EU Sanctions Against Russia Accelerate Slightly

The 14th package of EU sanctions against Russia has finally been approved. South Korea is implementing its sanctions, the US has sanctioned the Moscow Exchange, and the UK has introduced its first sanctions against Russia's shadow tanker fleet. What’s happening? Finally, the ice has broken, and Russia is beginning to receive the consequences from the civilised world that it should have faced in 2022 after its full-scale invasion of Ukraine or even in 2014 after the invasion of Donbas by Russian proxies and the direct annexation of Crimea.

It has happened: after four months of tough debates, the EU Council officially adopted the 14th package of sanctions against Russia on 24 June. Only two of the previous thirteen sanctions packages were as challenging to discuss. The 11th package also took four months of deliberation, and the 12th required six months. Most earlier packages were prepared and implemented within two to three months. Why is it taking so long now? And, most importantly, why are the sanctions not as devastating? Russia can still afford to pay hundreds of thousands of soldiers who invaded Ukraine. It can also produce fairly modern weapons using European, Chinese, Taiwanese, and even American components.

It seems these questions are a concern in many capitals, which is why the pace of sanctions and restrictions has significantly accelerated.

"...although he (Putin) continues his illegal aggression"

Josep Borrell, High Representative for Foreign Affairs and Security Policy:

“Our sanctions have already significantly weakened the Russian economy and prevented Putin from accomplishing his plans to destroy Ukraine, although he still continues the illegal aggression targeting civilians and civilian infrastructure. The 14th package of sanctions demonstrates our unity in supporting Ukraine and seeking to limit Russia’s criminal activities against Ukrainians, including efforts to circumvent EU measures.”

14th Sanctions Package: Primarily About Technology

The path to approving the latest European sanctions package against Russia was marked by loud scandals and resistance from lobbyists advocating for the right to conduct business as usual with Russia. Perhaps the most heated dispute centred around the requirement for European suppliers of sensitive goods and technologies to include a complete ban on further export of these items to Russia in their contracts. The German government, concerned about the profits of German corporations, opposed this provision. Consequently, the Russians were left with a loophole to circumvent direct bans on the export of sensitive goods and technologies.

Overall, this was not entirely unexpected. Since the imposition of the first direct sanctions and restrictions on the supply of weapons and components to Russia in 2014, these components have continued to flow to the Russian military-industrial complex. Because suppliers claimed that the relevant contracts were signed before the sanctions were implemented. After 2022, such blatant and direct disregard for sanctions became impossible, so proxy companies emerged, facilitating the transfer of sensitive components and technologies to Russia. Unfortunately, this flow will not be completely interrupted, as the German government managed to insist on its stance.

However, it cannot be said that efforts to combat the circumvention of sanctions and restrictions are entirely neglected. The 14th sanctions package includes a requirement for EU parent companies to make every effort to ensure that their subsidiaries in third countries do not engage in any activities that would result in outcomes that the sanctions aim to prevent.

Additionally, it was decided to counteract the re-export of military goods critical for the development of Russian military systems. This means that EU operators selling such military goods to third countries must use due diligence mechanisms to control the risks of re-exporting sensitive goods and technologies to Russia. The same applies to the transfer of industrial know-how for the production of military goods to third countries. Recipients must guarantee that such know-how will not be used for goods destined for Russia.

So, the EU Council added 61 new entities to the sanctions list, including those directly supporting Russia's military-industrial complex. These entities will face particularly stringent export restrictions on dual-use goods and technologies, as well as goods and technologies that can be used by the Russian military-industrial complex. Organisations from third countries, including China, Kazakhstan, Kyrgyzstan, Turkey, and the United Arab Emirates, are also included in the sanctions list.

The list of goods prohibited for export to Russia has been expanded to include certain machine tools and specific high-mobility vehicles. Restrictions have been extended to new sensitive items, including chemicals such as manganese ores and rare earth compounds, plastics, earth-moving equipment, monitors, and electrical equipment.

Photo: The 14th sanctions package includes numerous restrictions aimed at preventing the Russian military-industrial complex from fuelling its aggressive war against Ukraine. Source: EC

14th Sanctions Package: Finance, LNG, Transport, and Media

In the finance sector, the EU Council has banned the use of Russia's "System for Transfer of Financial Messages" (SPFS), created by the Russian Central Bank to bypass restrictions. Specifically, EU organisations operating outside Russia are now prohibited from connecting to this and similar systems. Additionally, EU entities are forbidden from conducting transactions with entities using SPFS outside Russia.

The EU Council has also banned transactions with financial institutions and crypto-asset operators established outside the EU if these organisations are involved in transactions related to the Russian military-industrial complex.

Widely promised sanctions on Russian liquefied natural gas (LNG) turned out to be somewhat half-hearted. The re-export of Russian LNG through European ports is prohibited, but the import of Russian LNG into the EU is not banned. However, new investments and any assistance in completing ongoing LNG projects, such as Arctic LNG 2 and Murmansk LNG, are prohibited. This is a good start, and perhaps in the future, EU countries will stop purchasing Russian LNG, preventing the Russian military budget from being financed by taxes from LNG extraction and export.

The EU has banned the import of helium from Russia to reduce the Russian budget's revenue from selling this resource abroad.

Regarding transport, 27 maritime vessels have been sanctioned by the EU for circumventing the ban on exporting Russian oil beyond price limits and for involvement in transporting military cargo, stolen Ukrainian grain, and LNG operations. Additional restrictions and monitoring have been imposed on aircraft used for irregular air transport (including charters and private flights) if they serve Russian clients.

To combat Russian propaganda, the EU Council decided that political parties and funds, non-governmental organisations, including think tanks, and media service providers are banned from receiving funding from Russian state structures or their proxies.

Background Context

The presentation of the new sanctions package was preceded by several other significant events. The latest was an appeal by Ukraine's Ministry of Finance and the Ukrainian Financial Monitoring Service to the Financial Action Task Force (FATF) to finally add Russia to the "black" list at its plenary meeting, which began on 23 June and will conclude on 28 June. Ukrainian authorities rightly point out that Russia is expanding and upgrading its "comprehensive" partnership with North Korea, one of the few countries on the FATF black list.

Previously, FATF had refused to move Russia to the "black list," citing concerns about excessive politicisation. However, now these concerns are unfounded, as Russia has provided ample justification for such a decision.

In the first half of June, the US imposed sanctions on the Moscow Exchange and its related entities, causing significant problems for Russian banks conducting cross-border transactions. Unfortunately, this did not completely block the financing of military and dual-use goods purchases by Russian companies circumventing sanctions. An alternative financial operation channel remains Russian subsidiary banks of international banking groups, such as Raiffeisen Bank International (Austria), UniCredit (Italy), and OTP (Hungary).

An interesting example of coordinated action is the UK's announcement on 13 June of broad sanctions against Russia, including only a few oil tankers from Russia's "shadow" tanker fleet of hundreds. The UK also sanctioned the Russian insurance company Ingosstrakh Insurance Co., which insures the transportation of Russian oil, including violations of price caps. Overall, London has sanctioned 50 legal and natural persons from various sectors.

It seems the trend of strengthening and expanding sanctions coverage on Russia is now clearly visible. Unfortunately, the pace of this process is not yet lethally swift for Russia. But more to come.