The European Union (EU) continues to adopt further packages of economic sanctions against Russia due to the continuance of its military aggression against Ukraine, the latest of which are summarised below.

The relevant legal framework is EU Regulation 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine (“Regulation 269”) and EU Regulation 833/2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine (“Regulation 833”) (hereinafter collectively referred to as the “EU Sanctions”).

Note: The position is constantly evolving. Additional sanctions may be introduced in the coming days and these will be the subject of future articles.

This information is:

11th SANCTIONS PACKAGE

On 23rd June 2023, the 11th sanctions’ package was adopted by the EU against Russia and Belarus principally through Council Regulation (EU) 2023/1215 of 23rd June 2023 amending Regulation (EU) No 269/2014 and Council Regulation (EU) 2023/1214 of 23rd  June 2023 amending Regulation (EU) No 833/2014.

The 11th package contains, among others, the following measures:

12th SANCTIONS PACKAGE

On December 18, 2023, the European Union ("EU") adopted its 12th sanctions package against Russia amending EU Regulation 269/2014 concerning restrictive measures in respect of actions undermining or threatening the territorial integrity, sovereignty and independence of Ukraine and Regulation 833/2014 concerning restrictive measures in view of Russia's actions destabilising the situation in Ukraine

The 12th package broadly:

When did it come into effect?

New asset freeze designations entered into force immediately upon publication on December 18, 2023, while the remaining measures entered into force at midnight on December 19, 2023. However, various exemptions, derogations and transition periods are outlined under the adopted texts.

Various amendments were made to Council Regulation (EU) No 269/2014 ("Regulation 269/2014") applicable to asset freeze measures which we describe briefly below:

A. Additional Listings

140 persons (61 individuals and 86 entities) in the military, defense, private military, IT, media, aviation, industrial and economic sectors were added to the list of individuals and entities subject to EU asset freeze measures. Notably, the 12th Package targets (i) several telecommunications companies, such as LLC MirTelecom, LLC Miranda Media, LLC Shipping Company Lyukstrans, JSC Krymtelecom; (ii) AlfaStrakhovanie Group (Alfa Insurance), one of the biggest insurance groups in Russia; and (iii) Rosfinmonitoring.

B. Stricter Asset Freeze Obligations: New listing criteria have been established to freeze assets of persons benefiting from the forced transfer of ownership or control over Russian subsidiaries of EU companies. This measure aims to prevent individuals from profiting when EU companies face forced acquisitions by Russian owners or management. The following individuals and entities can now be made subject to asset freeze measures:

- Russian entities previously owned/controlled by EU entities, where their ownership or control has been compulsorily transferred by the Russian government;

- Individuals and entities that benefitted from such transfer;

- Individuals appointed to the governing bodies of these entities without the consent of the EU entity that previously owned or controlled it.

C. New and Extended Grounds for Authorization to Deviate from Asset Freeze Measures

New derogations: The EU introduced five new derogations from asset freeze measures including (i) Deprivation by Member States of sanctioned parties' funds/economic resources in the public interest: authorizations can be obtained for judicial or administrative decisions by an EU Member State, under conditions provided by law, to deprive in the public interest a sanctioned person of funds or economic resources belonging to, owned or controlled by such person, provided the compensation paid for such deprivation is frozen and (ii) Derogation linked to forced transfer of ownership: authorizations can be obtained for funds/economic resources necessary (i) for the sale or use of shares in, or assets of, Russian entities designated under the new forced ownership transfer criterion, (ii) in order to enable the payment of the consideration agreed by the parties or for the compensation decided in the context of the compulsory transfer of ownership or control.

II. RESTRICTIONS ON SERVICES

The 12th Package introduces new and reinforces existing import-related and export-related control measures imposed under Council Regulation (EU) No 833/2014 ("Regulation 833/2014"), while also extending or phasing-out existing exemptions and derogations.

The most important ones are the (a) new measures on software for the management of enterprises and software for industrial design and manufacture (Annex XXXIX of Regulation 833/2014) and (b) the additional prohibitions on related services under Article 5 (n).

Scope of prohibitions – New prohibitions were introduced in relation to the:

(a) Sale, supply, transfer, export or provision of enterprises management and design-related software to the Government of Russia or entities in Russia;

(b) The provision of related services (technical assistance, brokering services, other services, financing or financial assistance) to the Government of Russia or entities in Russia.

(a) Software covered – The following software are covered:

- Software for the management of enterprises: 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, product lifecycle management (PLM) software and typical components of these suites, including software for accounting, fleet management, logistics and human resources;

- Design and manufacturing software: building information modelling (BIM), computer aided design (CAD), computer-aided manufacturing (CAM), engineer to order (ETO) and typical components of these suites.

Exemption and derogation – The following exemptions are foreseen:

- Wind-down by March 20, 2024, of contracts concluded before December 19, 2023, and ancillary contracts;

- Until June 20, 2024, services that are for the exclusive use of Russian entities that are owned or controlled by entities in the EU, EEA, Switzerland or a partner country.

