Russia-Ukraine War Impact: EU Adopts 12th Package of Economic and Individual Sanctions

On December 18, 2023, the EU unveiled the 12th package of sanctions targeting Russia through Regulations (EU) 2023/2878 and (EU) 2023/2875. These amendments, effective immediately from December 19, 2023, have a significant impact on businesses operating in Russia or seeking to exit the region. Key measures include expanding controlled business services, ending exemptions for certain services to Russian subsidiaries, and extending divestment licensing deadlines. Moreover, bans have been imposed on Russian diamonds, with some additional import/export restrictions and stringent measures against entities supporting Russia's military-industrial complex. These sanctions significantly affect businesses across sectors and even those not directly trading with Russia must be careful about circumvention risks.

"With this 12th package, we are putting forward a robust set of new listings and economic measures which will further weaken Russia’s war machine. Our message is clear, as I already stated when I chaired the informal Foreign Affairs Council in Kyiv: we remain steadfast in our commitment to Ukraine and will continue to support its fight for freedom and sovereignty."

• Josep Borrell, High Representative for Foreign Affairs and Security Policy

In brief, the 12th EU Russia Sanctions Package encompasses, among other measures, the following provisions:

Expansion of controlled business services covered under Article 5n

The scope of controlled business services as articulated in Article 5n has been broadened beyond the earlier boundaries of services exclusively offered to the Government of Russia or Russian authorities. The initial ban on Government of Russia and Russian entity services such as accounting, legal advisory, auditing and architectural services has been widened. This revised policy helps in extending the reach of the restrictions, now it prevents the trade or transfer of software suited for business management and industrial engineering. The restrictions on software are now extended to a large number of sectors including architecture, engineering, construction and manufacturing, media, education, and entertainment. This shows how much the restrictions have spread and how far they have reached.

The recent prohibition can greatly impact the operation of the Russian subsidiaries of Western companies that depend on Enterprise Resource Planning (ERP) and different types of business software. This restriction is mentioned in Annex XXXIX of EU Regulation 833/2014 and covers the following business software:

• Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), Business Intelligence (BI), Supply Chain Management (SCM), Enterprise Data Warehouse (EDW), Computerized Maintenance Management System (CMMS), Project Management Software, Product Lifecycle Management (PLM), and typical components of the above-mentioned suites, including software for accounting, fleet management, logistics and human resource

• Building Information Modelling (BIM), Computer Aided Design (CAD), Computer-Aided Manufacturing (CAM), Engineer to Order (ETO), and typical components of above-mentioned suites.

Wind down of the “partner country” exemption for controlled business services under Article 5n7

Following a six-month wind-down period expiring on 20 June 2024, the EU will eliminate the exemption for the provision of controlled business services to Russian subsidiaries of companies headquartered in the EU or other partner countries. This means that an authorization from the competent authority will be required to continue to provide controlled business services to Russian subsidiaries of companies headquartered in the EU or other partner countries. Currently, the partner countries involved in this initiative include the US, Japan, the UK, South Korea, Australia, Canada, New Zealand, Norway, and Switzerland.

Extension of Article 12b divestment licensing grounds

The deadlines pertaining to licenses for the sale, supply, import, transfer of controlled items, and the provision of controlled business services essential for divesting from Russia have been extended. These extensions vary, stretching to 30th June 2024, 31st July 2024, or 30th September 2024, contingent on the specific sanction involved.

Bans on Russian Diamonds

The EU has imposed bans on the direct or indirect import, purchase, or transfer of diamonds sourced from Russia. This ban encompasses diamonds of Russian origin, those exported from Russia, those passing through Russia, as well as Russian diamonds processed in third countries.

Starting from 1st January 2024, there will be a direct prohibition on non-industrial natural and synthetic diamonds, along with diamond jewelry. Additionally, an indirect import ban on Russian diamonds, when processed elsewhere (cut and/or polished), including jewelry containing these diamonds, will be phased in gradually, starting from 1st March 2024, and concluding by 1st September 2024. This phased approach aims to implement a traceability mechanism ensuring effective enforcement and minimal disruptions in the EU market.

