26.01.2024

Russia embargo - part 2: 12th sanctions package contains important deadlines!

Part 2: Prohibition on intra-group services and/or software – deadlines: 18 December 2023 / 20 March 2024 / 20 June 2024

Background

On 18 December 2023, the EU published its 12th package of sanctions, comprising Regulations (EU) 2023/2873, 2023/2875 and 2023/2878, to tighten the embargo against Russia. Amongst other things, the package includes new provisions that apply to all companies that still have subsidiaries in Russia.

Former Article 5n of Regulation (EU) No. 833/2014

Under the already known version of Article 5n of the applicable Russia embargo Regulation (EU) No. 833/2014, it was already prohibited to provide to legal persons, entities or bodies established in Russia (or to the Government of Russia), directly or indirectly:

  • accounting and auditing, including statutory audit, services;
  • bookkeeping and tax consulting services;
  • business and management consulting and public relations services;
  • architectural and engineering services;
  • legal advisory services;
  • IT consultancy services;
  • market research and public opinion polling services;
  • technical testing and analysis services; and
  • advertising services.

At first glance, this prohibition appears to affect only “external” providers of such services. De facto, however, it is also relevant with regard to intra-group services. Based on the wording of the prohibition, it does not matter whether such “business and management consulting services”, “legal advisory services” or, for example, “IT consultancy services” are provided by an independent consultancy firm to a Russian client or whether they are provided by an EU parent company to its Russian subsidiary.

According to the exception stipulated in Article 5n(7), however, this does not apply to the provision of services intended for the exclusive use of companies established in Russia that are owned, or solely or jointly controlled, by an EU company; the same applies accordingly to Russian subsidiaries of parent companies from within the European Economic Area or a partner country as listed in Annex VIII to the Regulation (currently, the USA, the UK, Japan, South Korea, Australia, Canada, New Zealand, Norway, and Switzerland).

Amended Article 5n of Regulation (EU) No. 833/2014

Regulation (EU) 2023/2878 of 18 December 2023 has amended Article 5n in significant respects. According to the new Article 5n(2b), for example, it is now also prohibited to sell, supply, transfer, export, or even merely provide, directly or indirectly, software for the management of enterprises and software for industrial design and manufacture as listed in the new Annex XXXIX to companies established in Russia (or to the Government of Russia). The relevant Annex contains a comprehensive list of software that is subject to sanctions, including software regarding, for example:

  • enterprise resource planning (ERP);
  • customer relationship management (CRM);
  • supply chain management (SCM);
  • project management;
  • accounting, fleet management, logistics and human resources;
  • computer aided design (CAD); or
  • computer aided manufacturing (CAM).

The above prohibition is accompanied by the newly inserted Article 5n(3a), according to which it is prohibited to provide, directly or indirectly, technical assistance, brokering services or other services, or financing or financial assistance, related to the already prohibited services or the aforesaid software.

Companies distributing software that is now subject to sanctions may be able to rely on the interim rule set out in Article 5n(4b), according to which the prohibition under the new paragraph 2b does not apply to contracts that were entered into before 19 December 2023 if performance takes place by 20 March 2024.

More crucially, however, the exception provided for in Article 5n(7), that is, the exemption from the current prohibitions on services, including the new prohibition on software, related to Russian subsidiaries has now been limited to the period until 20 June 2024! For the period thereafter, a special authorisation may be applied for with the competent authority – in Germany, the Federal Office for Economic Affairs and Export Control (BAFA) – according to Article 5n(10)(h).

Equally important, it appears that the new prohibition on providing (inter alia) technical assistance and other services related to the services that are subject to sanctions or the relevant software (new paragraph 3a) is not intended to be covered by the current exception provided for in Article 5n(7): If applying the rule literally, this therefore means that such services to Russian subsidiaries (including at an intra-group level) have been prohibited since the entry into force of the 12th package of sanctions on 18 December 2023! Even though the new conditions for authorisation set out in Article 5n(10)(h) apply also in this case, there is no transition period.

Impact and recommendations

To date, neither the European Commission nor the German Office for Economic Affairs and Export Control (BAFA) nor the German Federal Ministry for Economic Affairs and Climate Action (BMWK) has commented on the changes regarding Article 5n of the Russia embargo Regulation. German (and European) companies that still have subsidiaries in Russia and are affected by the prohibitions on services and software have little choice but to submit an application for authorisation to the competent authorities in accordance with Article 5n(10)(h). In light of the notoriously long time it takes for the BAFA to handle applications – and also with regard to the fact that the prohibition on providing technical assistance and other services may already be applicable – this should be done immediately so as to obtain the authorisation by 20 June 2024, in a best case scenario.

Unconfirmed reports have it that the German Office for Economic Affairs and Export Control (BAFA) is considering a general authorisation. It remains to be seen what its contents might be, and also its conditions. In spite of this, there is probably no way around submitting a precautionary application for an individual authorisation.

Author
Ole-Jochen Melchior

Ole-Jochen Melchior
Partner
Essen
ole.melchior@luther-lawfirm.com
+49 201 9220 24028