In light of the ongoing Russian invasion of Ukraine, the UK and EU, in close collaboration with their G7 partners, have continued to exert economic pressure on Russia through an array of sanctions.

In this bulletin, we provide a high-level overview of the UK and EU’s latest sanctions packages from December 2023 which, amongst other measures, impose additional import and export restrictions on Russia, including restrictions on diamonds of Russian origin. We also discuss recent enforcement and anti-circumvention developments which remain a high priority for the UK and EU governments and regulators alike.

EU sanctions

On 18 December 2023, the EU adopted its 12th sanctions package against Russia. The measures are wide ranging and significant and include the following key elements:

• “No Russia” clause – exporters are contractually required to prohibit the re-export to Russia, and for use in Russia, of: (i) certain sensitive goods or technologies; (ii) common high priority items; and (iii) firearms and ammunition. Exporters will have to comply with these measures from 20 March 2024, but this obligation will not apply to contracts concluded before 19 December 2023 until 20 December 2024 or until their expiry date (whichever is earlier).
• Diamond ban – in collaboration with the rest of the G7, the direct or indirect import, purchase or transfer of diamonds from Russia is prohibited from 1 January 2024. The prohibition applies to diamonds: (i) originating in Russia; (ii) exported from Russia; (iii) transiting Russia; and (iv) Russian diamonds that have been processed in third countries other than Russia (from 1 March 2024). Separately, on 3 January 2024, PJSC Alrosa, the world’s largest diamond-mining company by output, and its CEO, were targeted by an EU asset freeze.
• Restrictions on revenue-generating imports – further restrictions have been introduced on the import of goods which generate significant revenues for Russia. These goods include copper wires, aluminium wires, tubes, and liquefied propane (in respect of which, a 12-month transitional period applies for contracts concluded before 19 December 2023).
• New export controls on dual-use items – a number of restricted items that could contribute to the technological enhancement of Russia’s defence and security sector have been added. These additional items include: (i) chemicals; (ii) lithium batteries; (iii) thermostats; (iv) DC motors and servomotors for UAVs; (v) machine tools; and (vi) machinery parts.
• Further restrictions on the provision of services – the provision of software for the management of enterprises and software for industrial design and manufacture to the Russian Government or Russian entities are now prohibited, subject to certain exemptions and derogations.
• Oil price cap enforcement measures – itemised price information for ancillary costs, such as insurance or freight, must be shared at request throughout the supply chain of the Russian oil trade in relation to product loaded after 20 February 2024, where service providers do not have access to the purchase price per barrel. Moreover, the sale of tanks for the transport of crude oil or certain other petroleum products to a Russian entity or for Russian end-use is prohibited. A notification requirement has also been introduced, which obliges any seller or transferor of a tank to any third country to immediately notify the competent authorities of the relevant EU Member States.

Additionally, as part of the 12th sanctions package, 61 individuals and 86 entities were added to the EU’s asset freeze list, which is continuously being reviewed and extended. These asset freeze designations primarily target persons operating in Russia’s military, defence and IT sectors, but have also affected a major insurer and several telecommunication companies. The French director general of two Finnish companies was also designated for involvement in potential actions in circumvention of the EU’s trade sanctions. A new listing criterion has also been introduced to enable the European Council to list entities and individuals who benefit from the compulsory transfer of ownership or control over Russian subsidiaries of EU companies without said company’s consent.

Separately, on 24 January 2024, the European Commission followed up on the European Economic Security Strategy announced in June 2023 by introducing several proposals to strengthen the EU’s economic security (see our bulletin here). As part of these proposals, the European Commission is considering a more coordinated approach to dual-use export controls, which would include uniform EU controls on dual-use goods that are currently regulated through a patchwork of national approaches.

Political agreement on the EU’s common sanctions enforcement framework

On 2 December 2022, the European Commission proposed a new directive to harmonise the scope of criminal offences and penalties for the violation of the EU’s sanctions regimes. The aim is to align the enforcement position across the EU Member States to facilitate stricter enforcement of sanctions laws that will reduce circumvention. The result is likely to be that companies and individuals face a higher risk of being exposed to more severe enforcement actions and penalties.

In brief, the proposed directive will define criminal offences for, amongst others, violations of EU sanctions and conduct intended to circumvent EU sanctions. Inciting, aiding and abetting these offences will also be criminalised. The penalties for individuals and legal persons who are found guilty of such offences will be potentially severe, including, amongst others, imprisonment for up to five years, substantial fines of up to 5% of the total worldwide turnover in the business year preceding the fining decision and disqualification from the practice of business activities.

In terms of next steps, on 12 December 2023, political agreement between the European Council and the European Parliament for the final text of the directive was reached. As the final agreed text of the directive is not in the public domain, many points of detail, including the timeline for the transposition of the directive and the precise scope of the offences and penalties, are uncertain. Nonetheless, the directive is expected to enter into force in April 2024, with Member States obligated to transpose the directive within 6 or 12 months of the directive’s entry into force.

The UK sanctions on Russia tighten

On 14 December 2023, the UK announced two further sanctions package against Russia, which build on the existing export and import bans on goods that carry a risk of military or industrial usage and products that provide a source of funding for Russia’s war against Ukraine.

