‘No re-export to Russia’ clause to become mandatory for EU operators

Since Russia's invasion of Ukraine in February 2022, the EU swiftly adopted unprecedentedly tough sanctions. The 13 packages of EU sanctions adopted since then have resulted in an unparalleled set of measures targeting key sectors of the Russian economy and political elites. However, the unprecedented nature of the sanctions imposed against Russia, in scale and scope, have created new implementation challenges. EU sanctioned goods still find their way to Russia, albeit through increasingly complex routes and schemes.

Against this background, member states and EU institutions have renewed efforts to close loopholes to prevent circumvention. Among others, the EU has established legal instruments such as the ‘no re-export to Russia’ clause to tackle sanctions circumvention. It is not just companies continuing business with Russia which have to take sanctions seriously. The new instrument applies to operators selling, supplying, transferring or exporting certain goods to third countries. 

Many EU operators already insert ‘no re-export to Russia’ clauses in their contracts restricting onward movements into Russia or for use in Russia, as a best practice within their due diligence. For EU operators that have not reviewed or updated their contracts, it is important to check if their commercial contracts fall within the wide-ranging scope of Art. 12g of Regulation (EU) No 833/2014.

Scope of the ‘no re-export to Russia’ clause

The mandatory requirement to insert a ‘no re-export to Russia’ clause applies for certain sensitive goods destined for third countries except for ‘partner’ countries, such as the UK or the US. Under the EU regulation, contracts concluded on or after 19 December 2023 must contain such a clause as of 20 March 2024. To ensure compliance, EU operators need to be familiar with the wide-reaching scope of the requirement. 

What contracts are covered?

Art. 12g obliges EU exporters to insert a ‘no re-export to Russia’ clause in their contracts which involve any selling, supplying, transferring, or exporting to a third country. It is important to note that not only sales agreements are covered. 

The obligation to include the clause depends on the contract’s date of conclusion. Contracts concluded before 19 December 2023 benefit from a one-year transition period until 19 December 2024 or until the contracts’ expiry, whichever is earliest. For any execution of these contracts as of 20 December 2024, they need to be amended to include the clause.

Contracts concluded as of 19 December 2023 must contain a ‘no re-export to Russia’ clause as of 20 March 2024. Exporters should not sell their products to any non-EU operator that is not ready to incorporate a ‘no re-export to Russia’ clause in contracts falling under the scope of Art. 12g.

What goods are covered?

The obligation applies to specific types of sensitive goods, including goods related to aviation, jet fuel, firearms and Common High Priority items that are listed in the relevant Annexes to the Regulation. In particular, the latter category may affect many companies, since it covers a broader range of products, such as ball bearings.

If companies cannot rule out with certainty that goods they are dealing with fall outside of the Annexes in scope, it would be prudent to include a ‘no re-export to Russia’ clause.

Which third country destinations are not covered?

The obligation does not apply in respect to goods destined for so-called ‘partner’ countries: that is the US, the UK, Japan, South Korea, Australia, Canada, New Zealand, Norway and Switzerland. These countries are considered to have adopted substantially equivalent export bans to those of the EU. Therefore, there is no elevated risk of a prohibited re-export to Russia.

What are “adequate remedies” for a breach by the third country operator?

To ensure its effectiveness, the ‘no re-export to Russia’ clause must contain adequate remedies to be activated in case of its breach. These remedies should be reasonably strong and aim to deter non-EU operators from any breaches. They can include, for instance, termination of the contract and the payment of a penalty. Notably, Art. 12g requires exporters to inform their national competent authorities as soon as they become aware of a breach of the “no re-export to Russia” clause.

Key steps for implementation

EU operators need to perform thorough checks to ensure they implement the legal requirement correctly. Firstly, they must check if their goods are covered by the Annexes referred to in Art. 12g. Even if not, there may be other sanctioned EU goods in the portfolio for which operators may voluntarily implement a ‘no-export to Russia’ clause.

Secondly, EU operators should check which existing contracts are affected. Changing existing contracts requires thoughtful consideration. For instance, it is common in commercial contracts to include a provision that any changes made to a contract are ineffective unless made in writing and signed by or on behalf of both parties. In certain cases, the governing law may conflict with a ‘no re-export to Russia’ clause. Negotiations should commence imminently for those contracts which are subject to the first transition period expiring on 20 March 2024.

Lastly, exporters have to make sure that all concerned new contracts comply with Art 12g, and an effective way to achieve this is via a corresponding template.

Relevance for UK operators

The UK has not yet implemented a similar obligation equivalent to Art. 12g. However, Russia is likewise trying to procure UK sanctioned goods through complex supply chains and alternative supply routes.

The List of Common High Priority Items referred to in Art. 12g was developed together with the UK, US and Japan. Goods on the UK’s Common High Priority items list in light of its Russia Regulations are at high risk of being used in Russian sanctions circumvention efforts. UK businesses are therefore advised to conduct additional due diligence to ensure that the end destination of these products is not Russia.

The importance of due diligence

Independently of the obligation established by Art. 12g, operators should have in place strong due diligence frameworks to ensure sanctions compliance. EU and UK operators have an obligation to carry out due diligence when trading with third countries to ensure that their business partners are not circumventing sanctions. They should identify, assess and understand the possible risks of circumvention that are most relevant for their business activity and operational model, and should take action to mitigate such risks. This should be carried out on a recurring basis.

When doing this, an operator must have satisfactory procedures in place for following and maintaining the necessary information, including sanctions legislation and circumvention trade flows, and keeping them up to date. Staff training on these issues is also of critical importance. Art. 12g does not relieve operators from further due diligence and any red flags identified could lead to additional obligations to prevent circumvention.