EU Sanctions on Russia

Hong Kong sellers with supply chains extending into Russia from EU countries may need to take careful note of recent EU sanctions applied against the country. In response to Russia’s recognition of the separatist Donetsk and Luhansk regions of Ukraine as independent republics, and the subsequent military aggression against Ukraine that it launched on 24 February 2022, the EU has adopted a far-reaching package of sanctions severely restricting economic relations with the Russian government, and Russian entities and individuals.

Speaking on 1 March 2022 about the three waves of EU sanctions against Russia, European Commission President Ursula von der Leyen said that they comprise the largest sanctions package in the EU’s history. Below is a summary setting out the relevant measures and how they could affect Hong Kong traders.

Regulations implementing the sanctions were unanimously adopted by the European Council. They were published in the Official Journal on 23 February 2022 (the “first wave”) and 25 February 2022 (the “second wave”). The EU announced further measures on 26 and 27 February 2022, excluding certain Russian banks from the Society for Worldwide Interbank Financial Telecommunications (SWIFT), freezing reserves of the Central Bank of Russia, closing EU airspace to Russian aircraft and targeting certain businesspeople. These measures (the “third wave”) were partially published on 28 February 2022. On 9 March, the EU announced a number of further measures, including restrictions on the export of maritime navigation and radio communication technology to Russia, and new financial sanctions against Belarus, the latter coming in response to the country’s role in the ongoing crisis in Ukraine.

In lockstep with its G7 allies, as part of a bid to ramp up economic pressure on the Kremlin, the EU, (as part of a “fourth wave”) revoked Russia’s Most-Favoured Nation (MFN) status on 12 March 2022, rescinding many of the benefits that Russia enjoyed as a WTO member. Accordingly, Russian companies will no longer receive privileged treatment, notably preferred import tariffs in the EU market. Meanwhile, the bloc is working to suspend Russia’s membership of many of the world’s leading multilateral financial institutions, including the International Monetary Fund, the World Bank and the European Bank for Reconstruction and Development as part of moves to block Russia’s access to financing and loans from these institutions. This, together with other bans on Russia’s exports (e.g., energy, iron and steel) and imports (e.g., consumer luxury and other goods frequently purchased by Russian elites), if fully and widely implemented, could be another significant blow to the Russian economy, given that the EU is Russia’s largest trading partner.

These measures apply to anyone who comes within the EU’s jurisdiction. This includes EU nationals in any location, entities incorporated under the law of an EU Member State (including branches of those entities that are located outside the EU), and foreign companies in respect of their EU operations. Also covered are operations on board aircraft or vessels under the jurisdiction of the EU Member States.

Given the fluid situation, it is worth keeping an eye on this overview, as additional legislation may be published. The European Council’s website has an up-to-date overview of the measures it has taken in response to the crisis in Ukraine.

Trade Sanctions

Restrictions on trade in dual-use items, oil and aerospace goods and related services

In order to target Russia’s technology and military sectors, the EU has prohibited the direct or indirect sale, supply, transfer or export of dual-use goods, software and technology listed in Annex I of Regulation 2021/821, as well as goods listed in Annex VII of Regulation 2022/328, to entities and individuals in Russia or for use in Russia. It has also banned related technical assistance, brokering, and financial services. There are a very limited number of exceptions to this prohibition.

In order to target Russia’s oil and aerospace sectors, the restrictions also prohibit the direct or indirect sale, supply, transfer or export of EU goods and technology for use in oil refining listed in Annex X of Council Regulation 2022/328, and of those for use in the aerospace industries listed in its Annex XII, to Russian entities and individuals or for use in Russia, as well as related technical assistance and financial or brokering services.

Denial of MFN status

On 11 March 2022, the European Commission issued a press release withdrawing MFN status for Russia in response to its invasion of Ukraine, in coordination with its G7 allies in order to ramp up the economic pressure on the Kremlin. As a result, Russian goods imported to any of the EU27 Member States may be subject to a higher, yet-to-be-announced, import tariff. This together with various potential bans on imports from and exports to Russia, could be another significant blow to the Russian economy, given that the EU is Russia’s largest trading partner.

Financial Sanctions

1. Restrictions on payments to Russian banks

The EU has announced that it will exclude certain Russian banks from the inter-bank messaging system administered by SWIFT. This will prevent the designated banks from communicating payment instructions with other members of SWIFT.

2. Restrictions on transactions involving Russian sovereign debt, reserves and assets

Extending credit and loans to, and purchasing, selling or trading transferable securities and bonds issued by the Russian government, the Central Bank of Russia, or any entity acting on behalf of or at the direction of the Central Bank of Russia, is prohibited. EU individuals are also prohibited from making any transaction related to the management of reserves and assets of the Central Bank of Russia with any person or entity acting on behalf of or directed by the Central Bank of Russia.

3. Restrictions on transactions involving Russian corporate debt and securities

EU individuals are not allowed to purchase, sell, provide investment services for or assist in the issuance of, or otherwise deal with, transferable securities and money-market instruments issued by entities listed or controlled/directed by:

i. State-owned Russian financial institutions listed in Annex III to Regulation 2022/328; and

ii. major defence companies listed in its Annex V.

From 12 April 2022, it will be prohibited to conduct transactions involving all securities issued by entities listed or controlled/directed by:

iii. State-owned oil companies listed in Annex VI of Regulation 2022/328;

iv. major State-owned credit institutions listed in its Annex XII; and

v. other State-owned and State-controlled entities included in its Annex XIII.

From 26 February 2022, no new loans or credit may be extended to entities listed in points one to five above, with only a very few exceptions.

4. Restrictions on the supply of certain financial services

It is prohibited to accept deposits exceeding €100,000 from Russian entities and individuals established or resident in Russia, except for EU nationals. Only a limited number of exceptions apply.

Business and Individual Sanctions 

So as to target those supporting Russia’s actions in Ukraine, the EU has ordered the freezing of assets belonging to several individuals and entities listed in Annex I to Regulation 269/2014, and has banned the individuals listed from entering EU territory. Making funds or economic resources available to individuals and entities on the list, including indirect economic benefits such as payments to entities owned or controlled by a listed individual, is prohibited. The EU sanctions list now includes the following entities and individuals:

• Entities: Vneshekonombank (VEB), Promsvyazbank (PSB), Bank Rossiya, Internet Research Agency, and SOGAZ Insurance
• Individuals: Russian officials, including the president of Russia Vladimir Putin; several prominent businesspeople and media figures; and members of the Russian Parliament.

Managing Sanctions Risks

Hong Kong sellers working with EU individuals in their supply chain, who are doing business with Russia, or Russian individuals and entities, or who have supply chains that extend to Russia, should immediately assess whether their operations are affected by EU sanctions. Key risks include:

• Payments: Making payments to and withdrawing assets from Russian banks excluded from SWIFT will become practically impossible, and asset freeze orders prohibit making payments to entities subject to asset freezes, as well as to entities controlled by listed individuals or entities. Hong Kong traders and those in the EU they are dealing with are advised to screen payment beneficiaries, their principals, and recipient banks.
• Supply chain: Supplying goods and services that benefit listed individuals and entities, as well as entities owned or factually controlled by listed entities or individuals, is prohibited. Also, selling dual-use items, goods for the aerospace industry or for oil refining, either to Russian-owned companies or to any recipient who might use such items in Russia, is prohibited. Hong Kong traders and those in the EU they are dealing with should classify and screen the end-use and end-user of their products and services.