EU sanctions: “no Russia” clause in contracts

Over the course of 2023, Western countries were increasingly focussed on tightening the implementation of their sanctions on Russia. In particular, they intensified their demands and expectations on businesses to ensure that sanctioned goods are not diverted to Russia and made clear that failure to take adequate due diligence can itself amount to a sanctions violation. 

The EU ended the year by introducing a number of new obligations to prevent circumvention, in its 12^th Package of sanctions on Russia adopted on 18 December 2023. Notably, these included a requirement for exporters to insert what is being termed a “No Russia” clause into contracts with their customers in third countries, in an effort to stem the substantial flows of sanctioned goods finding their way to Russia and thence onto the battlefield in Ukraine.

New obligation

Article 12g, which was added to Council Regulation (EU) No 833/2014 (the “EU Regulation”) in the EU’s 12^th Package (set out in Council Regulation (EU) 2023/2878), requires EU exporters that sell, supply, transfer or export goods or technology to a third country to contractually prohibit their customers from re-exporting certain sensitive goods to or for use in Russia. The goods concerned are those listed in:

• Annex XI (aviation and space items);
• Annex XX (jet fuel and fuel additives);
• Annex XXXV and Annex I to Regulation (EU) No 258/2012  (firearms and ammunition); and
• Annex XL (‘Common High Priority’ items). This is a subset of items already prohibited for export to Russia but which have been identified by the G7 as posing the highest risks of re-export from third countries for use by the Russian military.

Timings

The “No Russia” contractual prohibition is required to be in place as of 20 March 2024. There is an exception for supplies made under contracts that were concluded before 19 December 2023, for which the clause must be in place as of 20 December 2024. (There is some ambiguity in the wording of the timings of the grace periods which might be interpreted as indicating that new contracts concluded before 20 March 2024 are not required to include the clause. But it may be risky to rely on this interpretation.)

Partner countries

Contracts with customers in partner countries are exempted, since these countries are considered to have effective sanctions enforcement regimes in place that prevent re-exports to Russia. These are the US, UK, South Korea, Australia, Canada, New Zealand, Norway and Switzerland.

Breaches

The contracts with customers in third countries are required to include “adequate remedies” in the event of a breach of the “No Russia” contractual obligation.

In the event of such a breach by a third-country counterpart, EU exporters are required to inform the competent authority of the Member State where they are resident or established as soon as they become aware of it.

Licensing

Article 12g does not provide any exceptions or grounds for competent authorities to issue a derogation (i.e. a licence) that would permit the inclusion with the “No Russia” clause of an exception for items that have been duly licensed for supply to Russia.

This may lead to a perverse situation in which an item could be licensed to be supplied directly to Russia but it cannot be licensed to be shipped via a third country.

The Commission has not so far published guidance in its FAQs on this or other issues related Article 12g. But it is to be hoped that, as such (presumably unintended) consequences of the new requirements are identified, the Commission will provide appropriate clarification.

Implementation

Businesses may wish to consider drafting a model “No Russia” clause for insertion in all relevant contracts before the implementation dates. Alternatively (subject to the amendment options provided in their contracts), they might write to all relevant counterparties to give notice that a “No Russia” clause will be in effect from the applicable date.

Given the requirement to provide for “adequate remedies”, the clauses should provide for appropriate indemnities in the event of a breach by the counterparty, such that they will for example meet the full costs of any sanctions enforcement penalties that may be imposed on the EU exporter as a result of a breach.

In practice, this contractual requirement appears likely to place a significant new compliance burden onto the counterparties. They are likely to need to implement new procedures to keep themselves updated of which items are listed in the relevant annexes of the EU Regulation (which are regularly expanded) and to ensure that any such items received from their EU supplier are not re-exported to Russia. They might (not unreasonably) ask their EU suppliers to notify them in advance if any items to be supplied to them are prohibited to be re-exported to Russia.

It is also worth highlighting that the “No Russia” clause required under Article 12g refers only to a relatively narrow set of items considered to be at highest risk of diversion to Russia. But there are many other items that are also prohibited to be supplied to Russia (for example in Annexes II, VII, X, XVI, XVIII and XXIII). EU exporters are equally obliged to ensure that these items are not re-exported to Russia, for example through due diligence on their customers and end-users, and end-user certifications. Businesses seem likely to want to maintain such due diligence measures in respect of all sanctioned items, whether or not they are covered by the “No Russia” clause, and potentially to consider going further and including all sanctioned items in their own version of the “No Russia” clause.

UK considerations

The UK has not (at least, not to date) adopted a measure equivalent to Article 12g, so there is no requirement for UK exporters (unless their activities are subject to EU jurisdiction) to amend their contracts with customers in third countries and no restrictions preventing the UK authorities from issuing a licence authorising sanctioned items to be supplied to Russia via a third country.

However, the UK has signalled its strong commitment, in common with the EU and other G7 partners, to crackdown on the circumvention of sanctions through third countries and expects exporters to exercise effective due diligence on counterparties, intermediary companies and apparent end-users to prevent this, as set out in published guidance. As noted above, failure to take adequate due diligence can itself amount to a sanctions violation. 
 
* The contents of this article do not constitute legal advice and are provided for general information purposes only.