Further EU and UK Sanctions Developments Relating to Russia

Further EU and UK Sanctions Developments Relating to Russia

December 21, 2023, Covington Alert

On 18 December 2023, the Council of the European Union (the “Council”) adopted a new package of economic sanctions against Russia. As we had outlined in our previous alert, this12th package of sanctions includes a range of new measures such as the wind down of an existing exemption allowing the provision of restricted business services to subsidiaries of EU companies, new export and import sanctions, an import ban in relation to Russian diamonds and new asset-freezing designations.

The UK also has made a series of changes to its sanctions against Russia, including: new trade restrictions on Russian metals and the addition of various items to existing categories of goods subject to export restrictions and an import ban on Russian diamonds; expanded restrictions on the provision of correspondent banking services to designated Russian banks by UK credit and financial institutions; and a range of amendments to other aspects of the UK's existing sanctions targeting Russia and to general licenses and guidance relating to the UK's Oil Price Cap and restrictions on iron and steel products. The UK Government also recently announced the establishment of anew public authority with responsibility for the implementation and civil enforcement of UK trade sanctions, the Office of Trade Sanctions Implementation, which is intended to be operational by early 2024. The EU’s 12th Package of Sanctions Targeting Russia

The EU’s 12th Package of Sanctions Targeting Russia

Asset-freezing Designations

Council Implementing Regulation (EU) 2023/2875 designates additional individuals and entities to the EU asset-freezing list. The new designations primarily target the Russian military sector but also include entities – and owners and senior managers of companies – operating in other sectors of the Russian economy, including AlfaStrakhovanie Group, one of Russia’s largest insurance companies, Rosfinmonitoring, the Federal Service for Financial Monitoring, various IT sector companies, and four telecommunications companies: LLC Mirtelecom, LLC SC Lyukstrans, JSC Krymtelecom, and JSC Beto. 

Council Regulation (EU) 2023/2873 (the “Regulation”) extends the listing criteria for asset freezing sanctions under the EU-Russia sanctions to include individuals and entities responsible for the forced take-over of EU companies established in Russia, and those benefiting from it. The Regulation also establishes the possibility of maintaining deceased persons on the asset-freezing list if the EU considers that there is a likelihood that the assets concerned would otherwise be used to finance Russia’s war against Ukraine and sets out the relevant conditions for doing so (this was a particular consideration with regard to Yevgeny Prigozhin, who had been a leader of the Wagner mercenary group prior to his death in August 2023 and reportedly amassed significant wealth through Wagner). The Regulation also introduces new derogations and amends existing ones, including in relation to specific transactions involving certain designated entities and individuals.

Sectoral Sanctions

In addition to the asset-freezing sanctions, Council Regulation (EU) 2023/2878, which amends Council Regulation (EU) No 833/2014 (“Regulation 833”), introduces new sectoral sanctions in relation to Russia and expands existing ones. Those measures include the following, among other changes:

New and Expanded Professional Services Restrictions

The Regulation makes significant changes to the existing prohibitions in Article 5n of Regulation 833 against the provision of certain professional services to Russian entities. 

• 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 allied jurisdictions listed in Annex VIII, will be wound down over a six-month period concluding on 20 June 2024 (an earlier draft of the Regulation had envisioned the wind down period to end three months from the publication of the Regulation). After that date, EU companies providing any restricted professional services under Article 5n will need specific licensing from a competent EU Member State authority (the Regulation includes a new licensing provision to this effect).  Professional services captured by Article 5n include: business and management consulting, accounting, auditing, including statutory audit, bookkeeping or tax consulting services, legal advisory services and IT consultancy services.
• The Regulation introduces a new prohibition into Regulation 833 concerning 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”). This Annex captures a broad range of software products ordinarily used in the business context. These new prohibitions will — until 20 June 2024 — also be subject to the a wind down exemption, after which companies will need a license for the provision of relevant software to Russian entities.
• A new prohibition also has been added in relation to the professional services prohibitions in Article 5n of the Regulation concerning the provision of technical assistance, brokering services or other services with regards to the restricted professional services, as well as a prohibition on the provision of related financial assistance. These restrictions are not subject to any wind down period and are effective immediately.

