EU and UK Impose Additional Sanctions and Export Controls Against Russia

EU and UK Impose Additional Sanctions and Export Controls Against Russia

October 10, 2022, Covington Alert

Following the attempted annexation by Russia of Ukraine's Donetsk, Luhansk, Kherson and Zaporizhzhia regions, on October 6, 2022 the Council of the European Union (the “Council”)  adopted a new package of economic sanctions against Russia. This eighth package is the latest in a series of EU sanctions implemented by the Council since Russia commenced its full-scale invasion of Ukraine in February 2022 (following Russia’s invasion of Crimea and the Donetsk and Luhansk regions of Ukraine in 2014). The new sanctions include additional asset-freezing designations, import and export restrictions, restrictions on the provision of business services, as well as additional restrictions with regards to certain Russian state-owned entities. The package also lays the basis for the required legal framework to implement a price cap on Russian oil envisaged by the G7 (to complement the earlier ban on Russian oil imports into the EU).

The UK Government has also announced a parallel package of further sanctions measures in response to the annexation of Ukrainian territory, which appears to include similar measures to the EU package but which has not yet been published or implemented.

On September 21, on the margins of the UN General Assembly in New York, EU foreign ministers convened for an emergency session and launched talks on a new round of sanctions against Russia for its escalation in Ukraine (Kremlin’s intended annexation of additional parts of Ukraine and mobilization of 300,000 additional troops for the war).

Several days later, European Commission President Ursula von der Leyen and her chief of staff Bjoern Seibert met with EU ambassadors in so-called “confessionals” to determine the potential range of sanctions and any potential red lines. (Both have kept tight control over this consultation process since February, and have served as the main interlocutors for allies such as the United States and the United Kingdom.) On September 28, the Commission formally presented its proposals at the Council of the EU, and the final package was approved a week ahead of expectations.

Additional Asset-Freezing Designations

Council Regulation (EU) 2022/1906 adds 30 individuals and 7 entities to the EU asset-freezing list. The new designations include, among other parties, the largest shareholder of arms producer JSC Kalashnikov Concern (Alan Lushnikov), the Deputy Ministers of Defence of the Russian Federation, various Russian defence sector companies, the Russian Central Election Commission (CEC), and JSC Goznak, a Russian state-owned joint-stock company responsible for the manufacturing of security products.

Council Regulation (EU) 2022/1905 broadens the listing criteria upon which specific designations can be made under EU sanctions against Russia, to include the facilitation of the circumvention of EU sanctions as a basis for designation. The regulation also introduces a derogation mechanism allowing EU Member States to authorize, under specific circumstances, the release of certain frozen funds or economic resources belonging to two specific designated entities, PJSC Kamaz and the Russian National Settlement Depository.

Additional Sectoral Sanctions

Council Regulation (EU) 2022/1904 introduces a number of new amendments to Council Regulation (EU) No 833/2014 (“Regulation 833”), which is the principle EU measure imposing sectoral export/import controls and services sanctions in relation to Russia, as well as changes to various exemptions and licensing provisions in Regulation 833. The following are the key measures introduced through the October 6 regulation.

Export Controls and Associated Services Restrictions

The regulation introduces a variety of additional restrictions on the sale, supply, transfer, or export of certain restricted items to persons in Russia or for use in Russia, including the following:

• Additional Annex VII and XXIII items: The regulation expands Annex VII to Regulation 833 to include certain semiconductor devices and other electronic components, additional chemicals and goods that can be used for capital punishment and riot control. Additional products, including certain coal products, have also been added to Annex XXIII.
• Aviation sector items: The sale, supply transfer or export of additional goods used in the aviation sector, as listed in Annex XI to Regulation 833, will also be restricted (subject to certain exemptions).
• Small Firearms: The regulation introduces further export controls on firearms, their parts and essential components and ammunition as listed in Annex I to Regulation (EU) No 258/2012 .

The foregoing restrictions are accompanied by associated prohibitions against providing services relating to the restricted items.

Import Controls

• Russian iron and steel products: The regulation extends the import and related service restrictions on iron and steel products, as listed in Annex XVII to Regulation 833, that either originate in Russia or are exported from Russia. From September 30, 2023, these restrictions will be extended (subject to limited exemptions) to include iron and steel products processed in a third country incorporating iron and steel products originating in Russia as listed in Annex XVII.

The regulation also introduces new exemptions for imports of certain Annex XVII steel products, up to aggregate quotas set out in the regulation.

• Other products: The regulation also expands the list of products, set forth in Annex XXI to Regulation 833, which are subject to import, purchase, and transfer restrictions where those items originate from Russia or are exported from Russia.

