France: EU sanctions against Russia – the limits of the system and the Union's responses

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Although the EU has adopted a significant set of sanctions against Russia, these restrictive measures have shown their limits, forcing the Union to toughen the tone and adopt new, more restrictive sanctions.
  

Since the annexation of Crimea in 2014, the EU has adopted a series of restrictive measures against Russia, which include trade restrictions, bans on the export of sensitive technologies, freezes on financial assets, as well as restrictions on access to the European financial market for certain Russian companies. The purpose of these sanctions is to exert economic pressure on Russia, as well as to weaken its military industry, in order to force it to respect the territorial integrity of Ukraine and to find a diplomatic solution to the war (see our article "Taking account of EU sanctions against Russia: a compliance issue for companies"). 

This relative impact of sanctions can be explained in several ways:
  • firstly, the fact that the sanctions are not "global": they do not target all sectors of the economy and provide for exceptions, particularly in the energy sector. What's more, they are only applied by certain countries;
  • on the other hand, it can be difficult to implement asset freezing measures, and there is no uniform criminal response within the Union in the event of sanctions being breached;
  • lastly, it seems that Russia and "accomplice" countries have found a way of circumventing the sanctions and delivering prohibited goods to Russia, in particular dual-use goods or other equipment likely to contribute to Russia's military and technological reinforcement or to the development of the defence and security sector.

After examining the limits of current sanctions and the ways in which they can be circumvented, we will look at the details of the measures recently adopted by the EU to remedy the situation.

The limits of current sanctions

The absence of "global" sanctions​

One of the limitations of the sanctions adopted by the European Union and the United States is that they are not comprehensive, either in terms of their material scope or the number of countries applying sanctions against Russia.

Material scope of European sanctions

Although Council Regulation (EU) 833/2014 of 31 July 2014 is extremely detailed, it does not cover all sectors of the Russian economy. Indeed, there are two main limitations or constraints on sanctions:
  • the desire to minimise the impact on the civilian population
  • not to harm the fundamental interests of the Union or of certain of its Member States, particularly in the field of energy
For example, the agri-food, pharmaceutical and health sectors, as well as gas and nuclear fuel supplies, are largely excluded from the scope of sanctions, or benefit from exceptions. In addition, the bans on Russian oil imports have been progressive. According to a report by the Finnish think tank Center for Research on Energy and Clean Air (CREA), EU Member States have bought around €50 billion worth of oil from Russia since the start of the war.

Finally, Russia continues to sell its oil to countries that do not apply sanctions against it. It has thus increased the proportion of crude oil exports to India, China, the United Arab Emirates, Egypt and Turkey, enabling it to finance the war in Ukraine.​

Limited number of countries applying sanctions

On 23 February 2023, 141 UN member states approved a resolution demanding the withdrawal of Russian military forces from Ukrainian territory. Only seven countries voted against (Russia, Belarus, Syria, North Korea, Mali, Nicaragua and Eritrea), while 32 abstained, including China, India, Iran, Algeria and South​ Africa. However, this resolution is binding and no sanctions have been adopted by the Security Council against Russia, given the latter's veto.

Sanctions against Russia have been imposed mainly by the European Union and the United States, along with their allies: the United Kingdom, Norway, Switzerland, Canada, Australia, New Zealand, Japan, Korea and Taiwan.

They therefore appear to be essentially "Western" sanctions, while most emerging countries, including major players such as China, India and Brazil, are refusing to impose sanctions against Russia, let alone condemn the invasion of Ukraine.

One explanation put forward for this lack of global agreement on sanctions against Russia is the increase in the number of people and countries affected by economic sanctions. There were around twenty economic sanctions measures in force in 1950, a hundred or so in the early 1980s, 200 10 years ago and more than 400 in 2022. Most of these measures are decided by the United States (40%), followed by the European Union (15%). This proliferation of sanctions and of the countries directly or indirectly affected by them partly explains why many countries are reluctant to adopt sanctions against Russia, or even to cooperate in implementing those adopted by third countries.​

Difficulties in identifying assets subject to freezing measures​

The French authorities, among others, face a real difficulty in identifying the funds and economic resources held by individuals and entities subject to an asset freeze.

The lack of transparency surrounding these transactions makes it difficult to identify the beneficial owners of these companies. The people targeted by the freezing measures sometimes use nominees to conceal the official owner of the company, who become the apparent owners of often considerable assets. These individuals also use shell companies and offshore entities, registered in countries known for their more flexible legislation on taxation and fund transfers, to conceal their transactions and thus evade the freezing measures.
These concealment techniques make it difficult to trace the origin and destination of funds, making it difficult to implement monitoring and control efforts.

