Today marks the one year anniversary of Russia’s invasion of Ukraine, and we are still awaiting the EU’s long signaled 10th sanctions package, which was pledged to be a key statement of the resolve of the Union and further demonstration of the effort to hinder Russia’s ability to wage aggression.
Pegged by some just last week that the approval process would be smooth sailing to a comprehensive package targeting Russian revenue streams, sanctions circumvention and measures to enhance the ability of the union to implement sanctions, it seems the final result will mostly be more of the same as previous packages rather than a fresh broadside against the Russian economy. As we previously highlighted, previously proposed components of the 10th package would have been marked expansions to the scope of Russia sanctions and included targeting of the nuclear sector, a ban on importing diamonds, and more restrictions on rubber imports, all revenue generators for the Kremlin. It seems though that all of these proposals won’t make it into the final text.
Why were the most expansive measures removed? The simple answer is out of concern for the economic impact on EU member states and Hungary’s increasing opposition to impose further costs on Putin. Hungary staunchly opposed any targeting of Rosatom or Rosatom officials even with carve outs for key pain points such as continuing fuel imports, resulting in nixing even very targeted designations related to Russia’s nuclear activity. The asserted disproportionate impact on the European diamond trade resulted in import restrictions removed from the package in favor of G7 pledges to establish a broader track and trace mechanism. And targeting synthetic rubber with a permitted import quota exceeding the unrestricted annual totals for any year in the past decade to protect select firms and industries held up the last minute approval by Poland for being too permissive.
What does this mean for future sanctions?
The key takeaway for us on the outside from the seemingly intractable negotiations, beyond a slimmed down package, is that for the future we are likely to see the focus of EU and G7 sanctions pivot from imposing additional costs on Russia to holding the line and enhancing implementation through targeting circumvention and evasion efforts.
As EU, US and other officials have highlighted, in the last year exports to Russia from the EU, UK and US have dropped, however exports to Russia’s neighboring countries have increased. Exports to Russia more than halved between May and July last year, whereas exports to Armenia and Kyrgyzstan increased by more than 80% and in turn their exports to Russia doubled in the same period, raising calls to do more on sanctions evasion and workaround.
As a result, we will see increased designations against individuals and companies engaging in circumvention and evasion, both in Russia’s neighbors and around the world, as well as increasing calls for applying punitive measures to countries that are permissive jurisdictions for such activity. These broader targets of countries would likely include expanded export control prohibitions towards those countries, and in the future, potentially limiting trade access to the EU single market and other G7 markets.
Increased focus on circumvention and evasion efforts likely also means increased scrutiny and, importantly, requests for information and explanation from local and international enforcement and regulatory bodies as well as the press over activities that are seemingly not in line with the letter, or the spirit, of the sanctions on Russia.