Sanctions on Russian State-Owned Entities

• Ban on EU nationals to hold posts in governing bodies: The regulation expands the prohibitions, set forth in Article 5aa of Regulation 833, against engaging in transactions with certain sanctioned Russian state-owned entities by introducing a ban on EU nationals holding posts on the governing bodies of such Russian state-owned entities.
• Additional state-owned entities: The regulation adds the Russian Maritime Shipping Register to the list of state-owned entities that are subject to the Article 5aa transaction ban.

Business Services Restrictions

• IT consultancy and other business services: The regulation widens the scope of prohibitions, set out in Article 5n of Regulation 833, associated with the provision of professional services to the government of Russia or legal persons established in Russia to include IT consultancy, legal advisory, architecture and engineering services. (Previously, Article 5n focused on accounting, auditing, book-keeping, tax consultancy, business and management consulting, and public relations services.) These restrictions are subject to a number of exemptions, including for the provision of services intended for the exclusive use of Russian entities owned by, or solely or jointly controlled by, an entity which is incorporated or constituted under the law of an EU Member State, a country member of the European Economic Area, Switzerland or a partner country as listed in Annex VIII to Regulation 833/2014.
  
  Prefatory language to the new regulation indicates that the foregoing services restrictions should be understood in the following manner:
  
  “‘[A]rchitectural and engineering services’ covers both architectural and engineering services as well as integrated engineering services, urban planning and landscape architectural services and engineering-related scientific and technical consulting services.
  
  ‘Engineering services’ does not cover technical assistance related to goods exported to Russia where their sale, supply, transfer or export is not prohibited at the time at which such technical assistance is provided.
  
  ‘IT consultancy services’ covers services related to the installation of computer hardware, including assistance services to the clients in the installation of computer hardware (i.e. physical equipment) and computer networks, and software implementation services, including all services involving consultancy services on, development of and implementation of software.
  
  ‘Legal advisory services’ covers: the provision of legal advice to customers in non-contentious matters, including commercial transactions, involving the application or interpretation of law; participation with or on behalf of clients in commercial transactions, negotiations and other dealings with third parties; and preparation, execution and verification of legal documents. ‘Legal advisory services’ does not include any representation, advice, preparation of documents or verification of documents in the context of legal representation services, namely in matters or proceedings before administrative agencies, courts or other duly constituted official tribunals, or in arbitral or mediation proceedings.”

• Crypto-wallets: The existing prohibition on providing crypto-asset wallet services to Russian persons or entities has been tightened to prohibit such services irrespective of the value of the wallet (previously access was permitted up to a value of €10,000).

Transportation Section Restrictions

• Access to EU ports: The pre-existing prohibition on providing access to EU ports to vessels registered under the flag of Russia will be extended to now also capture any vessel certified by the Russian Maritime Register of Shipping.

Implementing the G7 Oil Price Cap

The new measures also establish the legal basis for a price cap, as agreed by the leaders of the G7 group of countries (the United States, Japan, Canada, Germany, France, Italy and the United Kingdom) in September, related to Russian oil and petroleum products. The October 6 regulations do not, however, actually impose a price cap - rather, they establish legal mechanisms for the Council to do so in the future.

The new measures relating to the proposed price cap are as follows:

• The regulation retains Article 3n(1) of Regulation 833, which renders it “prohibited to provide, directly or indirectly, technical assistance, brokering services or financing or financial assistance, related to the transport, including through ship-to-ship transfers, to third countries of crude oil or petroleum products as listed in Annex XXV which originate in Russia or which have been exported from Russia[.]” That prohibition was originally subject to an exemption for the execution until 5 December 2022 of contracts concluded before 4 June 2022, or of ancillary contracts necessary for the execution of such contracts. The October 6 measures extend that exemption to 5 February 2023 for petroleum products falling under CN code 2710. The regulation also introduces new exemptions to the foregoing prohibitions for certain insurance claims.
• The regulation introduces a new prohibition, set out in Article 3n(4) of Regulation 833, relating to transporting, “including through ship-to-ship transfers, to third countries, crude oil falling under CN code 2709 00, as of 5 December 2022, or petroleum products falling under CN code 2710, as of 5 February 2023, as listed in Annex XXV, which originate in Russia or which have been exported from Russia[.]”
  
