Posted: 10/07/2024
On 24 June 2024, members of the European Union agreed to issue a 14th package of sanctions against Russia. This is in tandem with recent updates from the UK and US earlier in the month.
The 14th package amends Council Regulation (EU) number 269/2014 by introducing new restrictive measures on an additional 69 individuals and 47 entities.
Amendments to Council Regulation (EU) no 833/2014 also introduce new measures, some of which include clamping down on anti-circumvention measures, as well as further restrictions extending and establishing new prohibitions concerning Russian LNG exports, and other high-value sectors of the Russian economy, like energy, finance, transport, and trade.
This article summarises the two sets of amendments, focusing on the impact and commercial considerations specifically relevant to the shipping sector.
The newly named 69 individuals and 47 entities are subject to asset freezes, with the former additionally being subject to travel bans, bringing the total number of sanctioned individuals and entities to over 2,200, and the total amount of assets frozen in the EU to more than €28 billion. Additionally, the regulation forbids EU citizens and companies from making funds available to those listed.
The individuals listed span across numerous areas of Russia’s war efforts, including ‘military companies, companies active in space engineering, in the chemical sector or in the explosives sector’. Furthermore, the amendment includes businesspersons, media figures, public officials, members of the army, intelligence, and judiciary services, and those involved in circumventing EU sanctions through financial transactions or delivering EU-prohibited goods.
Notably, Russian shipping company Sovcomflot and its CEO Igor Tonkovidov have been included. State-owned Sovcomflot is Russia’s largest shipping company, specialising in the transportation of liquified natural gas (LNG), crude oil and petroleum products, and the servicing of offshore upstream energy production.
This new addition is a continuation of earlier Western action, whereby in December 2023 the UK sanctioned an Emirati company responsible for operating 61 tankers owned by Sovcomflot, and on 23 February 2024, the US targeted Sovcomflot under sanctions and asset freezes. The question of Sovcomflot’s ability to circumvent these measures through a ‘shadow fleet’ is a problem addressed in the amendments to Regulation 833/2014. Furthermore, container-shipping firm LLC Vostochnaya Stevedoring Company, accused of aiding Russian domestic shipments of weapons and ammunition to Russian far east ports, like Vostochny, has also fallen under specific sanctions in the amendments to Regulation 269/2014.
‘No liability’ clause and due diligence expectations
Under the EU’s ‘no liability’ clause, EU operators could not be held liable for actions they did not, or had no reasonable cause to, suspect would contravene EU sanctions. Regulations 833/2014 and 269/2014 now expressly provide that the ‘no liability’ clause does not apply in cases where EU operators clearly fail to carry out appropriate due diligence, such as simple checks or inspections.
Non-EU subsidiary compliance measures: control test
EU operators must now undertake their ‘best efforts’ to ensure non-EU entities they own, or control, do not participate in activities sanctioned by Regulation 833/2014.
The recitals define ownership as having possession of ‘50% or more of the proprietary rights of the legal person, entity or body, or having a majority interest therein’.
The recitals define control through variables including ‘the right or the power to appoint or remove a majority of the members of the administrative, management or supervisory body; the right to use all or part of the assets of the legal person, entity or body; managing the business of the legal person, entity or body on a unified basis, while publishing consolidated accounts; or the right to exercise a dominant influence over the legal person, entity or body.’
Making a ‘best effort’ comprises actions suitable and necessary to prevent contravening sanctions and can be achieved through implementing appropriate policies and controls. If this is not met, the recitals stipulate that EU operators can incur legal responsibility for the actions of their owned entities. However, this liability is limited to preventative actions they can feasibly undertake having regard to the operator’s nature, size, and factual circumstances outside of their control.
Under Regulation 833/2014, EU exporters must include in their contracts with counterparties in countries other than Russia, barring exceptional partner-countries, provisions which: (i) prohibit the re-export of certain inter-alia sensitive materials to, or for use in, Russia; and (ii) provide for appropriate remedies in case of contractual breaches. Breaches of these contractual provisions must be reported to ‘National Competent Authorities’ (NCAs).
New exemptions to ‘no Russia’ clause
Amendments introduced exemptions to: (i) exclude contracts related to goods added to the ‘Common High Priority Items’ list (including machining centres, lathes, milling machines); (ii) postpone the deadline for inclusion of the aforementioned clauses in contracts concluded before 19 December 2023 from 20 December 2024 to 1 January 2025; and (iii) exclude public contracts concluded with public authorities in third countries or international organisations, with the caveat of notifying NCAs two weeks from their conclusion.