Key elements of the Russia (Sanctions) (EU Exit) (Amendment) (No. 4) Regulations 2023, which came into force on 15 December 2023, are the provision of further:

• Import bans – the import of certain Russian-origin metals, such as copper, aluminium and nickel, is prohibited. This is subject to a general trade licence, which was issued to authorise the direct or indirect acquisition of a warrant on a global metal exchange by certain persons.
• Export bans – the export, supply and delivery and making available to, or for use in Russia of, additional categories of goods with a potential for military and industrial application are prohibited. This includes chemicals, electrical goods, metals, vehicles and machine parts.
• Reporting obligations – relevant firms must disclose funds held by them for the Russian Central Bank, National Wealth Fund and Russian Ministry of Finance on an annual basis. Asset freeze targets are also required to disclose the value and nature of funds held by them in the UK from 26 December 2023 onwards.
• Payment processing restrictions – the prohibition on UK credit or financial institutions from processing Sterling payments to, from or via certain designated financial institutions has been expanded to cover non-Sterling payments as well.
• Licensing grounds for divestment – licensing grounds have been added to support UK entities who seek to divest themselves, either fully or partially, of their Russian interests.

The Russia (Sanctions) (EU Exit) (Amendment) (No. 5) Regulations 2023, which came into force on 1 January 2024, introduces the G7-sponsored prohibition on the import of Russian diamonds and diamond jewellery from Russia into the UK. The supply and delivery of these items from Russia to third countries has also been banned.

The founding of OTSI

Like the EU, the UK Government is also focused on enforcement and, on 11 December 2023, it announced that it will be creating a new sanctions enforcement unit, the Office of Trade Sanctions Implementation (OTSI), in order to crack down on companies circumventing Russian sanctions. OTSI will be launched in early 2024 and will sit within the Department for Business and Trade.

OTSI will be equipped with powers to ensure that the UK’s trade sanctions across its 24 sanctions regimes are effectively implemented. In particular, OTSI will oversee the civil enforcement of trade sanctions by investigating potential sanctions violations (including the circumvention of sanctions, such as exporting products to Russia through third countries), issuing civil penalties and referring cases to HMRC for criminal enforcement where appropriate. OTSI will also assist companies with sanctions compliance.

UK agencies issue red alert

On 6 December 2023, the National Economic Crime Centre and other cross-agency partners such as OFSI and the Foreign, Commonwealth and Development Office, issued a red alert targeted at financial institutions and other members of the UK financial sector (the Red Alert). The Red Alert warns businesses that Russia is attempting to evade sanctions to purchase restricted goods and services, through intermediary countries.

The Red Alert provides UK businesses with information on the common techniques being employed by Russia to circumvent sanctions on the export of high-risk goods, which Russia is using in its war against Ukraine. Companies in the financial sector are encouraged to take steps to detect such attempts to circumvent trade sanctions and protect their business from Russian procurement activity by “utilising data sources, screening, and monitoring capabilities”.

Specifically, businesses should pay extra attention to transaction activity and customer attributes which contain red flags such as:

• transactions related to the payments for goods on the Common High Priority list, from a company based in known diversionary destinations and incorporated after 24 February 2022;
• transactions involving entities with little to no online presence; and
• customers who do not provide details on banks, shippers or third parties, including the end users of goods.

Separately, in January 2024, the UK’s National Crime Agency issued an amber alert relating to financial sanctions evasion, money laundering and cultural property trafficking through the art storage sector.

The cumulative impact of these and other similar alerts is to demonstrate the care that businesses across a range of different sectors need to take to ensure that they are not facilitating sanctions evasion.

The OFSI Annual Review

OFSI released its Annual Review 2022 to 2023 on 14 December 2023. The last financial year was described as a “historic and transformative period for the use of financial sanctions at both global and UK levels”. Here are some key statistics that can be drawn from the report:

• over 90% of the Russian banking sector has been sanctioned;
• by 31 March 2023, a total of 130 oligarchs and their family members, with a combined net worth of around GBP145bn at the time of the Russian invasion of Ukraine, had been sanctioned;
• in 2022-2023, OFSI recorded 473 suspected breaches of financial sanctions (excluding oil price cap and counter-terrorism breaches), which is a sharp increase from the 147 cases recorded in the previous financial year. As of April 2023, 172 cases were under live investigation; and
• GBP21.6bn of funds were reported to OFSI as frozen as of 30 September 2022, including GBP7.9bn due to the UK’s Russia sanctions regime. This was an increase of GBP9.2bn from 2021.

Concluding remarks

Looking ahead, it is clear that the UK and EU will continue to engage with their allies to achieve closer alignment globally of the sanctions being imposed on Russia. With the establishment of both OTSI and the EU’s forthcoming common sanctions enforcement framework, the UK and EU have also acknowledged that more can be done in terms of enforcing sanctions and ensuring that they are not being circumvented. We expect that the UK and EU’s sanctions regimes will only become more robust and sophisticated, placing individuals and companies under greater scrutiny in the short to medium term.