities involving certain critical raw materials;
- EU nationals are prohibited from holding any posts in the governing bodies of all Russian state-owned or controlled legal persons, entities or bodies located in Russia; and
- four new entities (NTV/NTV Mir, Rossiya 1, REN TV and Pervyi Kana) have been targeted by pre-existing broadcasting related sanctions, which prohibit EU operators from broadcasting or enabling, facilitating or otherwise contributing to the broadcasting of any content by the targeted entities.
The EU’s ninth package also introduced a new licencing route that is applicable to many of the existing trade sanctions. By way of derogation from certain export-related sanctions, EU Member State competent authorities may authorise the sale, supply or transfer of restricted goods and technologies until 30 September 2023, where such sale, supply or transfer is strictly necessary for the divestment from Russia or the wind-down of business activities in Russia. The following conditions must all be satisfied, however:
- the goods and technologies must be owned by an EU national or by an EU-incorporated entity or by Russian entities that are owned by, or solely or jointly controlled by, an EU-incorporated entity;
- the relevant competent authorities must have no reasonable grounds to believe that the goods might be for a military end-user or have a military end-use in Russia; and
- the concerned goods and technologies were physically located in Russia before the relevant prohibitions entered into force in respect of those goods and technologies.
Further, by way of derogation from certain import-related sanctions, EU competent authorities may authorise the import or transfer of certain restricted goods until 30 September 2023, where such import or transfer is strictly necessary for the divestment from Russia or the wind-down of business activities in Russia. The following two conditions must be satisfied, however:
- the goods are owned by an EU national or by an EU-incorporated entity or by Russian entities that are owned by, or solely or jointly controlled by, an EU-incorporated entity; and
- the concerned goods were physically located in Russia before the relevant prohibitions entered into force in respect of those goods.
Existing trade sanctions have caused additional complexities for EU companies seeking to exit their Russian business by way of sales to Russian buyers, for instance if their Russian subsidiaries had restricted goods/technologies in their inventory or under their control from before the imposition of the relevant sanctions. As such, these time-limited licensing routes should provide clearer grounds to enable Russian divestment activities in a sanctions-compliant manner.
Should you have any questions on the matters discussed in this article, please contact Matthew Townsend, Udo Olgemöller, Tim Muller, Jonathan Benson, Tom d’Ardenne, Sophie Davis or your usual contact at Allen & Overy LLP.