Is the EU’s new tool against sanctions evasion unusable?

By establishing new punishments for countries helping Russia evade sanctions, the EU may have created a rod for its own back, write Steven Farmer and Iris Karaman.

Steven Farmer is a Partner and Iris Karaman is an Associate at the international law firm Pillsbury.

Sanctions regulators throughout the EU have had a busy year and a half. In particular, one EU regulator recently reported that it had identified around 3,000 attempts to circumvent the sanctions imposed by the EU on Russia following the invasion of Ukraine.

Such reports are fuelling concerns amongst EU lawmakers that the effectiveness of its measures is being threatened by sanctions circumvention and evasion, with further data from twelve EU countries, as well as Norway, the UK, the US and Japan, suggesting that the circumvention of export sanctions on Russia amounted to around €8 billion in 2022 alone.

These concerns around sanctions circumvention have prompted a noticeable shift in the EU’s approach.

In particular, the EU has recently sought to impose measures to clampdown on circumvention by third countries with the latest package of sanctions, published in June this year, including ‘unprecedented measures’ to allow the bloc to restrict the sale and export of goods to certain third countries under threat of punishment, where those countries are found to have facilitated breaches of EU sanctions.

The EU has revealed this new sanctions tool with no small amount of fanfare, and on paper it would appear that the EU has strengthened its sanctions arsenal considerably, making it now possible to punish countries that help Russia to evade sanctions.

The reality, however, may be somewhat different, and in all likelihood, the EU is more likely to shy away from doing so.

For instance, the tool can only be used after a list of products that it believes are being circumvented and a separate list of countries where those products cannot be sold anymore have been drawn up, which is no simple feat given the difficulty associated with tracking sanctioned goods that are not sent directly to Russia.

In addition, all diplomatic measures must be exhausted before a country is added to the list – i.e., the EU has essentially baked into the law that the tool can only actually be used as a last resort, transforming it into more of a threat than a practical measure.

Perhaps the greatest impediment to the tool is the politics that underpin it. Even if all diplomatic avenues are exhausted, the tool requires unanimity for it to be applied.

The protracted negotiations that surrounded the tool’s creation, which saw opposition in some corners in France and Germany, for example, will hardly reassure those hoping for the necessary unanimity for it to be used.

Of note, in a statement responding to the publication of the sanctions package, the German Economy Ministry’s commitment to diplomacy over the use of the tool was clear, with an official spokesperson stating that ‘if it is possible to prevent sanctions evasion through closer cooperation, this is always the preferred means.’

Behind the concerns over the use of the anti-circumvention tool is the understandable concern that punitive measures, liberally applied, will simply drive third countries into the orbit of Russia.

Whilst negotiations were ongoing, one unnamed diplomat warned that the EU needed to be careful its approach didn’t ‘drive the countries we talk about into the arms of India, China or Russia’.

Such concerns were again raised, when the 11th sanctions package was published, with an anonymous diplomat declaring that the EU doesn’t ‘want to risk jumping straight into the punitive measures, which has a huge potential downside risk of pushing those companies, especially those in Central Asia, into the arms of Putin.’

Nonetheless, countries that may suspect themselves of being on the EU’s radar for facilitating sanctions circumvention will have felt the heat rise when the EU introduced these new measures, and so it may prove effective in the short term.

However, in creating the tool, in the longer term, the EU might have created a rod for its own back, whether it fails to exercise its powers under it, or it chooses to do so.

It remains to be seen whether the EU has created a weapon that it is unable, or simply unwilling, to wield, and whichever way it turns in terms of utilising its powers, what the ramifications of that might be.