Despite the EU’s 14th sanctions package strengthening sanctions against Russia, Russia still has room to manoeuvre, as some measures appear less ambitious than they could have been due to political compromises. Their implementation and impact should be closely monitored and further finetuned.
A spike of attacks by Russia against Ukrainian civilians and critical infrastructure is causing civilian casualties, and extensive damage to energy facilities, disrupting electricity access, and leading to massive power outages across the country. Russian missiles that destroy Ukrainian cities often use Western-designed components, including those that recently struck the children’s hospital in Kyiv. This attack further emphasised the Kremlin’s ability to buy and import Western components and evade Western sanctions. While the EU’s latest 14th Sanctions Package is an important step to further close the loopholes, Russia still has room to manoeuvre and much more must be done.
More anti-circumvention obligations on EU companies
EU-Russia bilateral trade continues to decline: between the first quarter of pre-invasion 2021 and the first quarter of 2024, the value of EU imports from Russia fell by 69%, and EU exports to Russia by 59%. However, Russia continues to actively use third countries such as China, Türkiye, Kazakhstan, and the South Caucasus to circumvent these sanctions. Moscow procures EU-origin equipment and technology (microelectronic and aviation components as critical inputs for Russian weapons systems) using third-country companies and individuals as a way to undermine the impact of Western sanctions.
To further hamper Russia’s circumvention efforts, the new 14th Sanctions Package introduces several important measures to strengthen the EU private sector’s compliance. Importantly, it requires EU companies to better control their foreign subsidiaries, thus expanding the territorial scope of the EU’s sanctions against Russia. However, EU member states failed to agree on introducing a “no re-export to Russia clause” as a contractual requirement for non-EU subsidiaries owned or controlled by EU companies. For the time being, as adopted in the 12th Sanctions Package, it is applied to EU operators selling certain restricted goods such as goods related to aviation, jet fuel, firearms, and other technology items. Ahead of the 14th package, some EU members said they were worried about the possible adverse impact/costs of this on EU businesses abroad.
Instead, the “best efforts rule” was applied. EU companies are obliged to undertake their best efforts to ensure that their non-EU subsidiaries “do not participate in activities that undermine EU sanctions against Russia”. “Best efforts” are defined as all necessary controls and procedures to mitigate and manage risks of non-compliance, following a risk-based approach. At the same time, non-compliance by third-country subsidiaries can be justified in certain circumstances, such as the limited effective control of EU operators over a subsidiary, relevant local laws, and others.
Additionally, due diligence for export control compliance, previously only recommended by the European Commission for EU companies, is now an obligation. EU companies selling Common High Priority (CHP) items including dual-use and technology items) must apply due diligence mechanisms “capable of identifying and mitigating risks of re-exportation to Russia”. EU companies are also required to ensure that their international subsidiaries do the same.
‘No-Russia clause’ rules have also been extended for Intellectual Property Rights (IPR) transfers. EU companies must incorporate this clause in their customer contracts to ensure that industrial know-how transferred outside the EU is not used to manufacture CHP goods intended for Russia. The implementation and impact of the ‘No-Russia clause’ on combating circumvention should be further monitored and revised, with possible extensions to non-EU subsidiaries.
The effectiveness of the new “best efforts” and “due diligence” obligations will be proved by how private companies’ efforts are implemented and how competent national authorities will enforce them. For now, the definition of the notion of "best efforts" is rather vague and can generate a lot of uncertainties. It needs to be further developed with clear guidelines, implementation parameters, clear exemptions, and liabilities.
Targeting Russian LNG industry
Increasing the effectiveness of energy-related sanctions was another important focus of the 14th package. EU energy sanctions have targeted Russian coal and seaborne crude and refined oil products (with derogations), while Russian pipeline natural gas and liquefied natural gas (LNG) have remained unsanctioned. Despite energy sanctions and a drastic decline in the EU’s import of Russian fossil fuels, Russian earnings remain significant (€31.3 billion in 2023 vs €128 billion in 2022), boosting the Kremlin’s revenues to finance its war in Ukraine. It consists mostly of pipeline gas (45% of imported Russian fossil fuels in 2023), crude oil via pipeline (28%), and LNG (26%).
The EU is still the fourth-largest buyer of Russian fossil fuels and the largest buyer of its LNG outright: the Russian LNG industry is particularly reliant on the EU market and EU ports. In 2023, Russia sent almost half of all its LNG exports to the EU, earning €8.1 billion.
Amid the general EU’s shift from pipeline to LNG imports since 2022, Russian imports of LNG to the EU have also grown . In the first quarter of 2024, Russia was the EU's second-largest LNG supplier (17.7%) after the US (47.4%). However, part of Russia’s LNG supply did not enter the EU gas system. It was transhipped in EU ports and then re-exported to third countries, thus facilitating Russia’s LNG access to global markets. According to CREA’s estimations, about 22% of Russia’s LNG inflow to the the EU were transhipped in EU ports in 2023, and then mostly re-exported globally.