It is therefore crucial to note that that the sale, supply, transfer, export or provision, directly or indirectly, of software for the management of enterprises and software for industrial design and manufacture (e.g. ERP-systems, CRM-systems, BI-systems, etc.), has been added to the list of prohibited services, which already encompasses e.g. business management and consulting services, auditing, PR-services, legal services and IT-consultancy.  This is highly relevant for EU parent companies providing any of these services to their Russian subsidiaries.

(b) Extension of restrictions to related services – The EU completed services restrictions by additional prohibitions on related services. In addition to (i) accounting, auditing, including statutory audit, bookkeeping or tax consulting services, or business and management consulting or public relations services, (ii) architectural and engineering services, legal advisory services and IT consultancy services, (iii) market research and public opinion polling services, technical testing and analysis services and advertising services, it is now prohibited to provide the following related services:

- Technical assistance, brokering services or other services;

- Financing or financial assistance.

Although there is no definition for financing or financial assistance, the new prohibitions make it clear that not of the existing 5n services can be carried out directly or indirectly.

Phased-in replacement of exemption for Russian subsidiaries by a derogation – The exemption for Russian entities that are owned or controlled by entities in the EU, EEA, Switzerland or a partner country will stop applying as from June 20, 2024. 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.

III. TRANSFER OF FUNDS OUT OF THE EU BY RUSSIAN-OWNED ENTITIES

The notification of transfers of funds exceeding EUR 100 000 out of the EU by EU entities directly or indirectly owned by more than 40% by Russians or entities established in Russia has now been introduced with the addition of article 5r in the Council Regulation (EU) 833/2014 which is as follows:

- As of May 1, 2024, EU entities that are Russian-owned will have to report every quarter on any transfer of funds out of the EU exceeding EUR 100 000, in one or several operations;

- As of July 1, 2024, EU credit and financial institutions will have to report every semester on transfers of funds out of the EU that they initiated for the aforementioned EU entities where their cumulative amount exceeds EUR 100 000 during that semester.

Further guidance via the Frequently Asked Questions of the EU Commission was issued on the 12th of April 2024 in relation to the exact form of the notification/report that should be submitted to the competent authorities of the EU Member States. This reporting must be done through an excel template form indicating in detail the type of transactions and the required information to be completed and reported by the EU Entities and Credit/Financial Institutions. The information will be used by Member States to assess breaches of EU sanctions and circumvention risks.

The template for Cyprus issued by the Ministry of Finance on 9th of May 2024 can be found here: guidancedocumentarticle5r-09-05-24.docx (live.com)

IV. OTHER AMENDMENTS TO EXISTING EXEMPTIONS OR DEROGATIONS

A. Restrictions on (re-)financing

The EU implemented new notification requirements for the use of exemptions relating to loans/credits for entities subject to (re-)financing restrictions under Articles 5 and 5a of Regulation 833/2014. The use of exemptions for (i) non-prohibited trade financing loans/credits, (ii) emergency funding loans/credits and (iii) drawdown or disbursements on pre-sanctions contracts must now be notified to national competent authorities.

B. Facilitating the Exit of Entities Subject to a Transaction Ban (Annex XIX of Regulation 833/2014)

The EU extended exemption for wind-down of joint ventures ("JVs") with entities subject to a transaction ban. As a result, transactions strictly necessary for the wind-down of a JV concluded before March 16, 2022, involving an Annex XIX target can take place by December 31, 2024 (instead of December 31, 2023).

Further, the derogation for divestment and withdrawal from EU entities of entities subject to a transaction ban (Annex XIX of Regulation 833/2014) have been extended. Transactions relating to the divestment and withdrawal by Annex XIX target from an EU entity can now be authorized until December 31, 2024 (instead of December 31, 2023).

C. Facilitating the Divestment or Wind-Down from Russia

The availability of derogations relating to export-related, import-related and services restrictions, permitting to obtain authorizations to carry out otherwise prohibited transactions in the context of a divestment or wind-down from Russia, has been extended until June 30, 2024, for trade control restrictions and July 31, 2024, for services restrictions (instead of, respectively, December 31, 2023, and March 31, 2024).

The EU also extended the derogation to divest from an EU JV involving Russian entities and operating a gas pipeline infrastructure between Russia and third countries. This specific derogation, which concerns restrictions on items listed in Annex II of Regulation 833/2014, has been extended until September 30, 2024 (instead of March 31, 2024).

13th SANCTIONS PACKAGE

On February 23, 2024, the European Union ("EU") adopted its 13th sanctions package (the “New package”) against Russia amending Regulation 269 and Regulation 833 as follows. The measures aim at “further limiting Russia's access to military technologies” and to “drain the Russian war machine of its revenue sources and key goods and technology”.

The New package:

When does it come into effect?

New measures entered into force at midnight on 23rd February 2023. However, various exemptions are outlined under the adopted texts.