Compliance measures and IP rights
Furthermore, EU operators who produce, sell, transfer or supply ‘Common High Priority Items’ to countries outside of the EU or partner countries are subject to increased compliance measures. Non-EU counterparts to EU operators, and their sublicensees, are also prohibited from using the IP rights or trade secrets of ‘Common High Priority Items’ intended for sale, supply, transfer, or export for use in, or to, Russia.
For the first time, and following on from the US and UK, the EU has placed asphyxiating measures on specific vessels, aiming to deny them vital operational services. Annex XLII identifies 27 vessels now subject to prohibitions under the new Article 3s. Of those listed, 17 are oil tankers, five are LNG-related, and the rest are grain or defence related.
In regard to these vessels, Article 3s stipulates that EU operators may not provide access to ports for listed vessels along with other restrictions in relation to the insurance, operation, management, STS operations, and import purchase or sale of such vessels.
There are of course exemptions for the listed vessels in need of humanitarian reasons like maritime safety, human health or safety and environmental reasons, or, in the event of recognising a judgment or arbitration award of a member state.
Derogations are also possible for NCAs of island member states, like Malta or Cyprus, which may authorise enlisted vessels to access port and anchorage zones and technical assistance if the vessel: (a) transports goods necessary to satisfy the basic needs of the member state; and (b) the import of such goods is not prohibited elsewhere in Regulation 833/2014.
Industrial and dual-use goods
Prohibitions have been extended to restrict further goods being imported into Russia. For example, annex VII of Regulation 833/2014 has been updated to include certain machinery, aerial amplifiers, and flight data recorders. The package also updated annex XXIII to include items relating to Russia’s industrial sector such as chemicals (manganese ores and rare-earth materials), plastics, and certain other electrical equipment.
Liquid natural gas (LNG) and transshipment of Russian LNG
In a drastic change, the EU will begin to phase out: (i) the transshipment of Russian LNG from EU ports to non-member states, but; (ii) will continue to allow Russian shipments of LNG from EU ports into the bloc. Furthermore, it will restrict investment into Russian LNG projects.
EU operators are prohibited from providing reloading services and transhipping Russian LNG within EU boundaries, whereby the LNG is transferred directly between vessels (ship-to-ship transfers), or between vessels with on-shore LNG pipelines at import terminals (ship-to-shore transfers), or temporarily stored at an import terminal to be later reloaded into an EU vessel (reloading). Related technical assistance, brokering services, financial assistance and other assistances are also barred.
Necessary reloading services for the bunkering of LNG-fuelled vessels are exempt. Further exemptions exist for vessels in need of assistance, and derogations are available for the transshipment of Russian LNG at EU ports if the shipment is intended for another EU member state to ensure the member state’s energy supply.
For contracts entered into before 25 June 2024, the EU grants a winding-down exemption which permits the execution of said contracts until 26 March 2025.
Import of Russian LNG into EU ports
Imports of Russian LNG into EU ports will not be prohibited. However, the purchase, import or transfer of Russian LNG through EU-based LNG terminals which are not connected to the interconnected gas system is prohibited. This measure is designed to ensure all Russian LNG imported into the EU stays in the EU.
In the latter-case, for contracts entered into before 25 June 2024, the EU grants a winding-down exemption which permits the execution of said contracts until 26 July 2024.
Reporting measures
As of 26 July 2024, and following on a monthly basis, reports must be submitted on all unloading transactions and imports of Russian LNG into the EU, including the volume of each shipment.
New investments into Russian LNG projects
The sale, supply, transfer, or export of goods or technology for the completion of Russian LNG projects, like Arctic LNG 2 and Murmansk LNG, is prohibited by any EU operator. Related technical assistance, brokering services, and financial assistance is also prohibited.
For contracts entered into before 25 June 2024, the EU grants a winding-down period which permits the execution of said contracts until 26 September 2024.
Although this latest sanction package has presented major changes, it remains consistent in trying to restrict any means of circumventing the sanctions. Efforts have been made to increase the extent of the EU Russia specific sanctions to beyond the European Union, more so than in previous packages. Furthermore, LNG has come under scrutiny for the first time. Also of interest is the addition of annex XLII and the 27 vessels; this is certainly not an exhaustive list and aligns the EU regulations more with OFAC, where vessels have been directly sanctioned for some time.
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