destroyed building© Pexels/Ales Uscinau

Ramifications of the War in Ukraine

Since February, the sanctions measures against the Russian Federation have developed dynamically. Large parts of the Russian economy are exposed to their effects. Even where this would be legally possible, it is increasingly unprofitable for German companies to remain in Russia. Policy-makers and the business community should prepare for the EU-Russia embargo to remain in force for decades.

As recently as July, the EU strengthened its embargo against Russia with the “maintenance and alignment package” and made significant specifications in some areas. The new measures continue to exclude Russia’s food, grain and fertilizer exports. The preamble to Regulation (EU) 833/2014 now contains an explicit clarification in this regard.

EU-Russia Embargo

So far, the EU’s Russia embargo – not taking into account the sanctions measures against Belarus – can be roughly divided into five categories of specific sanctions measures:

  • Personal sanctions against individuals and legal entities. To date, some 1,250 individuals and over 100 entities have been sanctioned;
  • Export bans, for example, against dual-use goods and other technology, as well as technology relevant for the mining of raw materials Russia, for maritime shipping and a number of luxury goods;
  • Import bans on gold, iron and steel products, coal and petroleum products, among others. If exceptions are granted based on special import licenses, the latter may not be exported;
  • Various restrictions on access to the domestic market, such as exclusion from public tenders, access prohibitions for ports and locks, closure of the European airspace;
  • Financial sanctions form the backbone of the EU’s Russia embargo, as this is where the lifeline of the Russian real economy is hit. Particularly noteworthy here are:
    • sanctioning of the Russian Central Bank and its foreign currency reserves abroad;
    • prohibition for rating agencies to quantify the risks in doing business with Russia;
    • prohibition on the provision of accounting, auditing, bookkeeping or tax consulting services;
    • disconnection of a total of ten Russian banks from SWIFT's financial messaging services.

The disconnection from SWIFT in particular should be considered as to its practical effects. A disconnection from SWIFT does not prevent banks from carrying out transactions. It makes transactions significantly more difficult and increases the associated costs for financial institutions. A real decoupling of the Russian banking sector has not yet been considered. Such an exclusion from major Western currencies (clearing ban) would isolate the Russian economy internationally overnight, because it would prohibit banks doing business with Russia from accessing the transatlantic currency markets.

Risks of the sanctions

Strengthening the EU’s Russia embargo (Regulation (EU) 833/2014 and Regulation (EU) 269/2014), which has been in force since the annexation of Crimea, has been advanced at an enormous speed since Russia’s attack in February 2022. Companies face uncertainties regarding applicability and affectedness. Such uncertainty causes an enormous workload – also and particularly for the Federal Office of Economics and Export Control (BAFA) as the competent licensing authority. Economic operators must expect longer processing times at BAFA.

Challenges and Options

By the end of 2022, some core industries expect to have withdrawn their business from Russia by up to 90 percent. Regarding the application of the EU’s Russia embargo, however, it is the view of BDI that the use of customs tariff numbers remains problematic. As a means of tariff classification, these refer to entire groups of goods and do not allow precise conclusions to be drawn about individual export restrictions. This practice was introduced following Russia’s latest military aggression against Ukraine in 2014. In that sense, a thorough technical revision of the embargo is desirable in order to establish legal certainty wherever economic operators continue to be contractually obligated to maintain business relationships with Russia.

Two years from now, Regulation (EU) 833/2014 and Regulation (EU) 269/2014 will have been in force for ten years. German industry must therefore prepare itself for the fact that the updated embargo will also remain in force for an extremely long period. A resumption of economic relations is hardly plausible, since concessions by the Kremlin necessary for this – rendition of suspected war criminals, withdrawal from the territory of Ukraine, reparations and reconstruction in Ukraine – can be ruled out.  Moreover, the unanimity required in the European Council for a reduction of the measures is not foreseeable even in the long term. Nevertheless, politicians and the business community should prepare structurally for a cautious resumption of relations. Since such a resumption – if at all – will be marked by numerous political uncertainties, the above-mentioned improvements and clarifications in the EU-Russia embargo are necessary. Only then could a gradual and incremental withdrawal of individual sanctions, linked to measurable Russian concessions, be implemented in a way that makes sense in terms of foreign, security and economic policy.