Trade Sanctions

• Additional export/supply controls: The regulation adds additional items to Annex VII to Regulation 833 (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 to Regulation 833 (which lists “goods which could contribute to the enhancement of Russian industrial capacities”) including machinery and parts, construction-related goods, processed steel, copper and aluminum goods, lasers, and batteries.
• Transit restrictions: The existing transit restrictions prohibiting the transit via Russia of restricted items exported from the EU will be broadened by adding certain economically critical goods listed in the newly introduced Annex XXXVII to Regulation 833 (which lists a sub-set of items captured by the Article 3k, Annex XXIII export restrictions).
• Import, purchase and transfer restrictions: Existing restrictions concerning the purchase, import and transfer of restricted items listed in Annex XXI has been expanded to include new items such as: certain liquified petroleum gas (LPG), pig iron, copper wires, aluminum wires, foil, tubes and pipes. Certain exceptions and transitional periods are provided for these new restrictions.
• Steel import restrictions: The Regulation extends certain wind-down periods for the import of specific steel products with CN codes 7207 12 10 and 7224 90 and introduces a list of partner countries that apply restrictive measures on the import of Russian iron and steel products that are substantially equivalent to those maintained by the EU. Imports to the EU from these countries will be subject to less stringent attestation requirements with respect to the origin of the processed steel inputs. The list of countries currently includes Switzerland and Norway.
• Obligation for operators to contractually prohibit the re-export of specified items: From 20 March 2024, EU operators that export certain items subject to restrictions under Regulation 833 to any country (other than partner countries listed in Annex VIII to Regulation 833) will be required to seek contractual assurances from their counterparties that the restricted item will not be re-exported to Russia. Restrictions apply to items listed in Annex XI (“aviation or space industry items”), Annex XX (“jet fuel and fuel additives”), Annex XXXV (“firearms”) or Annex XL (which is a new Annex that lists different types of items that are critical to Russia’s military capabilities). These contractual assurances — the specific text of which is not defined in the Regulation — must include "adequate remedies" in the event of a breach of a contractual obligation, although the precise nature of those remedies are not prescribed in the Regulation. EU operators will also be required to inform their competent member state authority when they become aware of a breach of the contractual obligation.

Import Ban on Russian Diamonds

The Regulation introduces a new prohibition on the direct or indirect import, purchase or transfer of diamonds of Russian-origin or that were exported from Russia, as well as diamonds and diamond products processed in a third country using Russian diamonds and diamond products. Those prohibitions are accompanied by broad service restrictions.  These restrictions apply as of 1 January 2024 to certain diamonds and diamond products that originate in Russia or have been exported from Russia as listed in Annex XXXVIIIA to Regulation 833, and also captures listed diamond products of any origin, if they transited via the territory of Russia.

However, these restrictions also include a progressive phasing-in with respect to diamonds and diamond products processed in third countries, which come into effect on 1 March 2024 with respect to a narrower group of relevant items and expand in scope further from 1 September 2024:

• From 1 March 2024, it will be prohibited to import, purchase or transfer diamonds that are listed in Part A of Annex XXXVIIIA to the Regulation that have been processed in a third country if the processed diamond consists of diamonds that originated in Russia or have been exported from Russia with a weight equal to or above 1.0 carats per diamond.
• From 1 September 2024, those measures will be broadened to captured all products listed in Annex XXXVIIIA to the Regulation that have been processed in a third country if the processed diamond/diamond product consists of or incorporates diamonds originating in Russia or exported from Russia with a weight equal to or above 0.5 carats or 0.1 grams per diamond.

EU operators that import listed diamond items into the EU will be required to provide evidence at the time of the import into the EU of the country of origin of the diamonds or products incorporating diamonds used as inputs for the processing of the listed product, and from 1 September 2024 the traceability-based evidence shall include a corresponding certificate certifying that the diamonds are not mined, processed or produced in Russia.

