Photo: An exchange office in the center of St. Petersburg. February 28, 2022. Credit: Valya Egorshin/NurPhoto.

Tightening the Screw? — EU’s New Sanctions on Russia

A chasm has opened between the sanctions applied by the European Union (EU) and the US.

August 26, 2024

The difference between the EU and the US allows cash to flow into the Russian war machine and must be closed if the West is to tighten the screws on the Kremlin.

These problems are apparent from the EU’s 14th package of economic measures against Russia introduced on June 24, the most painful of which are aimed at sanctions busters and Russian liquefied natural gas (LNG) exports.

Despite the export ban on dual-use technologies and products, Russia consistently procures EU-originated equipment and technology crucial for its weapons systems, often through third-country intermediaries in China, Kazakhstan, Kyrgyzstan, Turkey, and the United Arab Emirates.

The missiles Russia fired at Ukrainian cities in July, including at a children’s hospital in Kyiv, used Western-designed components, particularly microelectronic and aviation parts. Indeed, Ukrainian government research has so far identified 3,638 Western military components in the Russian weapons systems used against it. Unlike the US, which targets embargo-busters in third countries, the EU’s effort is aimed at strengthening compliance within its own private sector. The EU has effectively delegated the lion’s share of the compliance and control to businesses.

The “best-efforts” obligation for EU companies regarding their foreign subsidiaries requires firms to mitigate and manage Russia-related non-compliance risks by implementing obligatory procedures and checks. Additionally, previously recommended due diligence practices for export control compliance are now mandatory for EU companies selling Common High Priority (CHP) items, including dual-use and technology items. They must now apply due diligence mechanisms to identify and mitigate the risk of re-exportation to Russia.

This requirement extends to ensuring that international subsidiaries adhere to the same standards. In short, every company is now responsible for ensuring its products don’t end up in a Russian missile.

However, the EU falls short of expanding the policy to an absolute prohibition on Russian trade through non-EU subsidiaries owned or controlled by EU companies, instead limiting this to best efforts. Currently, as adopted in the 12th Sanctions Package, the policy applies to EU operators selling certain restricted goods like aviation-related items, jet fuel, firearms, and other technology. Instead of a comprehensive clause prohibiting EU companies’ foreign subsidiaries from re-exporting to Russia, the “best efforts rule” was adopted, largely due to Germany’s reservations.

This vaguely defined rule could create uncertainties for businesses, necessitating the EU to provide clear guidelines, implementation parameters, and defined liabilities. But the bloc has historically been cautious about sanctioning third countries, preferring “alternative measures” and focusing on EU operators’ responsibility for sanctions violations (again, unlike the US, which on August 23 sanctioned another 400 foreign companies.) The effectiveness of the new anti-circumvention efforts will ultimately depend on implementation by private companies and enforcement by national authorities.

The second significant element of the package targets Russia’s LNG industry, marking the first EU legal restrictions on natural gas. Despite a collapse of the pipeline gas trade from the East, the EU is Russia’s fourth-largest buyer of fossil fuels and its largest LNG customer. In 2023, Russia sent more than half its LNG exports to the EU (51%), earning €8.1bn ($8.9bn.) It remained the EU’s second-largest LNG supplier in early 2024, accounting for 17.7% of imports, second only to the United States (47.4%).

Key measures in the package include banning Russian LNG transshipment through EU ports and prohibiting imports into terminals not connected to the EU gas pipeline network. These restrictions are designed to increase logistical costs for Russia, impacting its LNG revenues and limiting its ability to use EU infrastructure for shipments to third countries.

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It is estimated that around 22% of Russia’s LNG inflow to the EU in 2023 was transshipped through EU ports and subsequently re-exported globally, with 8% going to EU member states. To thwart Russia’s LNG expansion, the EU prohibits new investments and the provision of goods, technology, and services for the completion of key Russian LNG projects under construction, including Arctic LNG 2 and the Murmansk LNG. Even so, the EU falls short of a blanket ban on Russian LNG. Unlike the EU’s 2022 ban on Russian seaborne oil, the current package only limits LNG transshipment through EU ports. This ban includes a lengthy nine-month wind-down period, which probably weakens its immediate impact.

Furthermore, the ban may have minimal impact and potentially be counterproductive: the transshipments of Russian LNG to Asia via EU ports represent only a small portion of the total. It might now be absorbed by European markets, increasing Russian LNG volumes in the bloc. Ultimately, the EU’s continued reliance on Russian LNG and gas pipeline supplies, both direct and indirect, complicates the implementation of more restrictive measures.

While gradually aligning with United States sanctions, the EU doesn’t target intermediaries with secondary sanctions, or cut energy ties with Russia.

The dependency on Russia’s hydrocarbons, which the EU aims to overcome by 2027, contrasts sharply with the US’s more comprehensive bans on Russian oil, gas, and coal imports and stricter restrictions on energy-related technology exports.

The EU also faces additional challenges, such as the need for unanimous agreement among member states and variations in implementation across countries, which can dilute the sanctions’ impact. The omission of a comprehensive “No Russia” policy in the latest package underscores the complexities of balancing sanctions with energy security concerns.

Moving forward, the EU’s sanctions strategy requires greater vigilance, diplomatic liaison, and a willingness to endure short-term economic challenges for long-term strategic gains. Without these efforts, the EU will lag behind the US in its pressure against Russia.

The first co-author is an academic currently living in the US, who was raised in Belarus and still has family there. Their name is therefore withheld

The second co-author is Alexander Kolyandr, a Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA) specializing in the Russian economy and politics. Previously, he was a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.

Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.