This initiative to ban Russian diamonds aligns with a G7 initiative seeking an internationally coordinated prohibition on diamonds, aiming to deprive Russia of a crucial revenue source.

Restrictions and Controls on Import and Export

The council added 29 new entities in the list supporting Russia's military and industrial complex in its aggression against Ukraine. This means that entities will have more limitations when it comes to exporting dual-use goods and technologies that could strengthen Russia's defense and security sector. There are several companies in this list which are part of the countries that have been found to breach the economic sanctions. Additionally, some of these entities are Russian businesses involved in the manufacturing and supply of electronics for their military and industrial sectors.

Additionally, the current regulation broadens the range of restricted items capable of advancing Russia's defense and security sector technologically. This expansion now includes chemicals, lithium batteries, thermostats, DC motors, and servo motors specifically designed for unmanned aerial vehicles (UAVs), as well as machine tools and parts of machinery.

Further, the EU has imposed some additional restrictions on specific imports that profoundly contribute to Russia's revenue, for its ongoing aggressive actions against Ukraine. Items like pig iron, spiegeleisen, copper wires, aluminum wires, foil, tubes, and pipes, valued at €2.2 billion annually, are now subject to bans. Moreover, there's a new ban on liquefied propane (LPG) with a 12-month transitional phase.

Moreover, exemptions to import restrictions have been introduced by the Council, allowing for personal use items like personal hygiene products, clothing worn by travelers, or items in their luggage to be exempt. Also, cars with diplomatic vehicle registration plates are permitted entry into the EU. Moreover, to facilitate the entry of EU citizens residing in Russia, member states have the authority to allow the entry of their cars, provided they're not intended for sale and strictly for personal use.

Additional Measures to Enforce the Oil Price Cap

To reinforce the measures of the price cap mechanism, the EU has implemented a robust information-sharing protocol. This makes it mandatory for businesses involved in Russian oil trade to disclose price details for additional expenses like insurance and freight across the supply chain upon request.

Moreover, the EU has implemented notification regulations for tanker sales to third countries. This initiative is aimed to enhance transparency, particularly concerning the sale and export of second-hand carriers, minimizing the potential for evading the import restrictions on Russian crude or petroleum products and the G7 Price Cap.

The No-Russia Clause

The latest ruling mandates EU exporters to include contractual clauses restricting the re-exportation to Russia or for use within Russia of highly sensitive goods and technology when selling, supplying, transferring, or exporting to a third country, except for partner nations.

This clause encompasses items integral to Russian military systems detected on the Ukrainian battlefield or crucial to the conception, manufacture, or utilization of these systems, along with aviation-related items and weaponry.

Restrictive Measures on Russian Iron and Steel

The EU has introduced a new Annex XXXVI under Regulation (EU) 833/2014, outlining partner countries that enforce restrictive measures on Russian iron and steel imports, currently applicable to Switzerland and Norway. Consequently, importers handling products originating from these nations aren’t obligated to furnish evidence of the iron and steel input's origin for product processing. Furthermore, the EU has extended the duration of winding-down periods for specific steel product imports.

Reporting obligations on EU transfers over EUR 100,000

The 12th EU Russia Sanctions Package brought in new regulations mandating the reporting of fund transfers exceeding EUR 100,000 from the Union. This requirement applies to entities owned, directly or indirectly, by establishments in Russia, Russian nationals, or individuals residing in Russia.

Prohibition for Russian nationals to possess, control, or maintain positions within the governing bodies of entities offering crypto-asset wallet, account, or custody services

To prevent bypassing the ban on offering crypto-asset wallet, account, or custody services to Russian individuals, the 12th EU Russia Sanctions Package introduces a prohibition on Russian nationals or residents holding ownership, control, or positions within the governing bodies of entities providing these services.