The various diamond-related prohibitions are subject to several specific exemptions and licensing provisions, set out in Article 3p of the Regulation.

Oil Price Cap Restrictions

The Regulation introduces a new restriction on the sale of tankers suitable for the transport of restricted oil and petroleum products to persons in Russia or for use in Russia (subject to certain derogations). In addition, persons subject to EU sanctions jurisdiction that intend to sell restricted tankers to any country will be required to notify their competent member state authority about the sale. This notification obligation applies retroactively to sales made after 5 December 2022 (sales made between 5 December 2022 and 19 December 2023 will need to be reported to the member state authority before 20 February 2024; Sales after 19 December 2023 will need to be reported immediately).

The Regulation includes new attestation requirements in connection with the EU’s oil price cap sanctions. From 20 February 2024, service providers with no access to the purchase price per barrel laid down in Annex XXVIII of relevant products will be required to collect itemised price information for ancillary costs as provided by operators further up the supply chain of Russian crude oil or petroleum product trade, and such itemised price information must be provided to counterparties and competent authorities upon request, for purposes of verifying compliance with the EU oil price cap.

Financial Restrictions

• Loan restrictions: Existing restrictions in Article 5 to Regulation 833 with regards to loans extended to certain designated parties have been amended to introduce new notification requirements in connection with the extension of a loan that would be covered by an existing exemption. The Regulation also introduces a derogation enabling the granting of loans or credits to entities operating in the Russian energy sector which are subject to the transaction ban provided for in Article 5aa to Regulation 833, under the conditions provided for therein.
• Crypto-asset wallet services: The Regulation introduces restrictions on Russian nationals or natural persons residing in Russia owning or controlling, or holding any posts on the governing bodies of, the legal persons, entities or bodies providing crypto-asset wallet, account or custody services.
• Transfer of funds: The Regulation imposes certain notification requirements in connection with the transfer of funds exceeding 100 000 EUR out of the EU made by entities established in the EU whose proprietary rights are, directly or indirectly, 40% or more owned by entities established in Russia, by Russian nationals or by natural persons residing in Russia.

In addition the foregoing restrictions, the Regulation introduces various further amendments to Regulation 833, including by adding exemptions and derogations, by adding references that are missing in some articles but which were included in analogous articles, and by deleting references to transitional periods which have expired and other references that are not necessary for complying with the purpose of a particular provision. The EU has clarified that deletion of references to transition periods which have already expired is not intended to have any legal effects on past or ongoing contracts or on the applicability of those transition periods.

New Trade Restrictions

On 14 December 2023, The Russia (Sanctions) (EU Exit) (Amendment) (No. 4) Regulations 2023 (the “Amendment No. 4 Regulations”) amended the Russia (Sanctions) (EU Exit) Regulations 2019 (the “UK-Russia Regulations”) to introduce additional trade restrictions, aspects of which are broadly consistent with certain of the EU measures noted above. The Amendment No. 4 Regulations impose new restrictions on the import or acquisition of “metals” (as defined with reference to Schedule 3BA to the UK-Russia Regulations) which originate in Russia, and the supply or delivery from Russia to a third country of “metals” which originate in Russia.  Schedule 3BA lists various metals, including (among others): aluminium, cobalt, copper, lead, magnesium, nickel, tin, tungsten and zinc.

The Amendment No. 4 Regulations also added further items to the existing lists of items subject to trade restrictions on: critical industry goods and technology (as listed at Schedule 2A); luxury goods (as listed at Schedule 3A); iron and steel products (as listed at Schedule 3B); defence and security goods and technology (as listed Schedule 3C); and, G7 dependency and further goods (as listed at Schedule 3E). 

These new restrictions apply to a range of products, from components required for the manufacture of Printed Circuit Boards (PCBs) to additional categories of motor vehicles. The UK Government noted in a statement announcing these measures that its intention with respect to the further trade restrictions was to target “the latest items Ukraine has found on the battlefield” and that it intended that after the implementation of these trade restrictions “only low-risk, humanitarian, food, and health exports [to Russia] will remain unsanctioned”.