  The entry into force of this new prohibition is subject to the Council agreeing to a price cap formula, in consultation with other G7 member states within the "Price Cap Coalition." Once agreed, the price cap formula will be set out in new Annex XXVIII to Regulation 833.
• Consistent with the objectives of the price cap, the regulation introduces new exemptions to the Article 3n(1) and 3n(4) prohibitions for transactions relating to crude oil and petroleum products falling below the price cap (as and when the price cap is agreed and implemented). The regulation also retains a pre-existing exemption for the transport of crude oil or petroleum products as listed in Annex XXV where those goods originate in a third country and are only being loaded in, departing from or transiting through Russia, provided that both the origin and the owner of those goods are non-Russian. The regulation also introduces a further new exemption for the transport, or technical assistance, brokering services, financing or financial assistance related to such transport, of the products mentioned in Annex XXIX to the third countries mentioned therein, for the duration specified in that Annex. (Annex XXIX currently focuses on the transport to Japan of crude oil commingled with condensate, originating from the Russian Sakhalin-2 project, with that exemption set to expire on June 5, 2023.)
• The regulation also introduces a separate prohibition against providing services, as set out in Article 3n(1), relating to the transport of crude oil or petroleum products by a vessel that has transported crude oil or petroleum products whose purchase price exceeded the price cap amount.
• Finally, the regulation introduces a new exemption to the Article 3n(1) prohibitions for the provision of pilot services necessary for reasons of maritime safety.

The regulation also notes that “[i]n deciding whether to introduce the price cap, the Council will take into account the effectiveness of the measure in terms of its expected results, international adherence to and informal alignment with the price cap mechanism, and its potential impact on the Union and its Member States.”

Extension of restrictions to the oblasts of Kherson and Zaporizhzhia

Council Regulation (EU) 2022/1903 extends the territorial scope of the restrictions that had been introduced last February with regards to the "non-government controlled areas of the Donetsk and Luhansk oblasts of Ukraine" to now also cover the non-Ukrainian controlled areas of the oblasts of Zaporizhzhia and Kherson. Those prohibitions, which are set out in Council Regulation 2022/263, include various investment, export/import, and services-related prohibitions (including prohibitions associated with tourism services in the restricted territories).

Consistent with the approach taken by the EU in relation to Donetsk and Luhansk, the foregoing prohibitions apply only in relation to the portions of the Zaporizhzhia and Kherson oblasts that are controlled by Russia. (As of this writing, significant portions of both oblasts are controlled by the Government of Ukraine.)

New UK Sanctions Measures Announced

On September 30, 2022, the UK Government announced its intention to introduce further sanctions measures in response to the annexation by Russia of the Donetsk, Luhansk, Kherson and Zaporizhzhia regions of Ukraine. The announcement refers to “[n]ew services and goods export bans, targeted at vulnerable sectors of the Russian economy”. The announcement states, in particular, that the UK will prevent Russian access to IT consultancy services, architectural services, engineering services, advertising services, transactional legal advisory services and auditing services provided by UK operators, expanding upon the existing professional services restrictions (which currently apply to the provision of accounting, business and management consulting and public relations services). The proposed UK measures thus appear to carry a similar scope as the October 6 amendments to Article 5n of EU Regulation 833, described above, but as with regard to earlier iterations of the EU and UK professional services prohibitions it is possible that the UK will define its prohibitions in different terms and with a different range of exemptions.

The UK announcement also states that “the UK will suspend the process by which actions taken to manage the orderly failure of Russian banks are recognised [under UK law]” where the banks are sanctioned banks, in order to prevent such actions having legal effect in the UK. Finally, the announcement confirmed that the UK Government is working “with the G7 to finalise and implement the proposed price cap on Russian oil”.

We expect that the UK legislation will be published in the coming days and that the new measures will come into force shortly after publication.

Designation of the Governor of the Central Bank of Russia

Also on September 30, 2022, the UK designated for asset freezing sanctions the Governor of the Central Bank of Russia, Elvira Nabiullina. In an explanatory note included in its announcement of the same date, the UK Government stated clearly that it “does not consider that Elvira Nabiullina owns or controls the Central Bank of the Russia Federation for the purposes of reg. 7 of the Russia (Sanctions) (EU Exit) Regulations 2019”, meaning that the asset freeze does not extend to, or impact upon, the Central Bank.

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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, Brussels, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with the emerging Russia sanctions and export controls.

Our trade controls lawyers also work closely with Covington's Global Public Policy team which consists of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia. Many of the members of the Public Policy team have had substantial government experience in sanctions and export controls matters, and regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders.

Covington is therefore exceptionally well-positioned to assist clients in navigating their most complex challenges, drawing on our trade and public policy teams as well as our additional multidisciplinary teams in areas including international arbitration and disputes, cybersecurity, anti-money laundering, corporate restructuring, finance, and insurance.

As the Ukraine crisis evolves, we will continue to monitor developments, including those regarding U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments.