2. Summary and recommendations
2.1. Summary
In the past decade, a significant shift has occurred in the landscape of international human rights enforcement. Sanctions, once primarily seen as tools of economic or political leverage, are increasingly being recognized and utilized as instruments for protecting human rights. Yet the findings in this report suggest that there is a lack of consistency in compliance with the sanctions against Russia (also referred to as the "Russia sanctions") in Europe.
Our aim is to expose holes in the sanctions net, based on groundbreaking research that has already been presented by major European media outlets, such as Der Spiegel and Frankfurter Allgemeine Zeitung; to relate these findings to the implementation and enforcement of sanctions (especially across the community acquis and related jurisdictions); and to provide recommendations to stakeholders on how to strengthen sanctions legislation, enforcement, and compliance.
The report explores the emergence and significance of sanctions as a human rights instrument (chapter 2). We delve into the specific case of the Russia sanctions, that is, the export controls, providing updated data and macro trends, regarding their application and impact, including an estimate of the total Western exports of sanctioned goods, and an updated survey of the European exports of 17 groups of dual-use and other war-relevant goods (chapter 3).
Further, we will discuss the legal implications of sanctions violations (including circumvention) and the tools at the disposal of national authorities seeking to crack down on such violations, as well as enforcement records in practice (chapter 4). We will then look at the reputational and practical implications of sanctions violations for the business community, including investors (chapter 5).
In essence, the Russia sanctions are a human rights instrument aimed at ending an illegal war, which in turn has implications for all stakeholders in the so-called sanctions coalition: regulators, enforcement bodies and business communities. Violating or not enforcing sanctions could prolong the war, a cost in blood that Ukraine and its people would have to bear. Physical or legal persons who violate sanctions not only risk being liable under sanctions laws, but also becoming complicit in international crimes, with serious ethical, legal and reputational consequences. Moreover, if violations occur on a large scale, it could delegitimize sanctions as an institution, which would also be detrimental to international security and human rights.
The Russia sanctions are vast and complex. This report mainly focuses on export controls on war-relevant (mostly dual-use) goods imposed by members of the sanctions coalition against Russia, as these exports are a critical front in the ongoing war. Experts generally agree that the Russian war effort remains dependent on Western technology. Making the sanctions more effective, could therefore contribute to shortening the war.
Like many other researchers, we first present estimates of the total trade in sanctioned goods based on "excessive trade" with Russia's neighbors, and such estimates indicate that Western companies, including from Europe, North America, and Japan, exported goods worth 1-3 billion Euros per month to Russia via its neighbors.
However, we also provide a unique in-depth survey of the exact European exports of 17 groups of sanctioned commodities to Russia, amounting to almost 300 million Euros per month for this limited group of war-relevant goods, which we record both at commodity and European country level. As far as we know, there are no similar holistic surveys of trade in sanctioned goods available for policymakers, enforcement bodies, and business managers.
Our findings suggest a lack of consistent compliance across the coalition. The European Commission's most recent sanctions packages, related measures, such as diplomatic efforts, as well as increasing public attention, have had a visible impact. Exports of war-relevant goods are shrinking. However, by August 2023, the flow of sanctioned goods to Russia from the West remains substantial.
We also present in-depth analyses of sanctions violations (direct and indirect) from two states in the coalition, Norway and Finland, based on a data set of the almost 4,000 individual shipments of sanctioned goods produced in those states. This represents the total exports to Russia from the two Nordic states, excluding most of the goods sold to Russia via the four members of the Eurasian Economic Union (EEU). These case studies reveal some of the routes and tactics utilized to bring sanctioned goods to Russia.
Based on the data, we can compare the degrees of sanctions violations between Western countries and detect the most important holes in the sanctions net. The data confirm that Turkey and Kazakhstan are key gateways for the flow of sanctioned goods to Russia. More surprisingly, our findings reveal that large quantities of war-relevant goods also flow directly from Europe to Russia. A few Western countries display particularly large direct outflows of sanctioned goods, including Poland, Germany, and Lithuania, the latter shipping sanctioned goods partly via Belarus.
This stands in contrast to the United Kingdom, Nordic countries and countries in Southeast Europe, which generally appear to comply with sanctions. But even companies in these countries violate sanctions, with or without knowledge and intent (i.e. intentionally or inadvertently). There are markedly lower exports of the most war-relevant goods from Denmark, Austria, Hungary, Romania, Bulgaria, Greece, and Norway.
The data paint a picture of a Russian adversary highly skilled at utilizing a plethora of markets, intermediaries and mechanisms to import the sanctioned and war-relevant goods and technologies needed to continue its war in Ukraine.
The legal basis for the sanctions against Russia goes back to 2014, Russia’s illegal annexation of Crimea and the measures adopted in response by a number of democratic states, with Regulation 833/2014 as a key document for restrictions on export of goods to Russia, which is the key area of focus for this report. In addition to the EU and the US, the sanctions coalition also includes EU candidate states, the European Economic Area (EEA) and G7 states, as well as a number of other states including Switzerland, Taiwan, Singapore, Australia, and New Zealand. Important non-sanctioning states include Turkey, India, and China, among others.
After the full-scale attack on Ukraine in February 2022, unprecedented new restrictive measures were imposed on Russia by the EU. These have taken the form of 11 sanctions packages (so far). The export related restrictions on Russia have been implemented by way of amendments to Regulation 833/2014, targeting broad sectors of the Russian economy. Similarly, sanctions against Belarus, Russia’s closest ally, have been regularly strengthened, albeit not to the same degree. Significant differences remain between these two sanctions regimes, and Belarus is still a channel for the flow of certain sanctioned goods to Russia, including war-relevant commodities.
Article 2 of Regulation 833/2014 states that is it prohibited to "sell, supply, transfer or export, directly or indirectly, goods and technology which might contribute to Russia’s military and technological enhancement... to any natural or legal person, entity or body in Russia or for use in Russia." The ban against indirect dealings is closely linked to the prohibition against circumvention of sanctions. However, while circumvention is aimed at actions conducted "knowingly and intentionally" to circumvent the relevant provisions (e.g. a scheme to deliberately avoid the restrictions imposed by sanctions), the prohibition against indirect dealings with restricted goods and/or parties also targets inadvertent (negligent) breaches. This places an obligation of due diligence on companies to ensure that they do not inadvertently export goods to, or for use in, Russia.
It is worth noting that, in everyday parlance, the term 'circumvention' is frequently used interchangeably with 'indirect violation'. In the EU's draft proposal for a directive to harmonize penalties for the violation of sanctions (described in section 4.4 below), however, circumvention is distinguished from direct and indirect violations of sanctions. Specifically, circumvention is described as an act to conceal or provide inaccurate information about the status or ownership of a sanctioned person or asset.
The directive is still in draft form and the EU institutions themselves (in for example guidance documents (FAQs) and press releases) still frequently use the terms 'circumvention' and 'indirect violation' interchangeably. However, for the purposes of this report, we have used the term 'indirect violation' to refer to activities one might typically consider to be circumvention (within its everyday meaning), such as seeking to (indirectly) violate sanctions by exporting restricted goods to Russia via third countries. The term 'circumvention' is thus only used in the narrower sense just described.
While the EU establishes the legal sanctions framework, states are responsible for enforcing the sanctions at a national level. Across the member states of the EU, as well as Norway, the UK and the US, there are significant differences in the type and severity of penalties that can be imposed for different sanctions violations, as well as the extent to which individuals and corporations can be held criminally or administratively liable for such violations. In some states, violations of sanctions are solely a criminal offense or solely an administrative offense, while in others, violations can amount to either an administrative or a criminal offense.
The lack of information on enforcement (e.g., investigations, fines, warnings, verdicts), makes it hard to assess what types of penalties and levels of enforcement are most effective. A tentative conclusion, however, is that the UK's mixed system of penalties (including the relatively recent addition of a strict liability regime), combined with a transparent enforcement authority with increasingly aggressive rhetoric (the Office of Financial Sanctions Implementation, OFSI), may in part explain why there are relatively few sanctions violations by British companies.
It seems likely, too, based on information from enforcement authorities, that the more effective enforcement tools include negligence provisions (i.e. that natural and legal persons can be penalized for violating sanctions without intent or knowledge, if they should have known that their actions would result in a violation), and a form of corporate liability that can be imposed even where no identifiable individual (or individuals) may be held liable for the criminal act.
While enforcement remains relatively weak and inconsistent, there is a trend towards increasing enforcement action for sanctions violations. The trend is evident from statements made by authorities, as well as the number of pipeline cases currently under investigation. Companies involved in persistent and/or deliberate acts of direct and indirect sanctions violations, or companies generally failing to impose controls to prevent such violations, are thus exposed to a genuine risk of action being taken against them from enforcement authorities. Given that the sanctions are a human rights instrument aimed at ending an illegal war, violating the export controls on war-relevant goods not only means violating sanctions laws. In certain grave cases, it could even lead to complicity in Russia's war crimes.
2.2. Recommendations to EU institutions and national governments
Based on the findings of this report, we believe that a key problem is a lack of a consistent compliance culture across the sanctions coalition, and in Europe generally. This should not be surprising, given the sweeping and unprecedented nature of the Russia sanctions, and the speed with which they have been introduced. There are a number of holes in the sanctions net that need to be plugged to curb Russia’s violations of international law. These holes also have a direct adverse impact on businesses: companies that are compliant and refrain from illicit trade with Russia risk losing market share, to the benefit of competitors that violate sanctions rules via direct or indirect trade with Russian companies or otherwise in violation of appliable restrictions.
There is no silver bullet. All stakeholders must contribute. Many companies and investors do not seem to have adequate measures in place to analyze risks and conduct due diligence. There is a lack of awareness about the risks involved. This may be connected to enforcement authorities that do not always have the necessary experience, resources and legal tools to promote awareness and enforce compliance.
Export controls on war-relevant goods hurt Russia’s military industry and war effort, but the side effect is pain for Western economies and companies. There is a constant risk of "sanction fatigue", something the Russian government hopes for and seeks to nurture. For this reason, equitable burden-sharing is a must. If there are varying degrees of enforcement and compliance between states and companies, the coalition may indeed experience cracks and fatigue. Harmonization of compliance is thus key, and the EU, UK and US play leading roles in this effort.
To mend the holes in the sanctions net, based on the findings of this report, we believe that EU legislative and executive bodies, as well as national authorities, should consider the following measures:
Negligence provision. In its work to ensure the uniform implementation of restrictive measures in all member states, the European Commission proposed a directive to harmonize criminal offenses and penalties in December 2022. The European Parliament amended the proposal in July 2023, including by strengthening the draft directive to include a negligence provision (as opposed to the original proposal which required serious negligence). We believe it is critical that the EU criminalizes violations of restrictive measures (sanctions) when committed with negligence, i.e. that enforcement authorities can penalize or prosecute legal or natural persons who violate sanctions if they knew or should have known that their actions could result in a violation.
Closing the Belarus gap. While the Belarus sanctions have been strengthened and to some extent harmonized with the Russia sanctions, with the latest measures introduced in August 2023, there are still differences between the regimes. Our findings suggest that Belarus remains a channel for certain sanctioned war-relevant goods from the coalition to Russia.
Plugging the EU hole. A large number of sanctioned war-relevant goods go directly to Russia from ports and airports in the EU. This is a systematic feature. Goods from EU providers are sold to companies or individuals from third countries, while the goods are still in the EU. They are then sold to Russian counterparts by the companies or individuals from the third countries and transported directly from EU territory to Russia. Customs authorities, especially in the countries close to Russia and countries with much maritime trade, need to step up enforcement.
Removing the intermediaries from the equation. There are a number of companies, also within the EU, that function as intermediaries for exports, yet appear not to face consequences even when they are repeat offenders. There are even examples of companies being sanctioned by the United States, but still continuing their illicit trade with Russia. Enforcement authorities should deal more quickly and decisively with such offenders, based on a regular and more systematic monitoring of customs data.
Create incentives for business. Companies applying for contracts as part of the internationally funded rebuilding of Ukraine, should be informed that only those companies that comply with sanctions are eligible to participate in the tenders. The EU should work with Ukrainian authorities to track and document violations and use sanctions violations as a criterion for exclusion from reconstruction contracts. This would make it even more clear to exporters that they need to conduct effective due diligence.
Extend export licensing regimes for military, dual-use and other war-relevant goods. Many war-relevant and dual-use goods enter Russia via third countries, not least through members of the Eurasian Economic Union. The EU should consider extending the current military and dual-use licensing regime to include a much larger group of war-relevant goods, including digital components. Such restrictions could decisively reduce Russia’s access to some key technologies.
Quota regimes for members of the Eurasian Economic Union and selected other states. Sanctioned goods, whether they are war-relevant or not, flow to Russia via members of the Eurasian Economic Union, as well as from Turkey and the United Arab Emirates. A quota regime based on historical trade volumes in the years predating the full-scale invasion, would limit exports of selected goods to a quota derived from that baseline. Such quotas are already used for certain goods in the sanctions against Russia.
Updating laws and tools. Member states are tasked with enforcement, and some may need to revise their legislation. Enforcement authorities need training, resources, and better tools of investigation, including access to and training in the use of open sources.
Increase transparency in enforcement. Sanctions coalition members should publish information about fines imposed, investigations opened and enforcement decisions dealing with sanctions violations, to the extent possible without adversely impacting ongoing investigation efforts.