Therefore, the 14th Sanctions Package is an important step. While EU member states could not agree on imposing a total ban on Russian LNG due to concerns about the EU’s gas supply security, they did reach a consensus on prohibiting the transshipment of Russian LNG through EU ports to third countries including ship-to-ship and ship-to-shore transfers, and re-loading operations. This ban is expected to increase logistical costs for Russia, which would hit Russia’s LNG revenues and deprive it from using EU infrastructures to optimise its LNG shipments to third countries.
Furthermore, the import of Russian LNG through EU terminals not connected to the natural gas system was also restricted. The EU also prohibited new investments, the provision of goods, technology, and services for the completion of key Russian LNG projects under construction, such as Arctic LNG 2 and the Murmansk LNG, seeking to limit the future expansion of Russian LNG capacities.
However, the transshipment ban includes a lengthy wind-down period of 9 months. And overall, the continued EU reliance on Russian LNG and gas pipeline supplies (both direct and indirect via Azerbaijan and Türkiye) is risky for the EU’s energy security. If the EU still aims to end its dependence on Russian fossil fuels by 2027, it must take more ambitious steps toward reaching this objective.
Other major sectoral measures related to “shadow” fleet, trade, finance, and transport
For the first time, the EU also adopted a measure targeting Russia’s ‘shadow fleet’, which transports sanctioned Russian oil above the oil price cap, thereby boosting Russia’s energy export revenues. The black listing of shadow shipping companies and tankers already implemented by the US have proven to be effective in disabling them. However, Russia’s shadow fleet is immense, and continues to expand. In May 2024, about 60% of the volume of Russian seaborne crude oil was transported by shadow tankers. As of the first quarter of 2024, more than 400 vessels are estimated to be part of the Russian shadow fleet. It also includes old tankers lacking sufficient Protection & Indemnity (P&I) insurance to cover the costs of an oil spill or other catastrophe.
For the first time, the EU blacklisted 27 vessels for their involvement in Russia’s war against Ukraine and for participating in the shadow fleet transporting Russian oil. These vessels are now prohibited from EU port access and services. Still, amid rising ecological concerns including possible oil spills and the scale of circumvention by Russia, this number seems insufficient to make a significant difference. Stronger enforcement efforts, further vessel designations and the limitation of the size of the shadow fleet is central to the effectiveness of the price cap.
In addition to strengthening EU companies’ compliance, the EU also continues to monitor and blacklist third-country entities associated with Russia's military-industrial complex and involved in circumventing the EU sanctions regime. The blacklisted entities are subjected to tighter export restrictions for the export of dual-use and advanced technology items. 33 entities from third countries were added, including 19 in China/Hong Kong, nine in Türkiye, two in Kyrgyzstan, one in India, one in Kazakhstan, and one in the United Arab Emirates (UAE).
Finally, to further strengthen EU financial sanctions, the 14th package bans the use of the System for Transfer of Financial Messages (SPFS), developed by the Central Bank of Russia as an alternative to SWIFT to neutralize the effect of restrictive measures. Around 160 international banks are currently connected to SPFS. EU banks outside Russia are now prohibited from connecting and carrying out transactions using the SPFS. In addition, EU companies are prohibited from making transactions with third-country banks using SPFS (the EU will put together a list of these banks).
Furthermore, the lists of goods that fall under both import and export restrictions have been expanded and reinforced. The existing export bans on industrial goods (chemicals, plastics, vehicle parts, and machinery) have also been reinforced by broadening the banned product categories (from 6-digit HS code bans to 4 digits).
Looking ahead
Unfortunately, agreeing new packages of sanctions among EU member states is becoming increasingly challenging due to the diverse national interests of member states. There is also increasing geopolitical and economic uncertainty in the context of the upcoming US elections and their impact on US sanctions policy and the security situation in Europe.
While the 14th package delivers important measures, some (such as the LNG transshipment ban) constitute a political compromise, with long transition periods, derogations, and exemptions, undermining the impact of the sanctions. Thus, to undermine Russia's war potential, a much tougher approach is needed, despite the economic pain it may cause. Enhancing sanctions enforcement and EU companies’ compliance, further targeting Russian shadow fleet and LNG industry, strengthening the capacity of enforcement agencies and export control bodies, revising the lists of dual-use and advance technology items, derogating Russia’s circumvention channels in third countries will remain the targets of the EU’s sanctions policy against Russia’s aggression.
This commentary is part of the Ukraine's European Future project.