Example: we can cite the example of the real estate assets of Boris Rotenberg, who is subject to an asset freeze measure under Council Regulation (EU) No 269/2014 of 17 March 2014, along with several members of his family. These properties are held by Monegasque companies, which lead to Luxembourg structures, which are themselves set up by a Panamanian shell company, known as Hyperion Consulting and mentioned in the "Panama Papers" (see "Boris Rotenberg, un oligarque russe dont les villas françaises échappent aux sanctions", Le Monde, 20 June 2023). Another example is Viktor Rashnikov's villa (which is also covered by Regulation (EU) No 269/2014) in Saint-Jean-Cap-Ferrat, which was the subject of a criminal seizure. Following the sanctions imposed on this Russian oligarch. The villa had slipped under the radar of the French authorities because it had not been declared as his property to the tax authorities. In reality, the villa belonged to a Swiss company, itself owned by a Panamanian structure (see "One villa and nineteen investigations opened: sanctions against Russian oligarchs begin to take effect").​

Technological and commercial bypassing

Since the start of the conflict in Ukraine, Russia has been able to exploit loopholes in European sanctions to import Western high-tech goods on which its defence industry is heavily dependent. Several EU Member States have noted that the tactics used to circumvent the sanctions are increasingly numerous and creative, involving the use of front companies and intermediaries in the circle of countries surrounding Russia, namely Turkey, Kazakhstan, Belarus, Armenia and Georgia, as well as the United Arab Emirates and China.
For example, household appliances such as fridges, washing machines, calculators, printers and even electronic cigarettes have been exported from countries in Central Asia and the Caucasus. The electronic components of these goods are then reused to equip radar, Russian drones, missile systems and smart munitions. Similar movements have also been observed in Turkey, China and the United Arab Emirates.
This strategy of circumvention is reflected in Eurostat statistics, which show an increase in European exports to Central Asia since the start of the war in Ukraine (see the graph attached to this article).
Russian companies have also sought to establish partnerships with companies not subject to sanctions in order to continue their business activities in Europe. By creating such joint ventures, some Russian companies have managed to maintain their activities on the European market despite the sanctions.

Lack of a coordinated criminal justice response

EU Member States have different definitions of what constitutes a
violation of the restrictive measures provided for in Council Regulations (EU) Nos 833/2014 and 269/2014, as well as the nature of the penalties that should be applied in the event of violations.
As a result, infringement of the sanctions does not constitute a criminal offence in all EU Member States. For those Member States whose legislation does provide for such a criminal offence, penalties are often very disparate.
In France, breaching European sanctions against Russia (for example, continuing to export and sell certain banned products or services in Russia) is punishable by criminal penalties. According to article 459, § 1 bis of the Customs Code, such behaviour is punishable by :
5 years' imprisonment, and
a fine equal to at least the amount of the sum involved in the 
offence or attempted offence, but not more than twice that amount.
Additional penalties may be imposed, such as exclusion from public contracts, a ban on receiving public aid, a ban on carrying out professional activities or an additional penalty of confiscation (art. 131-39 and 131-21 of the Criminal Code).

Possible responses to circumvention of sanctions

These weaknesses in the overall system have been identified by the EU and the other countries that have adopted sanctions against Russia. The new sanctions adopted by the EU since February 2023 include a number of measures to combat the circumvention of those already adopted. The EU and its allies have also increased their cooperation to limit the possibilities of circumventing sanctions.

Identify funds and economic resources subject to an asset freeze

In March 2022, the Commission set up a "Freeze and Sixteen Task Force", the aim of which is to ensure better coordination of the application of EU sanctions against Russian and Belarusian individuals and companies. To do this, the Task Force must explore the links between assets belonging to people targeted by EU sanctions and criminal activities. To this end, it has asked all Member States to share information on assets frozen to date in their respective jurisdictions.

Following this logic, entities and bodies resident or established in the Union have, since 25 February 2023, been obliged to communicate to the competent authority of their Member State information on funds and economic resources located within the territory of the Union and frozen (or which should have been frozen), and to cooperate with that authority (aforementioned Reg. (EU) No 269/2014, art. 8).

Identifying non-compliance with restrictive measures​

The Commission has set up an online tool, the "EU Sanctions Whistleblower Tool" (available in English only for the time being), which enables people to anonymously report a person or entity's failure to comply with European sanctions (not just those against Russia).

Helping companies comply with sanctions

A number of initiatives have been taken to help exporting companies to :
  • identify goods subject to restrictive measures,
  • identify the methods used to circumvent these sanctions, and
  • define the reasonable care they can take to avoid the risks of circumvention.

The Commission's actions

Commission policy paper 

On 7 September 2023, the Commission published a guidance note for European companies to help them identify, assess and understand the potential risks of circumventing sanctions and how to avoid them.
This document aims to provide an overview of what EU companies need to do when carrying out due diligence on their activities. It outlines some simple checks that can be carried out to identify :
  • the parties involved in the transaction,
  • the flows of money and goods involved in the transaction,
  • the goods involved in the transaction.
  • The guidance note also lists a number of "red flags" that should prompt European exporting companies to carry out additional due diligence.
In addition, to help exporters identify goods subject to import restrictions, the Commission has published two other lists, annexed to the guidance note:
  • an "Economically critical goods list" which mainly includes industrial goods subject to EU restrictive measures for which abnormal trade flows to Russia via certain third countries have been observed. This list includes goods for which: i) exports exceeding the threshold of €1 million over a 12-month period (in 2022) have been recorded and ii) an increase of at least 100% in exports from third countries to Russia compared with the average for the three years preceding the Russian invasion of Ukraine has been observed.
  • another referring to the "List of Common High Priority Items" comprising prohibited dual-use items and advanced technology items used in Russian military systems found on the battlefield in Ukraine or essential to the development, production or use of these Russian military systems.