Import Restrictions on Russian Diamonds

Also on 14 December 2023, the UK introduced further trade restrictions on the import of Russian diamonds through The Russia (Sanctions) (EU Exit) (Amendment) (No. 5) Regulations 2023.The restrictions, which apply from 1 January 2024, impose new prohibitions with respect to “diamonds” (as defined with reference to Part 2 of Schedule 3GA) and “diamond jewellery” (as defined with reference to Part 3 of Schedule 3GA). The restrictions follow an agreement between G7 countries to introduce import restrictions on non-industrial Russian diamonds that was announced on 6 December 2023 and broadly align with the equivalent EU measures noted above. Under these restrictions it will be prohibited to:

• Import diamonds or diamond jewellery that originates in Russia, or is consigned from Russia, into the UK;
• Acquire directly or indirectly diamonds or diamond jewellery that originates in Russia, or is located in Russia;
• Directly or indirectly supply or deliver diamonds or diamond jewellery from Russia to a third country (where a “third country” means a country other than the UK, the Isle of Man or Russia); and/or
• Provide associated technical assistance, financial services or funds, or brokering services with respect to the foregoing restricted activities.

There are exceptions to these restrictions for diamonds and diamond jewellery located in the UK or the Isle of Man that has been lawfully imported into those jurisdictions.

Correspondent Banking Restrictions

The Amendment No. 4 Regulations also introduced amendments to the existing restrictions on correspondent banking relationships with designated Russian banks set out in Regulation 17A of the UK-Russia Regulations. 

The amended prohibition on “processing payments” to or from Russian banks designated for purposes of Regulation 17A has been expanded to apply to all payments and not just payments in GBP.  However, this restriction does not include in the definition of “processing” the act of crediting a payment to a UK credit or financial institution where the payment is made into an account in the name of the UK credit or financial institution and is not held on behalf of, or for the benefit of, one of its customers. 

Previously only Sberbank had been designated for purposes of the correspondent banking restrictions set forth in Regulation 17A but on 15 December 2023 26 further Russian banks, which were previously subject to UK asset freezing sanctions and trust services restrictions, were also designated for purposes of the amended correspondent banking restrictions. These banks were: Alfa Bank, Bank Otkritie Financial Corporation, Bank Rossiya, Bank St Petersburg, Bank Uralsib, Bank Zenit, Black Sea Bank For Development And Reconstruction, Credit Bank Of Moscow, Gazprombank, Genbank, IS Bank, LLC Commercial Bank – International Settlements Bank, Metallinvestbank, Moscow Industrial Bank, MTS Bank, Promsvyazbank, RF Bank, Rosbank, Russian Agricultural Bank, Russian Regional Development Bank, SMP Bank, Sovcombank, Tinkoff Bank, Ural Bank For Reconstruction And Development, VTB Bank (together the “Newly Designated Banks”).

A Wind Down General License has been issued in relation to these new correspondent banking designations that permits UK credit or financial institutions to process: (i) payments from or via one of the Newly Designated Banks, and (ii) non-sterling payments from or via Sberbank. The Wind Down License extends to any UK or non-UK financial institution owned or controlled by the Newly Designated Banks and is effective from midnight on 15 December 2023 and expires at 23:59 on 22 December 2023.

Further Amendments to Existing Restrictions

The Amendment No. 4 Regulations also make a number of further amendments to the UK-Russia Regulations. These amendments introduce:

• New restrictions on the provision of technical assistance, financial services and funds, and brokering services in relation to the export of restricted luxury goods (as listed at Schedule 3A).
• New reporting requirements, including:
  • Additional reporting requirements requiring any “relevant firm” for purposes of the UK-Russia Regulations to inform HM Treasury:

  i. where it knows, or has reasonable cause to suspect, that it holds funds or economic resources for a “prohibited person” to whom financial services must not be provided in relation to the restrictions imposed with respect to foreign exchange reserve and asset management (as set forth in Regulation 18A(1) to the UK-Russia Regulations); and

  ii. of the nature and amount or quantity of funds or economic resources held by that firm for a prohibited person, by no later than 31 October of each calendar year.

