Following a proposal by the European Commission and an agreement in the Committee of the Permanent Representatives of the Governments of the Member States to the EU on 21 June 2023, the Council of the European Union adopted the eleventh sanctions package against Russia on 23 June 2023. The relevant regulations were published in the Official Journal of the European Union on the same day and entered into force on 24 June 2023. The eleventh sanctions package is primarily intended to prevent circumvention of already existing sanctions. We present the latest sanctions package’s main elements.

Effective Circumvention Prevention

Certain third countries pose a persistent, high risk of circumvention, i.e., listed goods, technologies and services, after flowing from the EU to these third-countries, are subsequently forwarded to Russia. These high risk jurisdictions include, above all, Iran, China, some Central Asian states and Turkey. In principle, this practice was already prohibited before the eleventh sanctions package came into force, e.g. as indirect exports or as a violation of the explicit prohibition of circumvention. However, foreign trade statistics show that these prohibitions have, in some cases, clearly failed to achieve their intended effect: Occasionally, extreme increases in import figures of listed goods to third countries occured, which correlated with an increase in export figures from those same third countries to Russia. In order to ensure the effectiveness of its sanctions, the EU had to deal with the politically difficult question of how to prevent circumvention of its sanctions without resorting to extraterritorial sanctions, i.e. subjecting economic operators in third countries to EU law. The latest sanctions package essentially imposes (even) more stringent due diligence obligations on EU exporters when examining their transactions with third countries and introduces a new instrument under which  the export of battlefield products and technologies from the EU to entire third countries can be restricted if circumvention of sanctions via the respective third country cannot be stopped successfully.

Lists of Sanctioned Goods with a Particularly High Risk of Circumvention

The European Commission has published - rather informally via its website - two lists of goods and technologies that are at a high risk of circumvention. These lists are aligned with partner countries, in particular the USA, Japan and the UK, and may be extended. They do not entail novel prohibitions or extensions of existing annexes to include additional goods and technologies, but contain goods that are already sanctioned and considered particularly "circumvention-relevant". These goods and technologies are subject to the European Commission’s and national customs and enforcement authorities’ particular focus. Therefore, a particularly high standard of diligence should be applied when exporting to third countries; potential "red flags" should be assessed with the utmost thoroughness and the assessment documented. EU exporters are not given any further specific instructions on how to handle these goods.

One of the lists published is the "List of High Priority Battlefield Items". It contains 38 dual-use and advanced-technology items that are subject to sanctions with regard to Russia but were found in Russian military systems in Ukraine. The list includes the following items, among others:

• electronic integrated circuits;
• electronic items related to wireless communications, satellite-based radio-navigation and passive electronic components;
• discrete electronic components, electrical plugs and connectors, navigation equipment, digital cameras and related optical components; and
• manufacturing equipment for production and quality testing of electric components and circuits.

In addition, the European Commission has published an "Economically Critical Goods List". These are also sanctioned goods, but a substantial number of them have entered Russia via third countries. This list is already quite extensive and can also be extended further. Covered are goods of the following product groups:

• chemicals (Chapter 28 of the Customs Tariff),
• machinery (Chapter 84),
• electronics (Chapter 85),
• maritime (Chapter 89),
• optics and instruments (Chapter 90).

A New Anti-Circumvention Tool

The eleventh sanctions package introduced the option to extend certain prohibitions on the export of goods and technologies under Regulation (EU) No. 833/2014 to third countries whose jurisdictions are considered to be at continued and particularly high risk of circumvention. The first step is to try to eliminate the risk of circumvention by listing additional third-country operators and cooperating closely with the third country concerned. If this does not lead to the desired success, the extension of certain sanctions to the third country in question may be considered as a last resort. This would require extensive reviews by the European Commission and the High Representative of the Union for Foreign Affairs and Security Policy, as well as a technical analysis by the Commission, which would include both relevant trade data and the EU's efforts to address the matter with the third country in question. In addition, affected third countries are consulted. Following this procedure, the Council may decide unanimously on the listing of the third country and the goods or technologies concerned. Thus, the final decision - via the Council - lies with the EU member states. Due to the high procedural and substantive requirements, in practice, the anti-circumvention tool appears to be primarily an instrument of deterrence.

Extension of the Transit Ban

Another anti-circumvention measure is the extension of the transit ban. Previously, only the transit of dual-use goods and firearms through Russian territory was prohibited. This transit ban now also applies with respect to

• goods and technology which might contribute to Russia’s military and technological enhancement or to the development of its defense and security sector;
• goods and technologies suitable for use in aviation or the space industry; and
• jet fuel and fuel additives.

The transit ban will primarily, but not only, affect freight forwarders transporting goods through Russian territory.

Restriction of Access to EU Ports

Ships involved in ship-to-ship transfers are to be denied access to ports and locks in the territory of the EU if the competent authority has reasonable cause to suspect that a vessel is in breach of the ban on importing seaborne Russian crude oil and petroleum products into the Union or is transporting Russian crude oil or petroleum products purchased above the price cap agreed by the G7. Also affected by the ban on access to ports and locks on the territory of the EU are vessels which competent authorities have reasonable cause to suspect of illegally interfering with, switching off or otherwise disabling their  shipborne automatic identification systems when transporting Russian crude oil and petroleum products.

Restrictions on Intellectual Property

Certain acts relating to the intellectual property in goods that are subject to a ban on sale and export are also sanctioned now. In connection with such goods it is prohibited to

• sell intellectual property rights or trade secrets;
• grant licenses or transfer in any other way  intellectual property rights or trade secrets; and
• grant rights to access or re-use any material or information protected by means of intellectual property rights or constituting trade secrets.