Appointment of an international special envoy to implement EU sanctions 

On 13 December 2022, the Commission created a new role of international special envoy for the implementation of EU sanctions, to ensure ongoing, high-level discussions with third countries and thus prevent the unprecedented restrictive measures imposed on Russia since the start of its war against Ukraine from being circumvented. David O'Sullivan has been appointed to this post. He will also be responsible for explaining to private business leaders the risks they are taking by not complying with European sanctions.

The REPO International Task Force

Following Russia's invasion of Ukraine in February 2022, Australia, Canada, France, Germany, Italy, Japan, the United Kingdom, the United States and the Commission launched the "Russian Working Group on Elites, Proxies and Oligarchs" (known as "REPO") to coordinate action and deny these actors access to the revenue streams and economic resources used to support Russia's war of aggression in Ukraine.
In March 2023, this working group published a guide identifying certain tactics for circumventing sanctions against Russia and issuing recommendations for mitigating the risk of exposure to this type of practice.

Penalising non-compliance with restrictive measures

As mentioned above, not all EU Member States have the same policy on non-compliance with sanctions.
In order to increase the effectiveness of sanctions and limit the scope for circumvention, on 22 November 2022 the Council adopted a decision to add the violation of restrictive measures to the list of EU criminal offences in the TFEU.
On 2 December 2022, the Commission then proposed a draft directive defining the criminal offences and penalties applicable to breaches of EU restrictive measures (C​OM​ (2022) 684 final, 2 Dec. 2022). It includes:
  • a definition of criminal offences that includes helping people to circumvent a ban on entering EU territory, marketing goods covered by restrictive measures or carrying out transactions with people affected by EU restrictive measures
  • the principle of dissuasive penalties for failure to comply with restrictive measures: penalties may vary depending on the offence, but they must be effective, proportionate and dissuasive
  • the principle of stricter enforcement: Member States will have to step up their
  • efforts to ensure compliance with EU restrictive measures

On 9 June 2023, the Council adopted its position aimed at harmonising, at Member State level, the criminal offences and penalties applicable to breaches of EU restrictive measures (Council Press Release 428/23, 9 June 2023). This position forms the basis for negotiations with the European Parliament with a view to reaching a common position on the draft directive.

Limiting by-pass possibilities

The 11th set of sanctions adopted by the EU on 23 June 2023 includes a number of important measures to minimise the risk of circumvention of the restrictive measures.

Article 2a(1a) of Regulation (EU) No 833/2014 now prohibits the transit through the territory of Russia of goods and technologies which could contribute to the military and technological strengthening of Russia, the development of its defence and security sector, as well as the transit of goods and technologies suitable for use in the aviation sector or space industry, and jet fuels and fuel additives, exported from the Union.

It should also be remembered that Annex IV of Regulation (EU) No 833/2014 lists the entities in Russia and third countries for which it is not possible to obtain a derogation from the ban on the export of dual-use items (Art. 2) and items likely to strengthen Russia militarily (Art. 2a). This list is added to regularly.

Lastly, Article 3(1)(h) of Regulation (EU) No 269/2014 now provides for the possibility of including on the list of persons subject to an asset freeze natural or legal persons, entities or bodies: who facilitate breaches of the prohibition on circumvention of the provisions of Regulation (EU) No 269/2014 or associated regulations and decisions or who otherwise significantly defeat those provisions.

Sanctioning non-cooperative states

Council Decision (CFSP) 2023/1217 of 23 June 2023 now allows the EU to impose sanctions directly on countries whose territory is used to circumvent restrictive measures. In order to combat the circumvention of European restrictive measures by third countries, the EU wishes firstly to strengthen bilateral and multilateral cooperation, by maintaining a diplomatic dialogue with the third countries in question and providing them with increased technical assistance.

If this cooperation does not produce the desired results, the EU will take "rapid, proportionate and targeted" measures aimed solely at depriving Russia of the resources it needs to continue its war against Ukraine, in the form of individual measures to remedy the involvement of third-country operators in facilitating circumvention. The EU will resume dialogue with the third country in question once these individual measures have been adopted.

If, despite individual sanctions and further dialogue, circumvention remains substantial and systemic, the EU will be able to take exceptional measures as a last resort. If necessary, the Council will be able to decide unanimously to restrict the sale, supply, transfer or export of goods and technology whose export to Russia is already prohibited - in particular goods and technology used on the battlefield - to third countries whose territory is shown to be exposed to a constant and very high risk of being used for circumvention purposes (Council Decision (CFSP) 2023/1217 of 23 June 2023, cons. 8 to 16).

Conclusion

The circumvention of EU sanctions against Russia highlights the limits and complexities of implementing these restrictive measures. To maintain the effectiveness of economic sanctions, the EU will need to strengthen coordination between its Member States and work with other international players that have adopted restrictive measures against Russia.​
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