I.ASSET FREEZE MEASURES

Various additions were made to Council Regulation (EU) No 269/2014 ("Regulation 269/2014") applicable to asset freeze measures which we describe briefly below:

A. Additional Listings

106 individuals and 88 entities in the military, aviation, industrial and economic sectors were added to the list of individuals and entities subject to EU asset freeze measures. Notably, the New Package targeted (i) several telecommunications companies, such as LLC MirTelecom, LLC Miranda Media, LLC Shipping Company Lyukstrans, JSC Krymtelecom; (ii) AlfaStrakhovanie.

In total, as of today, 2144 individuals and entities have been placed on the EU restricted parties list under the Russian program in respect of actions undermining or threatening the territorial integrity, sovereignty, and independence of Ukraine.

II. RESTRICTIONS ON SERVICES

The New package introduces new and reinforces existing import-related and export-related control measures imposed under Council Regulation (EU) No 833/2014 ("Regulation 833/2014"), while also extending or phasing-out existing exemptions and derogations.

Dual-use (Annex I of Regulation 2021/821) and advanced technology items (Annex VII of Regulation 833/2014)

Extension of the list of entities subject to enhanced restrictions in relation to dual-use and advanced technology items to cover an additional 17 new Russian companies and 10 non-Russian entities (Annex IV of Regulation 833/2014).  Among the non-Russian entities, all trading in the area of electronic components, four companies are registered in the People’s Republic of China (RG Solutions Limited, Guangzhou Ausay Technology Co Limited, Shenzhen Biguang Trading Co. Ltd and Yilufa Electronics Ltd.) and one each registered in Kazakhstan (TOO Elem Group), India (Si2 Microsystems Pvt Ltd), Serbia (Conex Doo Beograd-Stari Grad), Thailand (Thai IT Hardware Co. Ltd), Sri Lanka (Euro Asia Cargo (Private) Ltd.), and Turkey (Yildiz Çip Teknoloji Elektronik Elektrik Bilgisayar Malzemeleri Ticaret Sanayi Limited Sirketi).

Scope of prohibitions – The list of advanced technology items in Annex VII of Regulation 833/2014 was extended to include “Aluminum electrolytic fixed electrical capacitors” (excluding power capacitors) which have military applications (CN Code 8532 22).

Goods which could contribute in particular to the enhancement of Russian industrial capacities (Annex XXIII of Regulation 833/2014)

Extension of the list of goods which could contribute in particular to the enhancement of Russian industrial capacities listed in Annex XXIII of Regulation 833/2014 to cover every item with the tariff position 8504, meaning all “Electrical transformers, static converters (for example, rectifiers) and inductors” instead of only the goods within CN Codes 850432, 850433 and 850434. This amendment is one of the measures to enhance air defence in Ukraine, as these items can be used as drone components.

New exemption - The EU introduced an exemption to article 3k of Council Regulation 833/2014, for the performance until 25 May 2024 of contracts concluded before 24 February 2024, or of ancillary contracts necessary for the performance of such contracts, as to export of the “Electrical transformers, static converters (for example, rectifiers) and inductors” falling under CN codes 850410, 850421, 850422, 850423, 850431, 850440, 850450 or 850490.

 Import-related restrictions

Iron and steel (Annex XXXVI of Regulation 833/2014)

Strengthening of international cooperation -The New package adds the United Kingdom to the list of partner countries excluded from the iron and steel imports restriction, in addition to Switzerland and Norway, by amending the Annex XXXVI of Regulation 833/2014.

III. OTHER POINTS TO NOTE

Decisions adopted by the Council

(i) The Council on 12th February 2024 adopted a decision and a regulation clarifying the obligations of Central Securities Depositories (CSD) holding assets and reserves of the Central Bank of Russia (CBR) that are immobilised as consequence of EU’s restrictive measures, which:

(ii) Following on from this, the Council on the 21st of May 2024, adopted a set of legal acts ensuring that the net profits stemming from unexpected and extraordinary revenues accruing to central securities depositories (CSDs) in the EU, as a result of the implementation of the EU restrictive measures, will be used for further military support to Ukraine, as well as its defence industry capacities and reconstruction.

The amounts will be paid by the CSDs to the EU on a bi-annual basis, and will be used for further military support to Ukraine through the European Peace Facility, as well as with support to Ukraine’s defence industry capacities and reconstruction needs with EU programmes, according to the following key:

This allocation will be reviewed yearly, and for the first time before 1 January 2025.

CSDs will be allowed to provisionally retain a share of around 10% of the financial contribution to comply with statutory capital and risk management requirements in view of the impact due to the war in Ukraine, with regard to the assets held by CSDs.

(iii) The Commission also usefully released on the 19th of February 2024 an updated version of the Guidance for EU operators on the implementation of enhanced due diligence to shield against Russia sanctions circumvention.

Next Steps

MPC Legal monitors developments within the EU closely and expects that additional rounds of sanctions may be imposed as events unfold. Our dedicated sanctions team is available to advise clients on the legal and practical impacts of these measures.

Authors : Marilou Pavlou Christodoulides | Partner and Stella Kagia | Senior Associate