• New reporting requirements on designated persons that require:

i. designated persons who are UK persons to inform HM Treasury of the nature and value of any funds or economic resources that person owns, holds or controls in any jurisdiction and the location of such funds or economic resources;

ii. designated persons who are not UK persons to inform HM Treasury of the nature and value of any funds or economic resources that person owns, holds or controls in the UK and the location of such funds or economic resources.

These reports must be filed either within 10 weeks of this requirement coming into force on 26 December 2023 or 10 weeks after the person became a designated person if they were not a designated person when the relevant regulation (new Regulation 70A) came into force. Designated persons must also inform HM Treasury of any changes to the foregoing information.

• Three new purposes for which HM Treasury may issue a license, including (subject to conditions):
  • For purposes of enabling a UK entity to divest itself of funds or economic resources located in Russia.
  • For purposes of enabling anything to be done to a UK entity to enable another person to divest itself of funds or economic resources located in Russia.
  • For purposes of enabling anything to be done in connection with a license which the Treasury has decided to issue for another purpose set forth in the licensing grounds in Schedule 5 to the UK-Russia Regulations.
• New exceptions to certain trade restrictions under the UK-Russia Regulations, including:
  • An amendment to the scope of the exception to trade sanctions for personal effects set forth in Regulation 60A to expand the exception to cover additional categories of jewellery.
  • An amendment to the scope of the exception relating to goods consigned from Russia set forth in Regulation 60G to clarify that certain prohibitions do not apply with respect to certain products consigned from Russia before 15 December 2023 that are imported into the UK before 14 January 2024.
  • Further minor amendments to other exceptions to align the wording with other aspects of the UK-Russia Regulations as amended.

Additional Sanctions Designations

In recent weeks, the UK has designated a number of further individuals and entities for purposes of asset freezing and other sanctions, including:

• Russian bank Joint-Stock Commercial Bank Novikombank, which was designated for asset freezing, correspondent banking and trust services sanctions on 15 December 2023.
• Two Russian individuals, Andrey Korinets and Ruslan Peretyatko, designated for asset freezing sanctions under the UK’s Cyber (Sanctions) (EU Exit) Regulations 2020 on the basis of being members of a cyber-hacking group alleged to be controlled by Russian intelligence services. These individuals are separately subjects of a recently unsealed U.S. Department of Justice indictment relating to charges of a criminal hacking conspiracy targeting U.S. entities and individuals.
• The designation for asset freezing sanctions (as well as trust services sanctions for those designated under the UK-Russia Regulations) of 46 individuals and entities based in Russia, Belarus, Serbia, Turkey, the UAE and Uzbekistan alleged to be involved in the supply to the Russian military of restricted goods and technology.

On 11 December 2023, the UK Government announced that it would establish a new public authority responsible for the implementation and civil enforcement of the UK’s trade sanctions: the Office of Trade Sanctions Implementation (OTSI).  The Government has stated that OTSI “will launch in early 2024” by which point the precise nature of OTSI’s enforcement powers will have been established through legislation that is yet to be published. We anticipate that OTSI will have similar powers to those that OFSI has with respect to the civil enforcement of the UK’s economic sanctions and it is possible that civil enforcement of breaches of UK trade sanctions will be amended to a strict liability basis to align with the current position with respect to UK economic sanctions.  Responsibility for criminal enforcement of breaches of UK trade sanctions will remain with HMRC.

According to the announcement of OTSI’s establishment by UK Industry and Economic Security Minister, Nusrat Ghani, OTSI will focus in particular on identifying activity by companies that may be seeking to avoid UK trade sanctions by exporting products through other non-sanctioned jurisdictions where the purpose is for the goods to be diverted to sanctioned jurisdictions. As noted in our previous alert, this concept of “diversion risk” is currently a particular focus for sanctions authorities, including in the EU and U.S., and was the subject of a “Red Alert” issued by UK authorities earlier this month that was aimed primarily at the UK’s financial sector. 

