On 22 February 2024, the EU issued responses to FAQs in a new “guidance document” relating to sanctions regulations issued in December 2023 (specifically, the Frequently Asked Questions on: “No Re-Export to Russia” Clause, related [to] article 12g of Council Regulation 833/2014). This new guidance document demonstrates the EU’s continued commitment to strengthen sanctions against Russia and prevent export bans from being circumvented. 

Initial commentary relating to the no re-export clause and the guidance document has led to concern from some parties about the sheer number of contracts that an entity may have to amend, as well as projected pushback from non-EU contracting parties (particularly where those agreement are not otherwise the subject of amendments or even discussions). Moreover, firms have questioned whether the insertion of such a clause could render certain existing contractual provisions unenforceable. 

The reaction that has emerged since publication of the guidance document has also led to confusion among some market participants of exactly what language is sufficient, as well as when an amendment is necessitated, desirable or indeed, not necessary. This has led to some agreements being amended on a “better safe than sorry” basis; while caution may not be a bad response, it is not particularly attractive for a number of reasons leading to agreements becoming longer and more complex than is necessary. Although adherence to these requirements is critical, below we detail how and why this is achievable for EU exporters. 

Applicability of 12g

At issue in the EU’s new guidance document is Article 12g of Council Regulation 833/2014 (“Regulation”), which requires EU exporters to include a “no re-export to Russia” clause in export contracts, which specifically include those related to export, sale, supply, and transfer of goods. The requirement for such a clause is constrained to export contracts with specific countries and relating to specific goods/technologies.

Geography

As to countries, the Regulation concerns exports from EU-based entities to non-EU entities, with multiple exceptions. Specifically, the clause need not be included in contracts with Australia, Canada, Japan, New Zealand, Norway, South Korea, Switzerland, the United Kingdom, and the United States of America (See Annex VIII Council Regulation 833/2014 (“the Regulation”). These countries are generally considered to have adopted export bans similar to those of the EU, thus mitigating the risk of re-exports to Russia in contravention of the EU sanctions. The selected applicability of the clause depending on the non-EU country in question also suggests that there may be differing levels of scrutiny applied to reviews of different no re-export clauses.

Goods

As to applicable goods/technologies, the clause must be included in contracts relating to “sensitive goods,” which include the aerospace industry, jet fuel, firearms, ammunition, and other “common high priority items,” such as certain technological components (See Annexes I, XI, XX, XXXV, and XL in the Regulation). A fundamental review of these categories of goods demonstrates the EU’s focus on goods/technologies that may be used in conflict or warfare.

New and existing contracts

As to covered contracts, the guidance document provides that a “no re-export to Russia” clause must be included in any new contracts, for those exports described above, on and from 20 March 2024. In addition:

  • For contracts concluded before 19 December 2023, the deadline to include a “no re-export to Russia” clause is 20 December 2024. These contracts benefit from a one-year transition period. 
  • For contracts concluded on or after 19 December 2023, the deadline to include a “no re-export to Russia” clause is 20 March 2024.

Implications

The Regulation and the issuance of the new “guidance document” demonstrate that EU exporters must perform a due diligence review of their contracts with non-EU countries. Nevertheless, certain elements of the Regulation render the task ahead for EU exporters reasonable with the right guidance and information. These elements include:

  • Clause language: The guidance document contains a template for a “no re-export to Russia” clause that would fulfil the requirements of Article 12g. Nevertheless, the guidance provides that EU entities are “free to choose the appropriate wording” for the clause, as long as it fulfills the requirements of Article 12g. The option to create clause text that meets the requirements of the law and is amenable to both contracting parties increases the likelihood of swift re-negotiation of contract terms in the event that re-negotiation is necessary.
  • Remedy for breach: Article 12g requires that all “no re-export to Russia” clauses contain “adequate remedies in the event of a breach” by the non-EU party. However, there is room for interpretation as to the nature of the “adequate remedies” provided for in the clause. According to the guidance document, these remedies should be “reasonably strong” and “aim to deter non-EU operators from any breaches.” The guidance document suggests, but does not require, that the remedies could include termination of the contract and the payment of a penalty. When negotiating with non-EU exporters, the flexibility as to remedy language will be an asset in ensuring both negotiating parties are satisfied with the terms.
  • Enforceability and reporting: The Regulation envisions that enforcements and judgments relating to breach of its provisions, including Article 12g, are handed down by national courts (See Article 6 of the Regulation). As to reporting obligations, EU exporters must notify their national competent authority as soon as they become aware of a breach or circumvention of a “no re-export to Russia” clause (See Article 12g (4) of the Regulation). Although EU exporters must provide notice of a known breach, neither the Regulation nor the guidance document establishes a penalty for EU exporters when a non-EU party breaches a “no re-export to Russia” clause. Nevertheless, EU exporters must still pay close attention to national law and obligations to ensure compliance.

Moving forward, EU entities will need to review and consider contracts relating to exports to non-EU entities. Member states will need to consider and provide for penalties for breach of any no re-export to Russia clause. With a due diligence review of existing and new contracts, EU entities will be in a position to make necessary amendments in time to meet the deadlines provided for in the guidance document. Reed Smith’s global team of asset finance, transactional, and sanctions attorneys are ready to assist with the swift and pragmatic review of contracts needed to ensure compliance.