This prohibition also serves the purpose of preventing circumvention: If rights to listed goods cannot be sold or licenses granted, this reduces the risk that the goods will be copied or used in Russia.

Extension of Corresponding Prohibitions on Services, Financing and Licensing to Luxury Goods

Before the introduction of the eleventh sanctions package, only a direct and indirect ban on the sale, supply, transfer and export of luxury goods was in force under Article 3h (1) of Regulation (EU) No. 833/2014. Unlike other prohibition norms, these "main prohibitions" were not accompanied by ancillary prohibitions, such as those relating to the provision of technical assistance, brokering or the provision of financial resources in connection with listed goods. This gap has been closed now: It is now prohibited for natural or legal persons, entities, or bodies in Russia or for use in Russia to

• provide, directly or indirectly, technical assistance, brokering services or other services related to the goods referred to in paragraph 1 and to the provision, manufacture, maintenance and use of those goods (Art. 3h (2) (a));
• provide, directly or indirectly, financing or financial assistance related to goods referred to in paragraph 1 for any sale, supply, transfer or export of such goods, or for related technical assistance, brokering services or other services (Art. 3h (2) (b)); and
• directly or indirectly sell, license or transfer in any other way intellectual property rights or trade secrets as well as grant rights to access or re-use any material or information protected by means of intellectual property rights or constituting trade secrets related to the goods referred to in paragraph 1 and to the provision, manufacture, maintenance and use of those goods (Art. 3h (2) (c)).

The practical significance of this extension of the ban should not be underestimated, especially since a large number of different goods are listed in Annex XVIII, including clocks and watches, electronic items for domestic use, vehicles, leather goods, perfumes, musical instruments, and articles and equipment for sports. It should be noted that the bans only apply if the luxury good in question exceeds a value of EUR 300 per item, unless regulated otherwise in Annex XVIII. A higher threshold applies to, for example, electronic items for domestic use (value of more than EUR 750), or luxury vehicles (value of more than EUR 50,000/piece).

Extension of the Lists of Goods

The eleventh sanctions package also introduces further goods-related restrictions, primarily by expanding Annex XXIII of Regulation (EU) No. 833/2014 to include additional industrial goods. Accordingly, a sales and export ban pursuant to Article 3k of Regulation (EU) No. 833/2014 applies, for example, to electric and hybrid vehicles, various products made of rubber (pneumatic tires), water tube boilers with steam production and casting machines, and various measuring and testing devices. Here, it should be examined in detail whether a contract already concluded before 24 June 2023 may still be executed on the basis of a "grandfathering clause" until 25 September 2023.

Furthermore, some positions have been added to Annex VII Part A and Part B and thus the prohibitions of Art. 2a Regulation (EU) No. 833/2014 were extended to cover further goods. The following positions, amongst others, have been added:

• Part A: X.B.I.003; X.B.I.004; X.C.I.002, X.D.I.002, X.E.I.002. These items are all related to printed circuit boards (PCB).
• Part B:
  • Eleven other items under "Electronic integrated circuits, manufacturing and testing equipment",
  • Introduction of No. 6 "Energetic materials and precursors": Pulps of fibres derived from recovered (waste and scrap) paper or paperboard or of other fibrous cellulosic material: Cotton linters pulp (CN code 4706 10),
  • Introduction of No. 7 "Electronic devices, modules and assemblies", which includes a total number of eight goods with customs tariff numbers of chapters 84, 85 and 90.

In addition, the list of firearms has been expanded (new Annex XXXV).

Duty of Proof Regarding Iron and Steel Products

For imports, it is clarified again that special proof requirements apply to the import of iron and steel products processed in a third country using iron and steel products originating in Russia.

Personal Restrictions

71 individuals and 33 companies are added to Annex I of Regulation (EU) No. 269/2014. This means in particular that no funds or economic resources may be made available to them, either directly or indirectly. The new listings include two banks and companies in the Russian defense industry such as manufacturers of drones, missile defense systems, military vehicles and high-tech components for weapons.

A further 87 companies - including ten from third countries - were added to Annex IV of Regulation (EU) No. 833/2014. This means that more stringent export control requirements apply in connection to them for dual-use goods and advanced technologies. This includes not only Russian and Iranian organizations, but also companies registered in China, Uzbekistan, the United Arab Emirates, Syria and Armenia. These companies are suspected of forwarding sanctioned goods from the EU to Russia.

Recommendations

The strong political, public and legal focus on sanctions circumvention via high-risk third countries is not without consequences for day-to-day business practice. Anyone exporting listed goods to critical third countries or importing from these countries should apply a particularly high standard of diligence when checking their business partner and drafting contracts. Existing compliance systems should be revised if necessary. In particular, it is recommended that business partners are screened thoroughly, any "red flags" are thoroughly assessed, assessments are documented and, if necessary, clauses are included in contracts which exclude the transfer of sanctioned goods to Russia, contain obligations to provide information about the whereabouts of goods, and provide for contractual penalties in case of non-compliance.

In addition, it is the exporter's responsibility to continuously inform himself about applicable prohibitions and restrictions, which is also required to avoid negligent violations of EU sanctions. In this context, it should be emphasized that fines in Germany for any sanctions violation can be imposed as soon as the respective prohibition enters into force.  In principle, there is no grace period during which authorities would refrain from prosecution. In the case of goods-related restrictions - such as export bans - that have been newly introduced, grandfathering clauses, according to which contract execution may be permissible by way of exception until 25 September 2023, should be examined in every individual case.