Amendments to the UK Oil Price Cap Guidance and General License

On 20 December 2023, OFSI published updated guidance regarding the UK’s implementation of the oil price cap.The new guidance includes the following amendments:

• New guidance on the forthcoming changes to the attestation requirements in relation to the UK oil price cap that enter into force from 19 February 2024, which:
  • Amend the tier system for attestation;
  • Require attestation forms to be provided on a per voyage basis (where a ship-to-ship transfer would constitute two separate voyages requiring separate attestations); and
  • Require itemised ancillary costs to be recorded by Tier 1 entities and provided to Tier 2 and Tier 3A contractual counterparties upon request (in a manner consistent with the equivalent amendment implemented by the EU that is noted above).
• Clarification that UK nationals in third countries fall under the same tiering classification as that set out in the Oil Price Cap General License INT/2022/2469656 on the basis of their access to price information, and confirmation that companies can fulfil reporting requirements on behalf of any UK national employees who are involved persons as per the reporting requirements.
• Clarification that the effective date(s) of the contract(s) or agreement(s) to which the reportable activity relates or the dates between which the reportable activity took place should be included in the records kept by involved persons.

The UK Oil Price Cap General License INT/2022/2469656 has been amended to clarify and adjust the record-keeping and reporting requirements consistent with the clarifications in the new guidance.  Two UK Oil Price Cap-related General Licenses (Refined Products Oil Price Cap Wind-down INT/2023/2660772 and General License - Oil Price Cap Wind-down INT/2022/2470256) have been revoked.

New General License: Iron and Steel Products

On 11 December 2023, a new General Trade License was published by the UK Department of Business and Trade with respect to the trade restrictions concerning iron and steel products set forth at Chapter 4C of the UK-Russia Regulations. The new General License permits the import into the UK of goods that would otherwise have been subject to the UK import ban on iron and steel goods connected to Russia (and the provision of related services), and applies with respect to the following categories of goods:

• Reusable packaging goods that fall within commodity code 7326904000 (pallets and similar platforms for handling goods) imported into the UK for the purpose of facilitating the international trade of other goods, whether or not filled with other goods when imported which are not consigned from Russia;
• Relevant processed iron and steel products (i.e., iron and steel goods within scope of the restrictions that were processed in a third country that incorporate iron or steel products originating in Russia) that were manufactured or produced prior to 21 April 2023 and have not been located in Russia at any time since that date; and
• Relevant processed iron and steel products that were: (i) previously in free circulation in the UK, (ii) fall within the same product code as when exported from the UK, and (iii) have not been located in Russia at any time since 21 April 2023.

The associated UK guidance on trade restrictions relating to iron and steel products has been updated to reflect this new General License, which is of indefinite duration.

On 14 December 2023, OFSI published its Annual Review for the financial year 2022-23. The Annual Review summarises developments in UK sanctions over the financial year and provides statistics on enforcement of UK financial sanctions. In general, the Annual Review highlights the increase in the scale of OFSI’s activities resulting from the development of UK sanctions resulting from Russia’s invasion of Ukraine in early 2022.

The statistics on enforcement note that: in April 2023 OFSI’s enforcement unit had live investigations ongoing with respect to 172 live cases, OFSI recorded 473 suspected breaches of UK financial sanctions in the relevant financial year and issued 7 warning letters and 2 monetary penalties in the same period.  OFSI closed 51 cases with no further action (of which 44 related to reports of breaches of UK sanctions targeting Russia).The Annual Review also records a significant increase in licensing activity with respect to UK financial sanctions, with 28 new general licenses issued (up from 16 in the previous financial year) and licensing decisions taken in relation to 503 cases (up from 170 in the previous financial year).

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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.

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 regarding U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments.

Our team would be happy to address any questions you may have.